Here's why Apple shares will reach $135: Analyst

Citi's Apple optimism
Citi's Apple optimism

Citigroup updated its price target for Apple on Monday, saying strong sales of high-end iPhone models will drive up margins and earnings.

Apple's 64-gigabyte and 128-gigabyte iPhone 6 and 6 Plus models are its strongest-selling smartphones, according to global field work conducted by Citi. Since the latest generation of iPhones boasts a better camera and improved resolution, consumers are finding it worth the money to invest in more memory as they shoot and consume more pictures and video, Citi senior analyst Jim Suva told CNBC's "Squawk Alley."

That marks a shift from previous cycles, when mid-tier phones were the go-to, he added. Citi believes Apple makes more than 50 percent on gross margins when iPhone users trade up to the 128 gigabyte model.

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That is happening more frequently as carriers encourage consumers to upgrade their handsets, according to Citi's research note.

Suva now sees shares of Apple reaching $135, compared with its previous target and Street consensus of $120. He said Apple's stock is trading at about 13 times earnings after one removes the company's $20 of cash per share.

"That's a steep discount to the market multiple of 16 times. That's why we think the stock can get up to about $135, which is about 20 percent upside from today's share price," Suva said.

Shares of Apple were down about 2 percent at just above $112, as tech stocks turned broadly lower on Monday.

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One concern is that the 5.5-inch iPhone 6 Plus is cannibalizing sales of the iPad Mini, which has a 7.9-inch display. Citi sees iPad Mini becoming soft during the next couple of quarters, said Suva.