AP
Apple analyst Gene Munster confirms that Apple's margins are due for a big drop. And he also basically confirms its going to be due to smartphone competition.
In a new note, he's calling for Apple's margins to be at 34% in two years. He believes Apple's low-margin "cheap" iPhone, which Apple would release to chase market share, is going to hit the margins.
The consensus from analysts is for Apple's margins to be 37% in two years, which means that if Munster is right, investors are in for a surprise.
He says there are murmurs of Apple's gross margin going sub 30%, which would be a disaster. Munster thinks it would take "a nuclear meltdown" in Apple's model for the margins to go lower than his estimate. The nuclear meltdown would happen if Apple released a cheap iPhone that took 50% of the overall iPhone mix and if it release a super low-margin TV.
The good news is that Munster looked at the iPhone business and concluded that its margin has remained stable, which is counter to what many people believe since a year ago Apple's margin was 47.4%. Last quarter it was 37.5%.
The iPad Mini caused the drastic fall in Apple's margin, says Munster. He believes it has a 20% margin, while the iPhone has a 55% margin. If you back out the iPad Mini, Apple's overall margin would have been 40.2% last quarter.
Obviously, you can't back out the iPad Mini. Further, Apple is expected to release a cheap iPhone, which he thinks could have a margin similar to the iPad Mini.
He doesn't include an Apple TV in his model, but if Apple does release a TV, he sees it with a 10%-20% margin.
The cheap iPhone, the iPad Mini, and the television would all cause a serious drag on Apple's margins.
This is all largely speculative, so you should treat it as such. But, Munster lowered his price target on Apple to $655 from $688 after lowering his EPS estimate for next year by 5%.
Here's two tables from Munster that lay out various EPS scenarios based on the low-cost iPhone and TV.
 Piper Jaffray |
 Piper Jaffray |