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Friday, October 26, 2012, 08:13 am PT (11:13 am ET)

Market watchers reaffirm faith in Apple as new products shrink projected margins

Though Apple expects its margins to shrink in the holiday quarter as the company goes through an unprecedentedly large product transition, Wall Street watchers remain confident in recommending investors buy AAPL stock.

Apple reported its fourth quarter earnings on Thursday, revealing it sold 26.9 million iPhones, 14 million iPads and 4.9 million Macs in the September frame. Looking ahead to the December quarter, Apple executives noted that the company's recent product introductions have higher costs than their predecessors, which will drive down gross margins.

Following Apple's report, Wall Street analysts reacted positively, saying they expect Apple to have a blockbuster holiday quarter with h2 sales of the iPhone 5, iPad mini, new Macs and more. Below is a rundown of their takes:

Canaccord Genuity



As tracked by Philip Elmer-DeWitt of Apple 2.0, Michael Walkley was the most accurate analyst in predicting Apple's September quarter, with revenue and earnings per share estimates that were off by just 0.57 percent from the actual numbers. Professional analysts considerably outperformed independent market watchers, who proved too bullish.

iPhone 5


Walkley said that Apple's lower-than-expected margin guidance for the following quarter is disappointing, but it presents an opportunity for investors to buy in. He has reiterated his buy rating for AAPL stock with a price target of $800.

"Despite lower potential gross margin due to the record ramp of new products, we believe Apple's December quarter guidance could prove conservative given their strong product portfolio and our checks indicating very strong global demand," Walkley said.

Piper Jaffray



Gene Munster said Apple's September results demonstrated the strength of Apple's iPhone, as the handset exceeded market expectations of 25.3 million units.

For the December quarter, Apple's guidance is slightly better than the market expected, but projected earnings are worse. Munster noted that's a result of 80 percent of Apple's December product sales being upgraded in the past six weeks, marking the company's largest product transition quarter ever.

Munster expects that following the transition period, Apple's margins will rebound to their normal levels in the March quarter.

iPad mini


RBC Capital Markets



There was "nothing mini" about Apple's fourth quarter of fiscal 2012, said Amit Daryanani. He feels Apple's guidance for the December quarter "bakes in a healthy level of conservatism."

Like Munster, Daryanani sees Apple's margin-related issues as "transitory." He expects they will abate over the next one to two quarters.

For now, he recommends investors continue to accumulate shares of AAPL, focusing on the company's expected h2 holiday sales, ramping up of the iPhone 5 in China, long-term margin profile, and the potential for a full-fledged Apple television set.

Evercore Partners



Rob Cihra correctly projected Apple's iPhone sales for the September quarter. For the holiday period, he sees Apple selling 49 million iPhones, which would be 82 percent quarter over quarter growth, and a 32 percent increase from the same period last year.

Even with a blockbuster quarter and 49 million projected iPhone sales, Cihra believes Apple still won't be able to meet consumer demand for its latest handset.

"Apart from its $329 iPad mini, Apple has not really lowered the price of any new product," Cihra said, "so we don't see pressure from some new aggressive pricing strategy, rather believing (gross margins) should recover as yields ramp."

MacBook Pro


ISI Group



For Brian Marshall, the positives outweigh the negatives from Apple's September quarter. Specifically, he's bullish on iPhone sales and the potential of the iPad mini.

He believes the investment community is "wrapped around the axle" on what he called "tertiary details." He thinks investors should concentrate on the big picture, which is that demand for Apple products is currently greater than supply.

Morgan Stanley



Katy Huberty believes Apple "handed investors a perfect combination of a bullish demand view" along with an earnings per share reset that will set the company up to return to its "beat and raise" story.

She noted that Apple Chief Executive Tim Cook and Chief Financial Officer Peter Oppenheimer "sent a bullish message on demand" during their earnings conference call on Thursday.

As for the low margin guidance, Huberty sees a silver lining, as calendar year 2013 is shaping up as a margin expansion year, from 37 percent in the fourth quarter of calendar 2012 to a forecast of 41 percent in the first quarter of 2013.

iMac


J.P. Morgan



Mark Moskowitz also believes Apple has "beat and raise potential" in the cards for the first half of 2013. He believes that as the company scales its new products down the cost curve, its consolidated gross margin will move back to 40 percent or better following the December quarter.

He also believes Apple's December quarter outlook is a vintage conservative projection from the company. Apple has guided to revenue of $52 billion and earnings per share of $11.75, while Wall Street consensus is at $54.9 billion in revenue and $15.46 earnings per share.

"We believe the company is being conservative in its guidance, and we expect the gross margin to bottom in (the December quarter) as Apple ramps the new products across its product segments," he said. "We also note that the (December quarter) will have 13 weeks, versus 14 weeks in the year-ago quarter."

Needham Research



Apple's all-new product lineup unveiled in the past six weeks sets the stage for"a quarter unlike any in the past," Charlie Wolf said. He believes Apple's December quarter guidance is a reflection of the company's ability to supply products, not demand for them.

"We would not be surprised if Apple exits December with material backlogs in both iPhone 5 and iPad," he said.

Looking toward 2013, he assumes, like others, that Apple will progressively restore its gross margin from the anticipated lower margins in the December quarter.

JMP Research



Alex Gauna, known for being bearish on AAPL stock in stark contrast to his peers, has maintained his "market perform" rating. He said the positives of Apple's "resilient growth and profit generation in a tough macroeconomic environment" were "offset by further gross margin erosion as competition intensifies."

Gauna has reduced his fiscal year 2013 GAAP EPS estimate from $52.59 to $49.85, while average Wall Street expectations are at $53.30.