Proactive Investors - Apple Inc (NASDAQ:AAPL)investors have historically underestimated the iPhone maker’s gross margins and it appears to be happening again, analysts at the Bank of America (NYSE:BAC) believe.
“Historically, Apple investors have tended to look at existing products and the profitability associated with those products and services as a measure of how the company would do in the future,” they wrote.
Per their analysis, the consensus gross margins for 2023 back in 2018 were 39% but Apple printed gross margins of 44%, exceeding expectations of 500 basis points.
“In our opinion, the Street continues to underestimate the long-term gross margin potential for Apple across both products and Services yet again, where we see about 180 basis points of Product gross margin upside and about 150 basis points of Services margins upside over the next few years,” the analysts wrote.
The analysts also see Apple’s gross margins being driven higher by an increased mix of services within its overall portfolio, which they believe should account for about 60 basis points or margin improvement through to 2026.
“The large drivers of product gross margin include vertical integration of Apple using its own internal modem which we estimate could add up to 110 basis points of product gross margin and 160 basis points of iPhone gross margins,” they wrote.
Pricing is yet another way Apple’s margins are set to expand, the analysts highlighted.
“Consumers are opting for more higher-end devices (higher price), but we also expect Apple to raise pricing of individual hardware devices over time, which can be accretive to gross margin,” they wrote.
“Further, the services installed base although large only has about 300 million or so paying customers which we think can grow significantly over time.”
The analysts repeated their ‘Buy’ rating for Apple and price target of $225.
They see the stock as a ‘Buy’ on their thesis Apple will be a beneficiary of GenAI, gross margin upside and momentum in its Services segment.
Apple shares (NASDAQ:AAPL) traded hands at about $171 on Thursday afternoon.