Revised Apple stock price predictions have shares rising from 50% to 74% from its current level of about $115.
And what has analysts so excited isn't any of the new hardware Apple Inc. (Nasdaq: AAPL) announced last week, but a new way of selling the iPhone.
Such developments can have a huge impact on AAPL stock because the iPhone accounts for about two-thirds of the company's revenue.
Near the end of the Sept. 9 Apple Event, the company unveiled the iPhone Upgrade Program. Apple will essentially lease new iPhones for a monthly fee, starting at $32.41 for the least expensive model.
These iPhones will be provided unlocked so users can choose their own carrier. The iPhone Upgrade Program will help Apple stock in several ways.
It removes the concern of the carriers ending their phone subsidies while undermining customer loyalty to carriers like AT&T Inc. (NYSE: T) or Verizon Communications Inc. (NYSE: VZ). Instead, customers will be tied more tightly to Apple.
What's more, the program allows customers to upgrade to the latest iPhone every year at no extra cost. You need only trade in your old iPhone.
This provides an easy way for iPhone owners to make sure they'll always have Apple's latest and greatest. By cutting the normal two-year upgrade cycle in half, Apple will sell more iPhones to customers who want a new iPhone every year, while creating an inventory of more affordable iPhones it can sell in emerging markets as well as to customers on a budget in developed economies.
Amit Daryanani, an analyst with RBC Capital Markets, shared his math with Barron's. He figured that the average iPhone costs about $700 and costs the company $350 to produce - a 50% gross margin.
Here's where the iPhone Upgrade Program will make its biggest contribution to AAPL stock...
The Thinking Behind the Rising Apple Stock Price Predictions
A leased iPhone will bring in $384 in its first year, a 55% margin when you amortize over two years. When the customer trades in that iPhone after the first year, Daryanani says Apple will be able to re-sell it for about $500. That generates a gross margin of 65% in year two.
Combined, you get a two-year gross margin of 60% ($884 in revenue minus the $350 in costs) - a significant jump over the current iPhone margins.
Higher iPhone unit sales at higher gross margins means a big jump in profits. No wonder analysts are rethinking their Apple stock price predictions now.
Mark Mulholland, portfolio manager of the Matthew 25 fund (MUTF: MXXVX), told Barron's that "Apple has been undervalued for six years." His AAPL stock price prediction reflects that view.
"Today, Apple's fair price is $170-plus," Mulholland said. "Three to four years down the line, it is easily $200 to $250. And these aren't aggressive numbers."
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Indeed, that kind of lofty Apple stock price prediction should not surprise Money Morning readers.
Money Morning Chief Investment Strategist Keith Fitz-Gerald put a $200 price target on Apple stock back in April. He said AAPL would get there in two years.
In May, Money Morning Defense & Tech Specialist Michael A. Robinson predicted Apple would become a $1 trillion company by Labor Day of 2018, roughly three years from now. That would put the Apple stock price at $175.44.
And last month, Money Morning Options Trading Expert Tom Gentile did an analysis that showed Apple would rebound to $200 in just 12 months.
It's nice to see at least some of the minds on Wall Street catching up to what we've been saying for months.
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About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.