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Apple upgraded because $1,000 iPhone will ‘extract’ more profits from consumers

  • KeyBanc Capital Markets raises its rating on Apple shares to overweight from sector weight, predicting the company will report better-than-expected earnings next year.
  • "Apple's introduction of iPhone X at a $999 entry price, its increase to iPhone 8/8+ prices, and its change to storage step-up pricing collectively represent a more aggressive strategy to segment its customer base and extract incremental gross profit from its users than we previously expected," the firm's analyst writes.

Apple's rollout of more expensive iPhone models this year will boost the smartphone maker's profits, according to one Wall Street firm.

KeyBanc Capital Markets raised its rating on Apple shares to overweight from sector weight, predicting the company will report better-than-expected earnings next year.

"Apple's introduction of iPhone X at a $999 entry price, its increase to iPhone 8/8+ prices, and its change to storage step-up pricing collectively represent a more aggressive strategy to segment its customer base and extract incremental gross profit from its users than we previously expected," analyst Andy Hargreaves wrote in a note to clients Sunday.

Apple shares rose 0.9 percent in Monday's premarket session after the report. Hargreaves initiated a $187 price target on Apple shares, representing 19 percent upside to Friday's close.

"Apple's most inelastic customers are likely to be the ones who look to purchase the iPhone X first," he wrote. "Assuming supply of iPhone X improves, this should create a favorable initial mix of iPhone X units that is likely to be favorable to investor sentiment over at least the next few quarters."

The analyst predicts Apple's fiscal 2018 iPhone average selling price and gross profit margin will be $760 and 39.5 percent versus the Wall Street consensus forecasts of $725 and 38.6 percent, respectively. As a result, he raised his estimate for the company's fiscal 2018 earnings per share to $11.68 from $11.07 compared with the $11.03 Street average.

"The potential for Apple to exercise greater pricing power, along with further App Store growth, supports the view of the Company as a franchise with subscription-like qualities rather than a regular hardware business," he wrote.

Despite recent volatility, Apple is still one of the market's best-performing large-cap stocks so far this year. Its shares have rallied 36 percent through Friday versus the S&P 500's 14 percent gain.

The iPhone X will be available on Nov. 3 at a base model price of $999.

— CNBC's Michael Bloom contributed to this story.

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