Why Credit Suisse Is Raising Apple Targets Again

The buzz about the new Apple Watch, coupled with strong iPhone sales — in fact the company’s best quarter ever — has put Apple in a solid position going forward and analysts are rewarding the company.

What investors need to know now is that the Credit Suisse price target implies an upside of nearly 17% from current share prices. This call is coming from evidence of near-term iPhone strength, as well as a better-than-expected product mix. Such strength offsets weaker trends for the iPad and an additional currency headwind.

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As a result, Credit Suisse also raised its earnings per share (EPS) estimates by 4% and 7% to $9.07 and $10.37, respectively, for the 2015 and 2016 fiscal years. Considering the high retention rates and a superior ecosystem, the firm believes such elevated levels of earnings and free cash flow of $70 billion should be sustainable in the long term.

In addition, Credit Suisse has further raised its projection for iPhone volumes to more than 230 million units. In Credit Suisse’s installed base analysis, it shows iPhone users numbering at least 400 million. The quickening replacement cycle is expected to play a role in this as well, suggesting that iPhone volumes could grow from 193 million in the 2014 calendar year to 236 million in 2015 and 238 million in 2016.

Although iPhones make up a majority of sales, the Apple Watch also appears to be a solid addition to the portfolio. Around 10% of the iPhone installed base indicate a preference to definitely purchase an Apple Watch, suggesting volumes as high as 40 million. Credit Suisse conducted a survey that suggests an average selling price above $800. Furthermore, Apple products are expected to continue to support loyalty levels and drive brand equity.

Credit Suisse’s Garcha sees additional reasons for the upgrade on Thursday. First, the gross margins at 40% at the corporate level could prove conservative, as it does not take into account leverage from increased sales nor scope for expansion as cost curves on new products improve. Second, the firm assumes no significant impact from new products or the monetization of services, such as Apple Pay, Beats, HealthKit and HomeKit. Finally, Apple Watch estimates could prove to be on the conservative side.

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If you read the Apple call details, it is now of little surprise that Apple’s short interest slid 10%.

As far as where Credit Suisse fits within the rest of the analysts covering Apple, the highest analyst price target for Apple is $180, which implies upside of 45%. The stock has a consensus analyst price target of $140.17, suggesting upside of 13%. Shares of Apple were up fractionally at $123.97 in Thursday morning trading, in a 52-week trading range of $73.05 to $133.60.