Apple impresses, but margin outlook limits rally

SAN FRANCISCO (Reuters) - Wall Street analysts boosted their price targets on Apple Inc after it posted robust quarterly results, but the company's conservative margin forecast limited gains in the stock on Wednesday.

Apple shares climbed nearly 3 percent, boosted by better-than-expected Mac sales and continued expansion overseas.

The company -- which is famous for issuing cautious outlooks -- also set a revenue forecast for the current quarter that was $1 billion higher than Wall Street was expecting.

But its outlook for a 35 percent gross margin for the period was far below the analysts' average target of 40 percent.

"The stock would be up higher if it wasn't for the gross margin forecast," said Gleacher & Co analyst Brian Marshall.

Apple said it based its gross margin outlook on expectations of a higher mix of iPhone 4 and iPad sales.

The company acknowledged that the fourth-generation iPhone costs more to make than its predecessor and said it was pricing the iPad aggressively as its tries to define the nascent tablet market.

Marshall estimated gross margin for the iPad at about 35 percent as it ramps up production and 40 percent longer-term. For the iPhone 4, he put the margin in the mid-50s, below the 60 percent for the previous model.

Oppenheimer & Co analyst Yair Reiner said Apple's sales forecast helped put to rest any concerns about the controversy over signal loss on the iPhone 4, which has hurt the company's stock over the past month.

The margin forecast may make some people nervous, he said, but he expects that concern to fade fairly quickly.

"Apple's abysmal gross margin forecast might give investors pause, but its growth trajectory and valuation should provide considerable comfort," Reiner wrote in a research note.

STRENGTH IN MACS, OVERSEAS

On Tuesday, Apple reported a 78 percent earnings jump on a 61 percent climb in revenue for the third quarter ended on June 26.

Sales rose 66 percent in Europe, 63 percent in Japan, and 160 percent in the Asia-Pacific region. International sales accounted for 52 percent of revenue, up from 44 percent a year earlier.

Unit sales of Apple's Mac line of computers surged 33 percent overall, with strong growth in Asia.

JPMorgan analyst Mark Moskowitz raised his price target on Apple to $400 -- the highest on Wall Street -- saying the earnings report should help remind investors of the company's strengths.

Shares of the Cupertino, California-based company were up 2.6 percent at $258.50 in afternoon Nasdaq trading.

"While the media-driven frenzy over the iPhone 4 antenna issue is not likely to fade yet, we believe Apple's quarterly performance should restore focus back on the model's high-growth stature," he wrote in a research note.

On Friday, Steve Jobs rejected any suggestion that the iPhone 4's design was flawed, but offered consumers free phone cases to address reception complaints.

While the issue gave investors reason to question Apple's historically "airtight execution" in recent weeks, stock performance ultimately tracks earnings estimates, and the shares could move higher in the second half of 2010, said Morgan Stanley analyst Katy Huberty.

Investors were underestimating Apple's growth opportunities from continued iPhone share gains, iPad adoption, China and enterprise penetration, Huberty wrote in a note, raising her target on the stock to $346 from $332.

The median price target on Apple's shares stands at $330, or roughly 28 percent higher than Apple's share price on Wednesday.

Shares of Apple -- which competes with Research in Motion, Nokia and Microsoft in various markets -- are trading at a multiple of 15 times forward earnings, a 44 percent premium to its peers, according to StarMine data.

(Reporting by Gabriel Madway in San Francisco and Tenzin Pema and S. John Tilak in Bangalore; Editing by Unnikrishnan Nair, Gopakumar Warrier and Lisa Von Ahn)