The soon-to-be-released Apple Watch is generating the majority of headlines, but it's continued strength from the iPhone segment and a record-breaking stock buyback that will determine the path of
In a note to clients Wednesday, Citi analyst Jim Suva points to insatiable worldwide demand for the iPhone 6 and iPhone 6 Plus as critical factors for the company's January-March quarter, with earnings due out April 27.
"[W]e believe the company will beat consensus sales by at least $1 billion and iPhone unit shipments by at least 5%," Suva writes.
The power of iPhone upside for Apple's stock price was illustrated in January, when the company announced it sold nearly 75 million smartphones in the last quarter of 2014 and shares shot higher.
At this point, the success of the iPhone and the continued increases in Apple's massive capital return plan are the two most important drivers for a stock already at record highs.
Suva acknowledges potential headwinds, including the effects of a stronger U.S. dollar; the limited, U.S.-only rollout of Apple Pay to date; and the potential cannibalization of iPad sales by the large-screen iPhone 6 Plus.
But those concerns get short shrift as the Citi analyst sees five key elements to the case for Apple to trade higher:
- Faster smartphone upgrades by customers as wireless carriers like AT&T, Verizon, T-Mobile and Sprint fight to keep their own customers and win subscribers from rivals.
- Rising Wall Street earnings estimates that will likely keep Apple at a multiple below the S&P 500 (today it's 14 times earnings vs. the index's 17 times) even after a big run in the stock.
- Gross margin gains as customers opt for larger smartphone memory to account for higher-quality cameras and increased app usage.
- Apple Pay rolling out across various areas in both payments and integration with the Passbook feature that could lead to uses like keyless entry or loyalty programs.
- Expanding deeper into the enterprise segment, including through a partnership with IBM announced in 2014.
Another factor Suva highlights, but doesn't count for much in his $145 price target, is the Apple Watch. "The reason we view Apple Watch as a bonus potential catalyst is we are not impressed with the one day battery life or lack of built in GPS." But like most Apple products, he assumes the first edition is just the first step into a new category and likely to be followed by superior versions.
In the meantime, Suva figures the reasonable valuation, and a likely April increase in the capital return program -- Citi predicts an increase in share repurchase authorization to $120 billion from $90 billion and a 10% or more dividend increase -- still support continued gains from the stock.
Apple, which was added to the Dow Jones industrial average in March, has gained 12.7% this year, closing at $124.43 Tuesday.