Apple ( AAPL ) gave a solid Q3 performance driven by strong iPhone and iPad sales beating its own guidance and consensus forecasts. Many expect it to soon announce the iPhone 5, which has iPhone users salivating. While Apple continues to increase iPhone sales and gain more smartphone market share, its gross margin is something to watch out for. The gross margin has decreased from 62% in 2007 to 51% in 2010 due to declining prices amid rising competition from Google's ( GOOG ) Android-based phones, Research in Motion ( RIMM ), Motorola Mobility ( MMI ), Nokia ( NOK ) and HTC.
While we estimate iPhones's gross margin will decrease from 51% in 2011 to 37% by the end of our forecast period, Trefis members predict a smaller decline from 51% to 44% during the same period. The member estimates imply an upside of 10% to the Trefis price estimate for Apple's stock. This upside is justifiable if Apple is able to sell iPhone 5 at a higher price point and curb its manufacturing costs while ensuring smoother distribution and management of its supply chain.
We currently have a Trefis price estimate of $510 for Apple's stock , about 30% above the current market price.
iPhone Drives Apple's Q3 Performance
Apple sold 20.3 million iPhones compared to 8.4 million last quarter, representing 142% year-over-year growth, which is almost double of 67% growth in the global smartphone market going by IDC estimates. The sales growth was led by continued growth in Greater China where revenue grew almost 6x y-o-y. Apple also expanded its coverage to 15 new countries and added 42 new carriers.
Pricing Competition Could Impact Margin
As the average iPhone pricing continues to decline, this will also impact the margins. Competition from Android as well as other mobile makers like RIM, Nokia and HTC will add to the pricing pressure, compelling Apple to keep its pricing competitive. As the company preps up to release its much awaited iPhone 5, whether it retains its usual pricing of $199 and how comparable or better are the features to Android's remain to be seen.
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