Apple's Profitability Once Again Overlooked by Investors, Bank of America Merrill Lynch Says Its Shares Will Have 28% of Upside

• Bank of America says investors are once again underestimating Apple's earnings potential.

• The bank said Apple's future margins could be significantly higher than Wall Street's expectations.

• The bank reiterated its $225 price target for Apple, which represents potential upside to 28%.

A report released Thursday by Bank of America said Wall Street has once again underestimated Apple's earnings potential, which should lead to a significant increase in Apple's stock price in the future.

So far this year, Apple has had a tough time, with shares down 9%, as investors become increasingly worried about the source of future growth. But Bank of America (Bank of America) analyst Wamsi Mohan (Wamsi Mohan) said Apple has a lot of leverage to pull profit growth, making it more than expected.

"We see upside from vertical郃s and carbs, which could account for more than 100 basis points of GM's upside," Mohan said.

On the service side, Mohan sees potential growth margins of 100 basis points, "driven by Apple's low-cost delivery of data centers and chips".

In other words, Apple's use of a self-designed chip that reduces its reliance on public cloud providers should result in significant cost savings.

In total, these estimates suggest that Apple may surprise Wall Street in the most important way: profit growth.

According to the bank, a similar scenario occurred in 2018, where Wall Street estimated Apple's margins would reach 39% in 2023. as it turned out, Apple's margins improved dramatically, reaching 44% in 2023.

"We believe that Wall Street continues to underestimate Apple's long-term gross margin potential on both the product and service sides of the equation, and we see room for product gross margins to rise by about 180 basis points in the next few years, and room for service gross margins to rise by about 150 basis points," Mohan said.

Mohan believes that some of the upside in the service sector could come from the launch of Apple's much-anticipated iPhone with AI-generating capabilities, while the upside in profits on the product side could come from higher iPhone prices as consumers continue to favor higher-priced "pro" iPhone models. The upside for the product noodle could come from higher iPhone prices as consumers continue to favor more expensive "pro" iPhone models.

Bank of America reiterated a "buy" rating and $225 price target on Apple in a report on Thursday, leaving 28% of potential upside from Thursday's close.

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