Bernstein: Don’t be spooked by Apple’s gross margin guidance

From a note to clients by Bernstein analyst Toni Sacconaghi that crossed my desk today:

AAPL: FY Q2 Preview — Could component costs spook GM guidance, and should investors care?

We are modestly above consensus revenues and EPS for FQ2… The biggest potential issue for investors is gross margins, given recent price increases in NAND and DRAM, and we are lowering Q3 and Q4 gross margin forecasts by ~70-90 bps.

While Apple has a history of delivering on its GM guidance, the company has guided forward quarter GMs below consensus 7 out of the last 12 quarters since Luca Maestri became CFO (and the last 6 straight) by an average of about 60 bps.

On net, we forecast that Apple will guide for Q3 GM of around 37.5%, below consensus of 38.2%. We suspect the stock could come under modest incremental pressure, particularly if guidance is below 37.5%, but ultimately believe that it is not thesis changing – Apple should be able to adjust prices on its new iPhone 8 to reflect the prevailing component environment.

Reiterate Outperform and $160 price target.

Sacconaghi is one of the smarter sell-side analysts covering Apple. To see how his forecasts compare with his competitors’, see Apple Earnings Smackdown: Final spreadsheet, Q2 2017.

We’ll get Apple’s March quarter results  and June quarter guidance this afternoon, after the markets close.  Tune in tomorrow for the Q2 2017 edition of my Best and Worst Apple analysts report.

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