Analyst: Apple Approaching Crucial ‘Fork in the Road’

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Wells Fargo analyst Maynard Um saw “plenty of good news” in Apple’s (NASDAQ:AAPL) fiscal 2014 second-quarter financial results. However, Um also felt there wasn’t enough good news for him to fundamentally change his investment approach to the Cupertino, California-based company.

In a recent note to investors, Um maintained his Market Perform rating on the company based on his continuing concerns about gross margin pressure in the iPhone 6 cycle, limited market cap opportunity in existing product segments (including iWatch and TV opportunities), and a shifting balance of power in the smartphone market that favors wireless operators. However, the Wells Fargo analyst did boost his valuation range to $515-$585 from $505-$575.

According to Um, Apple is approaching a “fork in the road where it needs to choose between ASP/margin or units.” The analyst noted that the average selling price of the iPhone declined by 6 percent due to sales in China and “cycle lengthening.” Um predicted that Apple will soon have to decide whether it wants to focus on higher average selling prices or unit sales, since he doesn’t believe that the iPhone maker can maintain both.

However, it should be noted that Um was as surprised as most other analysts about the strength of Apple’s iPhone sales last quarter. Apple reported that it sold 43.7 million iPhones in the March quarter, 5.2 million more than what Um had projected. Apple also reported gross margin of 39.3 percent, higher than the consensus expectation of 37.6 percent.

Apple’s higher-than-expected iPhone sales and expanded capital return program were among the “good news” items highlighted in Um’s note to investors. Apple’s Board of Directors increased the company’s share repurchase authorization to $90 billion, up from the $60 billion that was previously announced.

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