Apple, Inc. Stock Could Hit $635 on More Expensive, Larger iPhone

Apple (NASDAQ: AAPL  ) stock could hit $635 in 12 months, says Pacific Crest Securities analyst Andy Hargreaves. That would give investors an 18% return at today's prices. His reason for the bullish outlook? A 4.7-inch iPhone with a subsidized price of $299, $100 more than the price for the iPhone 5s. While his speculation is certainly bold, the underlying assumptions are reasonable.

The case for a larger iPhone
There have been rumors that Apple is, indeed, developing a larger iPhone to launch in another bifurcated iPhone product release this fall. While it seems difficult for iPhone users to imagine a larger iPhone, designer Sam Beckett recently made an excellent case for the device in a concept video, dubbing the smartphone iPhone Air.

Despite the concept phone's 17% larger display than the 4-inch iPhone models, the actual phone in the concept is just 8% larger than the existing iPhone 5s. Designing with circulating rumors in mind, Beckett assumed that side bezels and the top and bottom of the frame could be slimmed down thanks to a sapphire crystal display.

Hargreaves believes Apple could position the iPhone Air as a more expensive device than the current iPhone 5s pricing. The fact that Apple's cheaper iPhone 5c didn't have an adverse effect on iPhone 5s sales, he says, is a sign that consumers are willing to pay more for premium smartphones. The notion goes entirely contrary to the industry trend to sell cheaper smartphones.

How Apple gets to $635
Hargreaves justifies the $635 price target by saying that the more expensive iPhone could reasonably capture 10% of the existing jumbo-sized phone market (smartphones larger than four inches) and add as much as $4 in earnings per share in 2014. That would boost EPS by about 9%. At $635, Apple stock would trade at a price-to-earnings ratio of 14.3, slightly higher than its price-to-earnings ratio today of 13.3.

AAPL PE Ratio (TTM) Chart

AAPL P/E Ratio (TTM) data by YCharts

While Hargreaves makes some good points about a larger iPhone and its meaningful potential on Apple's bottom line, there is a broader takeaway for investors from Hargreaves analysis. His scenario highlights the low downside risk to the value proposition for Apple stock at these conservative levels. Really any significant new product with meaningful success could positively impact the stock. And investors are in the fortunate position to know that the company is introducing new product categories, thanks to comments form Apple CEO Tim Cook. That said, Hargreaves price target of $635, in light of a rumored iWatch, revamped Apple TV, and a larger iPhone, seems sensible.

Of course Foolish investors shouldn't think in terms of twelve-month price targets, instead opting for an even longer-term time horizon. But the risk profile outlined for this market leader by Hargreaves is certainly enticing.

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Read/Post Comments (5) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 11, 2014, at 10:52 PM, NobodysFool111 wrote:

    When are you Apple polishers going to realize that this company is too slow moving in both product development and acquisitions to still be considered a growth company rather than the sedate value play it now represents? And actually, with price to tangible book at 3.83, it fails to meet the Graham-Dodd level of valuation.

  • Report this Comment On March 11, 2014, at 10:53 PM, Foolonthepill wrote:

    Apple "Could hit $635" is kind of a passive prognostication considering the list of features and subsequent strengths that AAPL will gift its loyal shareholders in the not-too-distant future. To back up your conviction, you should guarantee that AAPL will hit a minimum of $635. With such assurance, I will sleep better at night.

  • Report this Comment On March 12, 2014, at 12:26 AM, CraigWPowell wrote:

    Apple has launched CarPlay, its expected platform for pairing iPhones with in-dash automotive systems. Mercedes-Benz, Ferrari, and Volvo are rolling out cars that support CarPlay; most other major automakers plan to do so late.

    * I KNOW FIRST SYSTEM*

    ** CITIGROUP**

    *** MORGAN STANLEY*** are bullish on AAPL in 2014

    iOS 8 will feature a major overhaul of Apple Maps (AAPL). The UI will be revamped; transportation/POI data from recent acquisitions BroadMap, HopStop, and Embark will be included, and public transit directions (frequently requested) will be added.

  • Report this Comment On March 12, 2014, at 10:47 AM, jdmeck wrote:

    I still think a larger "phone" is a bad idea. Are they really popular among the type of customer who buys Apple products or are they popular among the type of customer who buys a cheap PC?

  • Report this Comment On March 18, 2014, at 8:33 PM, Foolonthepill wrote:

    $635? Who cares about $635? When is AAPL going back to a 7-handle - we want to make some money here! I'm sure the new tell-all-with-warts tome will take it back to the promised land. Apparently, Tim Cook can't hit the ground with his hat.

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