Morgan Stanley: How an iPhone Super Cycle Will Drive Apple Shares Much Higher

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If one company is the most loved on Wall Street and Main Street alike, it would still have to be Apple Inc. (NASDAQ: AAPL). Despite having made many people rich who invested in the stock over the past 10 to 15 years, the reality is that Apple’s equity market capitalization of $635 billion is the largest market cap in the world.

Now comes a call from Morgan Stanley’s Katy Huberty that has named Apple a top pick for 2017. Many positives were noted, but Apple’s prospect for higher sales from a new iPhone and Trump’s economic agenda were cited for the drivers of a positive view here.

Morgan Stanley reiterated its Overweight rating with a $148 price target. That is more than $15 higher than the year-end bull-bear consensus analyst price target. The real question is whether Apple shares can move back toward $162 in a would-be upside proposed in a prior Morgan Stanley call that pre-dates this January call.

Note that Morgan Stanley was a bit less aggressive back in October, but the firm’s report at the time said that Apple shares were not adequately pricing in the fiscal 2018 super cycle. That sounds familiar with this call. Huberty’s note at that time had just a $124 price target, but she said that accelerating iPhone growth could propel Apple’s stock price toward $162 in 2017.

Monday’s report showed that investors are currently too focused on near-term supply chain noise. Three upside catalysts that were offered were seen as follows:

  • iPhone super cycle, being led by China
  • Billions of cash from repatriation
  • U.S. tax reform

One issue that was brought up is that Apple is facing pent-up demand at the same time that it is heading into a significant form-factor change. Huberty sees that as most likely accelerating iPhone unit growth. Huberty’s report said about the China prospects that the iPhone super cycle is most debated by investors who see China as a risk rather than as an opportunity. While that was after weak demand from the most recent quarters, she said:

Our view is that China consumer loyalty to Apple remains high, evidenced by stable market share of 80 percent at the high-end of the market, and that weak demand is a function of the lack of a form factor change during the iPhone (6S/7) cycles which will be addressed with the AMOLED iPhone launch later this year… even a flat China upgrade rate next cycle will result in at least 20% iPhone unit growth…

One issue that was not really brought up for the new “Top Pick” call as a driver from Apple’s move into more services and into recurring revenue themes. That was addressed in a bullish call from Goldman Sachs, but that was their view and not Morgan Stanley’s.

Apple shares hit a 52-week high of $119.43 earlier on Monday. Its shares were last seen trading up 1% at $119.10, and the consensus analyst target was $132.25.