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Apple shares steady as worries about margins ease

Apple Inc CEO Tim Cook speaks on stage about the new iPad during an Apple event in San Francisco, California October 22, 2013. REUTERS/Rober
Apple Inc CEO Tim Cook speaks on stage about the new iPad during an Apple event in San Francisco, California October 22, 2013. REUTERS/Rober

(Reuters) - Apple Inc's shares rose slightly on Tuesday after the iPhone maker clarified its margin outlook by saying it would defer $900 million of revenue during the key Christmas holiday period, prompting analysts to raise price targets on the stock.

Apple shares were up about 0.5 percent in early trading after dropping as much as 5 percent in extended trading on Monday when the company reported fourth-quarter results.

"We think that the stock initially exhibited weakness after the report partly due to concerns about the first-quarter gross margin guidance (36.5-37.5 percent)," FBN Securities analyst Shebly Seyrafi said in a research note.

Investors had hoped for better gross margins as a result of higher sales of the more expensive iPhone 5S.

Apple later said it expected $900 million from deferred revenue in the first quarter related to its recent announcement of free software upgrades for Macs. This, analysts said, had the effect of masking improving gross margins.

Seyrafi said that without the revenue deferral, the gross margin guidance would have been 38.1-39.1 percent, higher than the market average estimate of 37.9 percent.

At least 12 brokerages raised their price targets on Apple's stock, to between $519 and $620. The stock was trading around $532 just after the opening on Tuesday.

Analysts generally echoed Chief Executive Tim Cook's prediction of a "really great" holiday season and an "iPad Christmas."

Goldman Sachs analysts said the margin outlook was the first tangible sign that Apple's current iOS products could produce a far-healthier margin profile, with both the iPhone 5S and cheaper 5C having steady gross margins in the low 50 percent range.

Apple last week unveiled thinner full-sized iPads, named iPad Air, and an iPad Mini with a higher resolution retina display, as well as faster Mac computers.

Sales of these products will also help margins in the current quarter, analysts said.

The December quarter is crucial for Apple as its new iPads go up against Amazon.com Inc's Kindle Fire, and its new iPhones compete with lower-cost gadgets made by Samsung Electronics and other companies using Google Inc's Android software.

Apple also last week took a poke at Microsoft Corp, whose business depends on sales of Windows and Office licenses, saying it would give away software upgrades for the Mac operating system and iWork software suite.

Apple said on Monday that because of its decision to offer much of its Mac software for free, it would defer a greater portion of its hardware sales in the current quarter.

Apple also said it expected revenue of between $55 billion and $58 billion for the December quarter, above the average analyst estimate of $55.65 billion.

"We think the stage has been set for Apple to deliver a series of beat-and-raise events," J.P. Morgan analysts said, recommending that investors to take advantage of any near-term weakness in Apple shares.

The addition of China's largest mobile phone operator China Mobile Ltd as an official iPhone carrier, the anticipated launch of a large screen iPhone, and launch of new products like smartwatches will also benefit Apple in 2014, analysts said.

Apple's sales in China, its second-largest market, increased 6 percent year-on-year in the September quarter.

Apple said it sold 33.8 million iPhones and 14.1 million iPads in the latest quarter, roughly in line with market expectations.

"Apple is now one of few companies in our space that is growing in China and not adversely impacted by the cloud," Barclays analysts said.

"At this point, we believe focus will turn to a potential expansion in Asia with China Mobile and even a potential increase to its capital return program in (2014)."

(Reporting by Soham Chatterjee; Editing by Ted Kerr)

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