With the coronavirus likely to create a global recession, it may be hard to imagine Apple (AAPL -1.22%) shares soaring to $500, or over 75% higher than yesterday's close. But that's where Evercore analyst Amit Daryanani thinks the stock can go under optimistic circumstances. In a research note released over the weekend, Daryanani outlined an "upside case" where improved profitability could potentially drive multiple expansion.

Here's what investors need to know.

Tim Cook in front of the Apple logo

Image source: Apple.

The path to $500

Daryanani reiterated an outperform rating and $325 price target on Apple, while describing a bullish scenario in which the stock could reach $500 if Apple can meaningfully enjoy operating leverage and expand gross margin for its hardware products back to 34%.

While gross margin in the products category hit 34% in the fourth quarter, Apple's hardware business is highly seasonal; operating leverage peaks over the holiday shopping season. For 2019, Apple's gross margin for hardware products was 32.2%, compared to a 64.1% gross margin for the services category.

Chart showing products gross margin

Data source: SEC filings. Chart by author. Calendar quarters shown.

However, that could be challenging, given that the expected shift to 5G iPhones will be expensive due to increased component costs associated with the new technology.

Under the analyst's base case, which underpins the overall $325 price target, Daryanani expects product gross margin to stay flat. In that scenario, Apple may also struggle to demonstrate operating leverage if operating expense growth continues to outpace revenue growth. In recent quarters, operating expenses have been marching higher, driven predominantly by higher investments in research and development while the revenue growth decelerates.

Chart comparing operating expense growth to revenue growth

Data source: SEC filings. Chart by author. Calendar quarters shown.

Still, the company's strong execution in wearables and services are encouraging, according to the analyst. That will help bolster Apple's business outside of the iPhone. "We expect wearables and services to sustain double digit growth driven by uptick in [average revenue per user] and better monetization of the install base," Daryanani wrote in a research note to investors.

The bull case of $500 per share corresponds to Apple's valuation multiple expanding to 27 times forward earnings, which would be unprecedented territory for the $1.2 trillion company, but in line with other companies that sell luxury goods to consumers.

AAPL PE Ratio (Forward) Chart

AAPL PE Ratio (Forward) data by YCharts,

The flip side of Evercore's analysis includes a bearish scenario in which the stock falls to $200, which could occur if the coronavirus causes a prolonged recession that leads to stagnant earnings through fiscal 2021. Overall, Evercore believes that Apple shares offer an attractive risk/reward trade-off, among the best in the tech sector, so Daryanani recommends that investors take advantage of coronavirus-related volatility to buy the stock.