Analyst: Falling Margins Won’t Hurt Apple

While Apple’s (NASDAQ:AAPL) falling gross margins may become the norm for the company, Evercore Partners analyst Rob Cihra said growth was not a cause for worry just yet. In a note to clients on Friday, Cihra also predicted Apple was likely to announce a low-cost phone this fall, resulting in further lowered operating margins. However, such a development was unavoidable as the company needed to “evolve its cream-off-the-top business model,” he said.

The low-cost device would possibly come in September at an unsubsidized price of $390, the analyst said. The 40-percent discount in price from the flagship iPhone model would still represent a premium compared to the rest of the market. Initial target launches would come in emerging markets and may accompany a relationship with China Mobile (NYSE:CHL).

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Lowered margins were acceptable for the company, wrote Cihra, who rated Apple stock Overweight with a $675 price target.

“Apple’s economic modus operandi has never seemed about high-volume mainstream but rather skimming off the premium price/margin of each market,” Cihra wrote. “But as large numbers become a governor, we see Apple forced to gradually scale down into more of the mainstream (e.g., iPad mini, low-cost iPhone).”

Yet, while such a transition would diverge from Apple’s traditional business philosophy, Cihra said he had no doubt about the company managing to sustain double-digit growth rates…

Apple’s vertically integrated hardware-software-services model would be enough to provide the company “almost unique latitude to manage the price/gross margin dilution,” he said.

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And while the smartphone market share gap between Apple and rival platforms may be getting wider, the iPhone maker would be able to maintain its success by controlling its own product cycles, hardware and software engineering, and services ecosystem. Cihra said his calculations allowed Apple’s business model to sustain margins meaningfully higher than its peers even after the introduction of a new low-cost product.

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