Analyst: Apple’s Gross Margins Will Keep Expanding in 2014

Source: Apple.comGlobal Equities Research analyst Trip Chowdhry came out in support of a bullish perspective on Apple (NASDAQ:AAPL) in a recent research note obtained by Street Insider. The analyst argued that Apple has the ability to continue to expand its gross margins throughout 2014. Chowdhry reiterated his “Overweight” rating on Apple shares and an $800 price target.

In the note seen by Street Insider, Chowdhry cited four major reasons why Apple’s gross margins will continue to expand in fiscal year 2014 and beyond. First, he noted that the high-end configurations of Apple’s iPads and iPhones are outselling low-end configurations by a two-to-one margin. According to Chowdhry, Apple sells twice as many 128GB and 64GB capacity iPad Airs and iPad minis than it does the 16GB and 32GB versions. As noted by the analyst, the high-end configurations of Apple’s devices have a higher gross margin.

Second, Chowdhry believes that Apple’s iTunes app sales will likely see 25 percent year-over-year growth in 2014. As noted by the analyst, Apple’s iTunes business is extremely profitable with over a 95 percent gross margin. Apple takes a 30 percent cut of the revenue generated by any app sale. Last year, the company crossed the 50 billion app download threshold. He also suggested that Apple may soon see additional sales in the categories of iBeacon-enabled mobile commerce and “wearable applications” that take advantage of the M7 motion coprocessor.

Third, the Global Equities Research analyst pointed out in his research note via Street Insider that Apple’s peripheral product sales are approximately a 75 to 85 percent gross margin business. For example, Apple’s iPad Smart Cover business has an 85 percent gross margin profile. According to Chowdhry, nearly 70 percent of iPad buyers also purchase a Smart Cover.

Finally, Chowdhry noted that the Apple Care product warranty program is a 90 to 95 percent gross margin business. Like Apple’s iTunes app sales, the analyst expects that Apple Care sales will achieve 25 percent year-over-year growth in 2014. According to Chowdhry, senior citizens and companies tend to purchase Apple Care when they buy iOS-based devices. He believes that both of these groups will help fuel the growth of Apple Care this year.

Chowdhry’s bullish note on Apple appears in some ways to be an answer to a recent research note written by Wells Fargo analyst Maynard Um. In his note, Um downgraded Apple from an “Outperform” rating to a “Market Perform” rating based on gross margin pressure concerns. Here’s how Apple has traded over the past five sessions.

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