Apple Inc.’s (AAPL) New iPhone Gimmicks Could Be a Magnet for Gross Margin Pressure, Netflix, Inc. (NFLX) Stands to Stretch Global Footprint


Apple Inc. (NASDAQ:AAPL) is set up to make a grand splash with its most elaborately high-tech production yet: the iPhone 8. Maxim looks ahead to the exciting capabilities of the new iPhone, but highlights concerns that with jazzed up elements come gross margin pressure risks. For the analyst, Apple’s upcoming iPhone launch boils down to a question of gimmick versus material cost increases- and time will tell if he continues to stay bullish on the stock. Meanwhile, how good do Netflix, Inc.’s (NASDAQ:NFLX) international prospects look? Following Piper Jaffray’s international survey testing the waters for NFLX’s potential to expand its worldwide mark, to put it simply: very. Let’s take a closer look:

Apple’s Tricky Tango Between Gadgetry and Elevated Material Costs

Though Maxim analyst Nehal Chokshi expects Apple’s long-term dance into Augmented Reality to be compelling as the iPhone 8 tacks on fancy new features, he keeps a watchful eye on gross margin pressure along the way. While new iPhone gadgetry is enticing, for the analyst, these facilities also translate to higher material costs.

Nonetheless, while the analyst anticipates the new features for wireless charging and augmented reality forthcoming with the iPhone launch “to be largely gimmicky” and prospectively risk GM pressure, he reiterates a Buy rating on shares of AAPL with a $163 price target, which represents a 13% increase from where the stock is currently trading.

iPhone GM initially took a step back from fiscal 2009’s 60.2% to 44.8% by fiscal 2016. However, based upon the tech giant’s fiscal first quarter print for 2017, GM looks to be “on track” to hit 41.9% for the year. iPhone GM certainly has waned in a course of eight years, but the analyst finds GM to be “relatively steady” at 40%.

Chokshi notes, “With each new iPhone generation, AAPL has had a strong history of implementing new capabilities that have required an increasing bill of materials cost, despite a relatively consistent ASP of ~$650 […]” Anticipating that should buzz spring to reality of rumored wireless charging and augmented reality features, between a $5 to $10 cost addition each for the electromagnetic receiver chipset coupled with the laser-meet-receiver depth detection module, the analyst projects Bill of Materials to approximate a $20 rise.

Overall, “Given the potential multiple moving parts, we are not revising our estimates, especially as we intend to commission a new consumer survey to understand the magnitude of unit growth for the iPhone 8 cycle as well as whether the year thereafter will sustain a third year of consecutive unit growth for the iPhone. We also expect the Augmented Reality industry event we are hosting on May 5 will provide greater visibility into the technology, competitive landscape, capabilities and cost of implementing Augmented Reality componentry within the next gen iPhone,” Chokshi surmises.

According to TipRanks, which measures analysts’ and bloggers’ success rate based on how their calls perform, four-star analyst Nehal Chokshi is ranked #574 out of 4,553 analysts. Chokshi has a 63% success rate and realizes 15.6% in his annual returns. When recommending AAPL, Chokshi yields 31.1% in average profits on the stock.

TipRanks analytics indicate AAPL as a Buy. Out of 37 analysts polled by TipRanks in the last 3 months, 28 are bullish on Apple stock, 7 remain sidelined, and 2 are bearish on the stock. With a return potential of 6%, the stock’s consensus target price stands at $152.90.

Netflix: International Subs Are Looking Good Long-Term

Piper Jaffray analyst Michael Olson is out with a bullish call on Netflix after surveying close to 1,000 internet households spanning across 7 global markets that have on average had the option to use the online video streaming giant’s services the past four years.

Believing the international survey results further bolster his conviction that not only can the giant’s penetration meet the analyst’s 2020 expectations, he anticipates Netflix could outclass his projections. Therefore, the analyst reiterates an Overweight rating on NFLX with a price target of $166, which represents a just under 16% increase from where the shares last closed.

Of the survey respondents spanning the globe, 37% are already subscribing to the giant’s platform, with 13% anticipating to hop on board later in the year. “Given Netflix will have been in all countries (excl. China) for four years by 2020, we have increased confidence in the company’s ability to achieve, or potentially exceed, our estimate for 12.5% international (excl. China) internet HH penetration by 2020,” asserts Olson, who believes that volatility circling subscriptions “comes with the territory,” but advises investors to “expect favorable ongoing LT trend[s]” moving forward.

Olson opines, “The most recent quarter’s results provided evidence that concentrating on quarter-byquarter nuances in the numbers (such as churn issues caused by un-grandfathering in 2016) can mask an otherwise positive trend. Simply put, Netflix is the leader in a category that contains very sizable growth potential. There will likely be increasing competition and hiccups in results along the way, but we think Netflix has reached ‘escape velocity.'” Though Netflix may see competitors join along the way, the analyst does not see this as threatening to the giant’s prospects, as “the market should support multiple large players” on back of a gradual transition from the old days of broadcasting to new emphasis on internet delivery.

“Netflix spent 2016 building a global footprint, which included launches in 130 countries (everywhere other than China and a few immaterial markets),” concludes the analyst, who notes that while 2016 gravitated not meaningfully ahead of a break-even margin, the years to come should translate as “highly profitable” for the giant, with international contribution margins not only catching up to the US after 2020, but potentially even beating its performance.

As usual, we like to include the analyst’s track record when reporting on new analyst notes to give a perspective on the effect it has on stock performance. According to TipRanks, five-star analyst Michael Olson is ranked #119 out of 4,553 analysts. Olson has a 65% success rate and garners 13.5% in his yearly returns. When recommending NFLX, Olson gains 8.3% in average profits on the stock.

TipRanks analytics show NFLX as a Buy. Based on 35 analysts polled by TipRanks in the last 3 months, 22 rate a Buy on Netflix stock, 12 maintain a Hold, while 1 issues a Sell. The 12-month average price target stands at $154.97, marking a nearly 8% upside from where the stock is currently trading.

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