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Morgan Stanley explains why Apple could rise 50%

Is Apple set to break out?

It's shaping up to be a great quarter and year for Apple, with iPhone and watch demand both set to impress, Morgan Stanley predicts in an analyst note.

Analyst Katy Huberty has raised her estimate for iPhone sales in the June quarter to 50 million from 46 million, and is also increasing fiscal 2015 and 2016 forecasts by 5 percent and 7 percent, respectively. The analyst explains that increased demand in the current quarter is being driven by China and other emerging markets.

Meanwhile, the next iPhone cycle is looking like another great one, thanks to survey results indicating "strong demand from existing iPhone users, with nearly half of the installed base planning to upgrade in FY16."

And it's not just the iPhone that could be set to impress.

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Morgan Stanley reports that in the U.S., demand for the Apple Watch has increased by some 60 percent since March.

Shoppers and salespeople at an Apple store in New York.
Scott Mlyn | CNBC

The firm's survey actually shows annual demand for 50 million watches, but this may be "the bull case given supply limitations," Huberty writes. Still, she expects to see watch sales of 36 million in the product's first 12 months, compared to her prior 30 million estimate.

Unsurprisingly, these increased results also improve Morgan Stanley's projection for Apple's earnings. The analyst is boosting her 2015 and 2016 earnings estimates by 4 percent and 8 percent, respectively. However, because she sees Apple's margins declining a bit, she is keeping her price target at $166.

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Yet the analyst sees a scenario where Apple shares rise even higher than that.

In a "bull case," the tech giant's shares could be set to climb to $195, as Apple's multiple stays high and earnings per share come in even stronger than estimated, the analyst writes. That's a 50 percent gain from Thursday's opening price of $130.

Her previous bull case target was $190.