Citigroup's 5 Reasons Why Apple Will Trade Higher - Apple (NASDAQ:AAPL)

Citigroup analyst Jim Suva on Thursday offered five reasons why shares of Apple Inc. AAPL can trade even higher.

Reason One: Device Acceleration

According to Suva, device acceleration is a "significant" underlying positive driver for Apple, as wireless carriers have shifted strategies to offer consumers a change to upgrade their cell phones before the expiration of their contract.

The analyst added that this behavior by the carriers is to prevent customers from switching to a competitor and gives existing customers compelling offers to upgrade their phones earlier than normal.

Reason Two: Attractive Valuation

Suva explained that it's not uncommon for investors to question share gain potentials, especially for the world's largest market cap company.

The analyst stated that shares of Apple are trading at 15x P/E (12x on an adjusted net cash basis), which compares favorably to the 16.6x multiple the S&P 500 trades at and a median of 12-13x for Apple's IT Hardware peer group.

Suva added that Apple is likely to announce an increase in its share buyback program to $120 billion to be used by the end of 2016, along with a dividend increase.

Reason Three: Gross Margins Move Higher

Suva continues to believe that increased usage of apps along with higher quality camera offerings will create a "permanent shift" towards phones with higher memory storage.

Suva stated that the average selling price of a higher memory device is $100 and incremental bust cost of the added memory is only $20. As such, the analyst added that Apple is unlikely to see a core fundamental gross margin decline excluding foreign exchange factors.

Reason Four: Apple Pay And Passbook

Suva argued Apple Pay and Passbook hold "tremendous" upside potential. The analyst cited several new uses including several states looking at enabling digital driver's licenses and iPhone users using Apple Pay for federal services (i.e., veterans pensions) and hotels enabling guests to use their smartphone as a virtual key.

Moreover, Suva stated that more than 750 financial institutions have announced support for Apple Pay, compared to only 11 major banks when the service was first launched in October 2014.

Reason Five: Enterprise Opportunity

Suva explained that Apple has "correctly" focused on offering a best in class portfolio of consumer products and operating systems. The analyst continued that now is the right time for Apple to invest in the corporate environment beyond general consumer product use of iPhones.

Specifically, Suva continues to see the company's relationship with IBM to build mobile enterprise applications that will drive future hardware sales and increase user stickiness coupled with the potential for future revenue streams (i.e., iCloud, Apps, Services).

Bonus Reason: Apple Watch

Finally, Apple's upcoming release of its Watch is only a "bonus" catalyst because Suva is "not impressed" with the features such as a poor battery life and lack of built-in GPS. However, the analyst is encouraged by the Watch moving forward as Apple will make enhancements and upgrades in future generations of the Watch.

Stock Rating

Shares of Apple are Buy rated with a $135 price target.

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