A Thursday report from Bank of America predicted that Apple's stock price will see substantial future gains due to Wall Street's continued underestimation of the company's profits potential.
Apple has had a rough year thus far, with the stock down 9% as investors worry about the company's future growth prospects. However, according to Wamsi Mohan, an analyst at Bank of America, Apple has a lot of room to manoeuvre in terms of exceeding expectations in terms of earnings.
"We see upside from vertical integration and mix on the product side that could account for over 100bps of GM upside," added Mohan. Mohan predicts an additional 100 basis points of growth margin upside for services, "driven by lower cost delivery from AAPL-based datacenters and silicon."
To rephrase, Apple should save a ton of money by using chips that it has designed in-house and by cutting back on its usage of public cloud providers. All things considered, Apple may be able to pleasantly surprise Wall Street in the most important area: profit growth, according to their projections.
The bank claims that a comparable situation occurred in 2018, when Wall Street predicted that Apple's profit margins would reach 39% in 2023. In 2023, Apple's profit margins came in at 44%, which was far better than expected.
"In our opinion, the Street continues to underestimate the long-term gross margin potential for Apple across both products and Services yet again, where we see about 180bps of Product gross margin upside and about 150bps of Services margins upside over the next few years,
there is a possibility that Apple's much-anticipated debut of an iPhone with generative AI capabilities could contribute to the Services upside, while the more expensive "Pro" iPhone models could continue to be popular among consumers, leading to higher prices and potential profit upside for Apple in the product side.
In a Thursday note, Bank of America reaffirmed its "Buy" rating and price target of $225, which represents a possible 28% increase from Thursday's closing.
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