Apple Analyst Shrugs Off Demand Concerns: 'Gross Margin Is The Key'

The holiday selling season is key for not only retailers but also for companies like Apple Inc. AAPL that derive much of their revenue from the quarter.

This year, Apple is headed into the holiday shopping season with three new iPhone models, including its 10th anniversary phone, the iPhone X. Against this backdrop, an analyst offered his take on Apple's fiscal first quarter ending Dec. 31, suggesting that gross margin outperformance can help to offset any potential unit demand weakness.

The Analyst

KeyBanc Capital Markets analyst Andy Hargreaves maintained his Overweight rating on Apple with a $192 price target.

The Thesis

Broad demand indicators for iPhone X suggest a mature market, offering little chances for sustained upside to high-end iPhone units, Hargreaves said in a Wednesday note. (See Hargreaves' track record here.)

Citing data from Alphabet Inc GOOGLGOOG Trends, search data for iPhone X was on par with that for the iPhone 6s during the comparable time frame around the launch, but below the search data for the iPhone 6 and iPhone 7.

The analyst does not expect upside to consensus iPhone unit estimates in fiscal year 2018. Hargreaves' fiscal 2018 iPhone unit estimate of 237 million is largely in line with the 240 million consensus estimate — and might require above-average upgrade rates and a relatively strong share-gain cycle.

Although achievable, the analyst said it cannot be sustained for multiple years, rendering gross margins critical for the company's outperformance.

"Despite our slightly dour view of iPhone units, we continue to believe the combination of increased iPhone prices and growing services revenue will drive upside to consensus gross margin estimates in FY18."

This, according to the analyst, should result in above-consensus earnings per share, even if iPhone units just hit estimates. The fiscal second quarter guidance is critical to proving the gross margin thesis, Hargreaves said.