Bank of America says investors are getting it wrong about Apple — again

Published Thu, Apr 11 202410:21 AM EDTUpdated Thu, Apr 11 202411:26 AM EDT

Investors are again underestimating Apple's gross profit margins, according to Bank of America. "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 180bps of Product gross margin upside and about 150bps of Services margins upside over the next few years," wrote analyst Wamsi Mohan in a Thursday note, referring to basis points, or 1/100th of a percent. AAPL YTD mountain Shares this year The same thing has happened before with Apple. Mohan noted that in 2018, Wall Street modeled gross margins at 39% for 2023. In actuality, the company exceeded those expectations, reporting 44% gross margins last year. Bank of America's assessment comes amid a rough patch for the iPhone and iPad maker. Apple shares have fallen 13% this year as it grapples with slowing iPhone sales and struggles to articulate its vision for incorporating artificial intelligence into its products and services. Looking ahead, Mohan estimates that vertical integration and product mix could yield more than 100 basis points of upside to Apple's gross margins. He also estimates Apple's utilization of its own internal modems could add 110 basis points to product gross margins and 160 basis points of iPhone gross margins. Meanwhile, Apple could lower costs by creating its own data center chips and harnessing its own silicon in data centers, and experience 100 basis points of upside to services gross margins in the process. "The increasing mix of Services (higher margin business) as a proportion of the total company revenue can improve gross margins by 60bps," Mohan wrote. "Pricing is an additional level that Apple can employ to further increase gross margins." JPMorgan also views Apple as underappreciated by investors, but sentiment is showing some signs of improving. This is partly due to the company's valuation premium sitting at the lower end of its range since the launch of the 5G phone, said analyst Samik Chatterjee. The rise of AI and its role in the next iPhone upgrade cycle is also piquing investor interest, he added. "Contrary to the deterioration of fundamentals relative to both Hardware demand as well as outlook for Services growth, the interest in AAPL shares [has] improved from the broader group of investors who have otherwise been averse to the premium valuation multiple despite one of the lowest growth outlooks relative to the other Mega Cap Tech stocks," he wrote.