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Apple, Inc. (AAPL): Shorter Phone Life Span Supports Bullish Case

By Kate George 

Apple Inc. (NASDAQ:AAPL) has been in news for the strong response to its latest iPhones (6S and 6S Plus). However, over the last six months, shares of Apple have dropped by 11.79 percent. Kathryn Huberty from Morgan Stanley weighed in as a response to the impressive iPhone replacement rates. 

Yesterday, Huberty maintained an Overweight rating on Apple while raising her price target to $162 (from $155). Huberty’s optimism is attributed to surveys conducted by Morgan Stanley, which show solid market growth and record market share gains for the tech giant. Huberty notes the “surprisingly” robust market demand for smartphones in spite of a volatile macroeconomic environment.

In her report, Huberty writes, “More people expect to purchase a smartphone in the US over the next 12 months than a year ago, despite market maturity.”

According to Huberty, shrinking replacement cycles are the reason behind the growing demand for smartphones. The analyst believes the average lifecycle of a smartphone in the US has decreased by five months. Similarly, replacement cycles are also falling in China, which incidentally is also growing as a percentage of the total market for smartphones. Consequently, more and more iPhone users in US and China are expected to upgrade their iPhones in the next 12 months.

Huberty said, “Further supporting revenue growth, ASPs should rise, particularly in China, where the majority of consumers plan to spend more on their next device. Overall smartphone demand that is up in both the US and China supports our view of 10 percent year-on-year unit growth in CY16.”

For Fiscal 2016, Huberty raised her unit growth estimates for iPhone to 7% as opposed to 3% previously. Her “realistic bull case” contends that the iPhone can see a year-on-year increase of 12%. As per Huberty, the updated unit growth estimates are meant “to better reflect more upgrades and expected share gains at the high end of the market.”

She attributes the better-than-expected performance of iPhones to robust upgrade cycle and the record share gains made by Apple in US and China “as consumers increasingly focus on brand/software over price.”

Kathryn Huberty has a 68% success rate recommending Apple with a +23.4% average return per rating when measured over a one-year horizon and no benchmark. Huberty has rated the tech giant 73 times since 2009.

As per TipRanks, out of 37 analysts who have recently rated Apple’s stock, 27 have rated it as Buy, 9 have rated it as Hold, and only 1 analyst has given a Sell rating for the stock. Based on these ratings, the average 12-month price target for Apple’s stock is $147.23, an upside of nearly 31% from current levels.