Warnings from Apple Inc. (NASDAQ:AAPL) that its future margins will fall are justifiably disappointing to investors. However, one initiative that could produce such pressure but also pay off in terms of global momentum is a free or low cost subsidized entry-level iPod or phone, one analyst suggested.
In theory, such a move could boost iPod’s momentum by as much as 50%, which would add approximately 25 million units in calendar 2009, Mike Abramsky at RBC Capital Markets told clients. A 10% increase to his unit outlook produces roughly $1-billion of additional revenue and $0.14 in earnings per share.
Despite a third quarter earnings beat, Apple’s fourth quarter guidance was a big disappointment and has led to a major sell-off for the stock. But the company’s outlook that reflects new product investments looks like a positive leading indicator of future outperformance, Mr. Abramsky said.
Although he sees some near-term risk for the share price, the analyst noted that previous transition periods have had similar negative impacts, but eventually led to outperformance. Meanwhile, the lower gross margins going forward due to back-to-school promotions and an unspecified product transition “suggest Apple is moving to capture a broad mass market opportunity,” he added.
Mr. Abramsky maintained his “outperform” rating on Apple shares but cut his price target to $200 from $220. His new revenue estimates are $42.3-billion and $54.5-billion for fiscal 2009 and 2010, respectively, while his earnings per share forecasts are $6.04 and $8.00.