According to Bofa, Apple's Doubters May Be Wrong Again About the Stock

Concerns surrounding spending pressures, Chinese competition, and a perceived lack of innovation have led investors to exhibit a negative sentiment towards Apple Inc. shares in 2024. Despite the S&P 500's positive performance, Apple's shares have declined by over 12% this year.

‍

However, BofA Securities analyst Wamsi Mohan suggests that Wall Street might be overlooking crucial aspects of Apple's potential, a recurring pattern in the past. Mohan, in his recent client note, highlighted the historical underestimation of Apple's gross margins by investors.

‍

According to Mohan, Apple's long-term margin prospects remain promising, with past projections consistently falling short of the actual performance. For instance, in 2018, the consensus forecast anticipated a 39% gross margin for fiscal 2023, whereas Apple achieved 44% during that period.

‍

Looking ahead, Mohan believes that Apple could generate approximately 180 basis points of gross-margin improvement in its product segment and 150 basis points in services over the forthcoming years. The increasing prominence of services within Apple's revenue mix is expected to contribute significantly to overall financials, given their higher profitability compared to hardware products.

‍

Mohan suggests that as Apple's business scales, it may opt to in-source server chips and reduce dependence on public cloud providers, leading to cost savings and potentially higher margins in services.

‍

Moreover, Mohan anticipates a potential boost in gross margins on the product side if Apple were to utilize its internal modem. Additionally, the trend of consumers opting for more expensive iPhone models, which yield higher profits, could further enhance gross margins.

‍

Despite maintaining relatively stable iPhone prices, Apple has strategically introduced pricing adjustments, such as eliminating the cheapest storage configuration of its iPhone Pro Max last fall, effectively increasing its price. Mohan speculates that Apple may implement further price adjustments in the future, which could positively impact gross margins.

‍

Mohan remains bullish on Apple, assigning a buy rating and a $225 price objective to its shares. He sees Apple as a strategic investment opportunity in the realm of generative artificial intelligence.

‍

In summary, while market sentiment towards Apple may be pessimistic due to various perceived challenges, Mohan's analysis suggests that the company's potential, particularly in terms of gross margins and the evolution of its product and service offerings, might be underestimated by investors.

‍