BofA/Merrill Lynch Upgrades Apple (AAPL) to Buy; Sees iPhone Super Cycle

BofA/Merrill Lynch reinstated coverage on Apple (NASDAQ: AAPL) Tuesday, upgrading shares from Neutral to Buy with a price target of $120.00 (up from $98).

Analyst Wamsi Mohan cited (1) an iPhone "super cycle" of 195mn units in F15, up 16% Y/Y driving our estimates of $220bn/$7.86 vs. Street at $200bn/$7.27, and (2) multi-quarter gross margin expansion driven by higher ASP from mix (30% of new model sales skewed to iPhone 6+) and incremental benefit from higher capacity models (mix to 64GB not yet in our estimates).

Mohan also said Apple's ecosystem remains strong. He said Apple Pay can conservatively worth $10/share over the next 3 years at run rate of $0.50/share in EPS. Apple Watch can similarly add $5/share in value over 2 years In addition, its $165 billion chest of cash can be used to enter new markets, return cash to shareholders, and support dividend increases.

The analyst said despite the 25% YTD move higher they expect the next leg up to be driven by positive earnings momentum from growth in gross margins for the next several quarters vs. the decline in gross margins in the 2012 cycle. "We expect this upgrade cycle to be driven by ~110mn units with phones older than 2 yrs, 42mn from early upgrades, 17mn from android to iOS switchers and 24mn from broader enterprise adoption," Mohan said.

For an analyst ratings summary and ratings history on Apple click here. For more ratings news on Apple click here.

Shares of Apple closed at $99.62 yesterday.

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