This post originally appeared in Business Insider.
Here’s something that’s rare lately: Apple is getting an upgrade.
Andy Hargreaves at Pacific Crest upgraded Apple to “outperform” from “sector perform” and gave it a $635 price target.
His reasoning for the upgrade: He believes Apple will release a 4.7-inch iPhone 6 in the fall. He thinks Apple will charge $299 for the phone on-contract, which is $100 above what it charges for the iPhone 5S. That will boost sales and earnings. He thinks that Apple will see a lot of phone upgraders this year buying the big-screen phone.
Pacific Crest
Hargreaves says that Apple consumers are relatively rich, so $100 doesn’t mean too much to them. He cites the failure of the iPhone 5C as evidence that Apple’s customers don’t mind spending an extra $100 for a better product.
Apple released the iPhone 5C, which cost $100 with a two-year contract. The iPhone 5S was $200. Over the life of a phone, which is two to four years, that $100 isn’t all that much. As a result people skipped the 5C for the better 5S.
Because Apple customers have shown they don’t mind paying a slight premium, he thinks Apple can charge $100 more for the newer, bigger phone. He also cites Samsung charging $299 for the Note, a bigger 6-inch phone, as evidence that you can charge more for a big phone.
Contrary to what many people think, Hargreaves doesn’t think Apple does two big phones this year. He only sees a 4.7-inch iPhone and not an additional 5.5-inch iPhablet like some were speculating would happen.
He also thinks there is “optionality” on new products. In other words, if Apple gets into a new, exciting product category, the stock could take off based on the new product. Now is a good time to take a chance on the stock.
“While many observers have chided Apple for a ‘lack of innovation’ over the last two years, we do not expect a linear path to commercially successful new product categories,” says Hargreaves. “Instead, Apple is likely to choose its opportunities and timing extraordinarily carefully and release new products or services only when it feels it has the best chance to succeed, which does not mean it is not innovative, just that it is not dumb.”
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