By Philip Elmer-DeWitt
March 14, 2012

What was their “bull case” price target in January became their “base case” in March

It must have been an embarrassment for Morgan Stanley’s Katy Huberty that her published 12-month price target for Apple (AAPL) — set on January 25 — was stuck at $515 while the actual share price zoomed past it and was setting new records almost every day. (Tuesday’s close: $568.10.)

On Wednesday she did something about it. She published a note to clients that set three new price targets:

  • Bull case: $960
  • Base case: $720
  • Bear case: $405

Although $720, her old “bull case” target, is now her “base case,” the thrust of Huberty’s note was that $960 was where her heart lay.

“We believe Apple’s earnings power is potentially far greater than investors believe and our prior bull case model suggested,” she wrote.

She cited three factors: (I quote)

1) Enterprise tablet adoption combined with demand upside from lower-priced iPad. The pace of enterprise tablet adoption is exceeding expectations, according to our January 2012 CIO survey. Fifty-six percent of US companies already purchase tablets for corporate use, compared to a 51% expected penetration a year ago. Assuming Apple maintains its 80% share of the enterprise tablet market, iPad purchases by enterprises could account for 9 million units and $5 billion in iPad revenue in CY12. This is in addition to consumer purchases of iPads, some of which will also be used in the enterprise.

2) iPhone estimates don’t credit Apple for the potential share gains when it launches an LTE-capable device in 2H12. Our supply chain checks suggest Apple’s sixth generation iPhone could include several changes that, in our view, will increase the upgrade rate relative to past product cycles. In particular, iPhone 5 is likely to include a higher-resolution and potentially thinner screen, new casing material, faster processor, and quad-mode baseband chip that works on multiple flavors of 3G and LTE. Our December US survey indicated that 62% of iPhone owners planned to upgrade to the new version, iPhone 4S. Assuming a similar upgrade rate for the LTE iPhone due out later this year, this implies 148M and 160M upgrade purchases in our base and bull case. The remaining 38M and 86M shipments would come from new users, roughly split between emerging markets and mature markets. For perspective, the same math implies Apple added roughly 48M new users in CY11.

3) China and other emerging markets, like Brazil, remain huge untapped markets. The emerging markets remain a huge opportunity for upside long term due to attractive demographics. Smartphone penetration is highest among cell phone users 25 to 34 years old, according to Nielsen. The emerging markets have nearly 14x the population in this age range than Western Europe and North America.

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