Morgan Stanley Raises Apple Price Target On Underestimated Demand For Apple Watch

In a note published late Wednesday, Morgan Stanley analysts raised the price target on shares of Apple Inc. AAPL from $115 to $126 and maintained an Overweight rating.

Katy Huberty finds the Apple Watch remains the key catalyst: "Our global AlphaWise survey indicates investors underestimate demand for Apple Watch, similar to iPhone and iPad at launch, which provides an attractive set-up into 2015. We model 30M Watches in CY15 or 10% penetration of the compatible iPhone user base, higher than the buy-side view of 10-12M."

The analyst listed other reasons for the price target increase.

Huberty expects wearables to be the fastest ramping consumer device to date; forecasting 530 million units sold by 2020.

Skepticism surrounding the Apple Watch mirrors low expectations seen ahead of the iPhone and iPad launches. Huberty wrote, "Ahead of iPhone launch in June 2007, the Street modeled 9M units for FY08 and Apple shipped 12M iPhones that year."

"Risk vs Reward remains attractive... We raise our base case CY15 EPS to $8.40 from $8.20 on the back of higher Watch unit (30M vs. 27M previously) and ASP ($450 vs. $400 previously) forecasts. Coupled with a one turn increase in P/E multiple to 15x, in-line with the recent trading range, our price target increases to $126 from $115.”

Shares of Apple closed Wednesday at $114.67, down 0.69 percent.