But Moskowitz and Kim wrote a Thursday client note saying these fears are overdone. The supply chain inefficiencies that led to a hit in gross margins have mostly been resolved, they wrote, increasing the potential for higher gross margins in the March quarter and beyond. In their view, Apple returning to 40% or better gross margin could revive interest from growth-based investors who are averse to owning any stocks having downside risk to gross margin. They further noted that Apple's foray into the midrange segment with a lower-priced iPhone does not mean the company's gross margin profile will collapse. A lower-priced iPhone, which would likely sell for about $350 without an annual service contract, could contain lower quality display and casing components to construct a bill-of-materials close to $175, they estimated. They also said that Apple could reduce costs by using its own applications processor and targeting savings in NAND flash and DRAM memory.
Adding in royalties, freight and logistics costs, and the total cost of sale could equal about $200, implying a 43% gross margin, Moskowitz and Kim calculated. That's lighter than the 45% to 55% profile for the iPhone 4 and iPhone 5, but exceeds Apple's consolidated gross margin figure. The analysts predict Apple could perform better than investors expect for the fiscal second quarter as iPhone sales reach within earshot of JPMorgan's forecast for 40 million units, "signaling the product has not lost its way." They expect that Apple's June quarter outlook may be conservative ahead of potential iPhone and iPad updates, but that this could be overlooked by investors if the March quarter results were better than expected. -- Written by Andrea Tse in New York Follow @atwtse >To contact the writer of this article, click here: Andrea Tse.