Goldman: Apple to surge 40% on iPhone upgrades

Published Tue, Sep 22 201510:57 AM EDT

Goldman Sachs gave clients three reasons Tuesday morning why Apple shares may rally by more than 40 percent over the next 12 months. A new analyst for the firm, Simona Jankowski, initiated coverage on the world's largest company by market value with a 'buy' rating, taking the reins from previous analyst Bill Shope. Jankowski built up a great track record with her coverage of other technology companies as her picks averaged a one-year return of 11.7 percent, according to TipRanks.com. Her price target of $163 is also much higher than the Wall Street consensus of around $145, according to FactSet. It was trading at $113.20 on Tuesday morning. Here are the three reasons: "Consensus expectations for the iPhone 6s product cycle, which kicks off this Friday, are low, with the Street modeling flat iPhone revenues in FY16 after a 51 percent surge with the iPhone 6 cycle in FY15. By comparison, we model 6 percent iPhone revenue growth (+7 percent units and -1 percent ASPs) in FY16, as our replacement cycle model shows that units can grow just on the strength of upgrades in the installed base, even with declining gross adds." The reason why the analyst believes the upgrade cycle will be so strong is because the number of upgrades to the next iPhone highly correlates with the number of new buyers the previous iPhone garners. "We estimate Apple's iPhone installed base is up 32 percent year-over-year, and growth in upgrades is 90 percent-plus correlated to growth in the installed base." Apple's new leasing plan directly through the company and not carriers should also boost the number of upgrades higher than the rest of Wall Street currently estimates, the analyst said. Falling unit growth for iPads has many calling for the death of the product as it is being cannibalized by bigger smartphones. However, Goldman thinks it may be too soon for that projection with the introduction of the iPad Pro, a higher margin product. Falling unit sales should stabilize next year and revenue should actually increase in 2016, according to Jankowski. Read More 2015 already a record year for chip sector M & A "With IoT, the smartphone is becoming the gatekeeper to one's home, car, health, and bank account (kids and pets, too) – which further increases its value and places a premium on security and privacy – key areas where Apple differentiates vs. ad-based models such as Google." Jankowski gets to her price target by applying a 13 multiple on the firm's 2016 earnings estimate excluding cash. Reasonable, considering the stock is under-owned by mutual fundd relative to the stock's weighting in the S & P 500. On the recent reports of the Apple Car, the analyst believes the company will contract out the actual building of the vehicle, similar to its iPhone relationship with Foxconn. So the product won't be as capital intensive as feared.

Apple Inc. iPhone 6s Plus smartphones are displayed after a product announcement in San Francisco, California.

David Paul Morris | Bloomberg | Getty Images

Goldman Sachs gave clients three reasons Tuesday morning why Apple shares may rally by more than 40 percent over the next 12 months.

A new analyst for the firm, Simona Jankowski, initiated coverage on the world's largest company by market value with a 'buy' rating, taking the reins from previous analyst Bill Shope. Jankowski built up a great track record with her coverage of other technology companies as her picks averaged a one-year return of 11.7 percent, according to TipRanks.com.

Her price target of $163 is also much higher than the Wall Street consensus of around $145, according to FactSet. It was trading at $113.20 on Tuesday morning.

Here are the three reasons: