Apple analysts are underestimating the company, Citi analyst Jim Suva says.
"Apple reports on Monday, April 27, after the market close, and we believe the company will beat consensus sales by at least $1 billion and iPhone unit shipments by at least 5% and at least a 2% EPS beat versus consensus (even after factoring in an estimated -6% year over year currency impact to financials)," Suva says in a new note.
He gives five reasons, plus a "bonus" reason, he thinks Apple's stock is going to soar. He calls Apple one of Citi's "highest conviction stock ideas."
Here are his reasons for being a mega bull:
1. "Device acceleration." Basically, people are still buying a lot of iPhones. In the recent past, Apple has seen an explosion in iPhone purchases during the December quarter, then a sharp drop in the March quarter and a gradual decline for the next two quarters. There will be a drop for the March quarter, but it will not be as severe as it has been in the past. Apple is selling a lot of iPhones in part because carriers have changed their upgrade policies. Previously, iPhone owners had to wait two years or more; now they can do it sooner. Suva says analysts haven't fully grasped this idea.
2. Analyst estimates are going to get jacked, and Apple's valuation is low. Apple is trading at 14 times forward earnings, while the S&P 500 trades at 17 times. Suva thinks that gives Apple room to grow. He also thinks analysts are too conservative and will soon have to raise their estimates.
3. Gross margins are growing. Apple sells three storage options: 16GB, 64GB, and 128GB. Each step up in storage costs consumers an extra $100 compared with just $20 for Apple, so that's $80 in profit. The 16GB phone is basically useless because it fills up with photos quickly. As a result, everyone is paying up for the 64GB or 128GB model, leading to a big expansion in gross margins.
4. Apple Pay/Passbook. This seems to be based largely on potential. Apple Pay is starting to gain traction, and in the long run it can be a nice business for Apple. Further, Suva thinks Passbook will be useful for all sorts of things.
5. Enterprise opportunity. For as long as we can remember, people have been saying Apple is on the cusp of cracking into enterprise. This time might be different because CEO Tim Cook is a bit more attuned to enterprise needs than Steve Jobs ever was. Apple has also done a deal with IBM to make enterprise apps for the iPad, which should help.
6. BONUS: Apple Watch! The Apple Watch comes out this year, and Suva is calling for just 7 million units in Apple's fiscal 2015. He does think, however, that it could add a nice boost to the stock.
7. Double bonus: Apple TV. Suva doesn't mention Apple TV, so we're doing it for him. There is talk of an Apple TV update coming this year. It's unclear whether that will lead to much in terms of revenue from unit sales. It will be exciting, however, and should add to Apple's services revenue.
