updated 02:38 am EDT, Tue July 15, 2014
Expected 'iWatch' acceptance, customer loyalty, new iPhone, strong management all factors
On the same day as Apple's stock hit a 52-week high, closing at $96.43 per share on Monday, two major brokerage houses have upped their predictions for year-end AAPL prices to $110, which would put the stock past its best-ever performance, even adjusted for the number of additional shares created. Morgan Stanley credited strong customer loyalty which will in turn drives initial sales of the long-rumored "iWatch," while Barclays analyst Ben Reitzes expresses new confidence in Apple management.
Analyst Katy Huberty of Morgan Stanley is basing her upgraded target price in part based on expectations that Apple will -- as usual -- meet or beat the high end of analyst expectations for the June quarter, the results of which will be revealed a week from Tuesday. The brokerage had previously set a $99 price point, but now believes shares could go as high as $132 per share (or as low as $74, depending on many potential market forces).
In her memo to investors, Huberty noted that loyalty to the iPhone has increased over the years, now reaching 90 percent of buyers and suggesting that once users try an iPhone, they stick with it. Loyalty has risen from 73 percent in late 2011 to 90 percent now, and Huberty believes this creates a built-in audience that will be likely to buy an Apple "smartwatch" or fitness band, or whatever the so-called "iWatch" the company is working on turns out to be.
Reitzes, who has been known for being bearish on AAPL, told his clients he is "back on board" with Apple thanks to renewed confidence in the management. He initially feared that Apple would be hurt in future quarters by a maturing smartphone market, but now belives that "Tim Cook has solidified his strategy and regained the confidence of Apple stakeholders in many ways - reversing many of the warning signs we saw earlier in the year."
Regarding the June quarter, he thinks Apple will report just over $38 billion in overall revenue, slightly higher than the consensus estimate of $37.85 billion, mostly on the strength of better-than-guidance sales of the iPhone (he predicts 37 million units, up from an earlier guesstimate of 35 million). Reitzes, who previously held a price target of $95 per share, now expects that Apple will continue to fend of the challenge of rival Samsung (which has been weakening of late) and grow iPhone sales 14 percent across 2014 (to 172 million units) and another 15 percent growth in 2015.
Both Reitzes and Huberty believe that strong expectations from supply-chain sources indicate some pent-up demand for both the next iPhone model as well as future new products such as the "iWatch." Huberty attributes this to a "halo effect" drawn from the high satisfaction rate Apple customers have with the products they purchase from the company. She believes the company has a good chance of selling at least 30 million, and possibly as many as 60 million, "iWatch" units in the first full year of availability -- assuming an average price of $300 and gross margins between 40 and 50 percent, this could lead to between $4 billion and $9 billion in new revenue for the company.
Huberty told investors not to use current smartwatch sales as a guide for how well the "iWatch" might do, noting that analysts and investors alike have traditionally underestimated Apple's ability to launch new products in new categories. Reitzes declined to make specific predictions on "iWatch" or other new product sales, but noted that the company's top-selling product -- the iPhone -- continues to grow in international markets, sell older models well enough to challenge even the flagship phones of rivals, and grow its North American share against the Android platform, where growth has stagnated over the past few quarters.
Before the recent 7-to-1 stock split, AAPL reached an all-time high of just over $700 in 2012. With company buybacks reducing the number of outstanding shares, followed by the septupling of shares because of the June split, on a price-adjusted basis, AAPL would need to reach $110 per share to beat its best-ever price. Many investors are predicting the event could happen before year's end, though prices would continue to flucuate higher or lower and would be unlikely to stay above record levels in the short term.