The iPhone line of smartphones from Apple Inc. (AAPL) will be a major driver of revenue and earnings for the company in upcoming years, according to Robert Cihra, senior technology, media, and telecom research analyst at Guggenheim Partners LLC, as reported by Barron's. The iPhone is riding a wave of "pent-up demand," Cihra writes in recent research report excerpted by Barron's. He forecasts that unit sales will rise by 13%, average prices by 17%, and total sales revenues by 32% in Apple's current fiscal year, which ends on September 30, 2018.

Future Gains Forecasted

Cihra has a buy rating on Apple, and has set a price target of $215 for the stock, almost 27% above its $169.64 close on December 5. Apple stock has risen 49% for the year-to-date through December 5, and 614% for the ten years through the same date. Its current forward P/E ratio is 14, per Thomson Reuters data reported by Yahoo Finance. This represents a discount versus the forward P/E on the S&P 500, which was 20 as of December 1, the latest weekly calculation by Birinyi Associates as reported by The Wall Street Journal.

Based on his own earnings projections for fiscal 2018, Cihra derives a P/E of only 11 for the company, excluding cash. After assuming a P/E for its services business, mainly represented by the App Store (see below), of 20, he estimates that Apple's product business is being valued at a forward P/E of only 9.

An iPhone Company

Smartphones have long since overtaken personal computers as Apple's leading product line by sales revenue. From now through fiscal year 2020, Cihra projects that iPhones will contribute 70% of the growth in the company's revenues, rising from 62% to 64% of total sales during that period.

He's impressed by the features of the iPhone X, and sees Apple as a leader in the development and monetization of augmented reality (AR) technologies, both hardware and software. Augmented reality overlays digital information or computer-generated images on a view of the user's actual environment in real time, per RealityTechnologies, with GPS being a common AR application for smartphones. By contrast, virtual reality (VR) creates a wholly artificial environment.

App Store Growth

Cihra also notes that Apple's services business, led by its App Store, is on track to contribute about 33% of the company's profits by fiscal 2020. Apple's services have a gross margin in excess of 60%, he adds. However, applications sold through the App Store are designed to run exclusively on Apple devices such as iPhones, the Mac line of computers, iPads, and the Apple Watch. As a result, increased App Store sales are dependent, to a large degree, on robust sales of such devices, an issue not remarked upon by Cihra in the excerpt of his report in Barron's.

Skeptical Views

Some skeptics about Apple worry that the stock simply has run up too far, too fast. Contrarians note that analysts are rather bullish about Apple's earnings over the next few years, meaning that the downside risk from earnings disappointments outweighs the upside potential from positive earnings surprises. (For more, see also: Why Apple Faces Trouble Ahead.)

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