Apple's (AAPL) NAND 'Gravy Train' is Vulnerable - Bernstein

Bernstein analyst Toni Sacconaghi highlights that Apple (NASDAQ: AAPL) makes a lot of money off of upselling consumers to higher storage configurations, which he believes is vulnerable.

The analyst estimates the company will generate $18 billion in revenue and 26% of operating profits from up-selling to higher NAND configurations in its fiscal 2019. Sacconaghi said profits from selling NAND will add an estimated ~400 bps to overall company GMs and ~600 bps to total product gross margins in the fiscal year.

The analyst said a key risk is whether 5G networks and cloud-based storage may mitigate the NAND upgrade imperative going forward, thus undermining Apple's profitability.

Sacconaghi notes while it is possible that Apple is be vulnerable, it is somewhat hedged with its iCloud storage offering. Although the analyst notes iCloud has lower margins than upselling NAND and takes ~4 years to reach breakeven on a revenue basis.

Separately, they note that while Apple is particularly vulnerable to the ongoing trade war, encouragingly, falling NAND (and DRAM) prices (each down ~50%+ YoY) provide Apple with a buffer to potentially mitigate the impact of tariffs going forward.

The analyst reiterated a Market Perform rating and $205.00 price target on AAPL.

For an analyst ratings summary and ratings history on Apple click here. For more ratings news on Apple click here.

Shares of Apple closed at $208.74 yesterday.

You May Also Be Interested In

• Morgan Stanley Reiterates Overweight Rating on Apple (AAPL), 'We expect $200 iPhone price hikes in September'
• Bernstein SocGen Group Starts Wuxi Biologics (2269:HK) (WXXWY) at Market Perform
• BofA Securities Downgrades Sylvamo Corp. (SLVM) to Neutral