Morgan Stanley‘s Katy Huberty this afternoon reiterates an Overweight rating on shares of Apple (AAPL) and a $630 price target, after sifting through the company’s 10-Q filing to determine whether its decline ingross margin is “structural” or just a passing effect.
Huberty concludes the margin “volatility does not appear entirely structural,” but in part cyclical, and that it could rebound with a forthcoming “iPhone 5S.”
Without stating an exact time frame for any new iPhone model, Huberty postulates that Apple’s reduced capex for new equipment (it purchases equipment for use by its manufacturing partners), and an easing of NAND memory chip prices, could improve gross margin later this year:
The 10-Q discloses $904M of commitments for equipment purchases compare to $4.5B just two quarters ago when Apple invested in new in-cell touch displays for the iPhone 5. The decrease is likely due to iPhone 5S not requiring significant hardware changes, therefore iPhone GM could be much higher in C2H13. NAND prices hurt in December but could ease. Deferred margin on component sales represents Apple’s component cost advantage relative to spot prices� and correlates with Apple’s GM (Exhibit 4). This metric deteriorated in C2H12 but could improve going forward given the recent increase in spread between NAND contract and spot prices. A more favorable NAND contract price trend is consistent with Apple increasing NAND in the 9.7� iPad last week.
Huberty is modeling gross margin of 38.7% this fiscal year ending in September, down from 43.9% in fiscal 2012.
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