Apple iPhone Has Upside But Expect Few Watch Details; Wells Fargo Sees $125 To $135 Price On Stock

In a report published Monday, Wells Fargo analyst Maynard Um maintained a Market Perform rating on Apple Inc. AAPL. The analyst expects the company to post strong FQ3 results, with an in-line FQ4.

"We maintain our Market Perform given difficult comps approaching, uncertainty into the next iPhone S-cycle, iPhone margins likely closer to peak, and limited new large carriers to add at launch," Um explained.

The analyst believes that the company would be able to beat the consensus forecasts for FQ3, driven by strength in the iPhone and Macs. However, there appears to be limited upside to the gross margin, despite the higher iPhone mix.

The FQ3 iPhone sales estimate has been raised from $29.6 billion to $30.8 billion, driven by the addition of 25 carriers during the quarter, along with indirect channel inventory building. "We believe gross margin upside in this S-cycle may be offset by increased bill of materials and potential pricing actions at the lower end," Um said.

The new 12-inch MacBook, released in April, is expected to also drive sales for the company, partially offsetting the weakness in PCs. While the Apple Watch estimate is two million units, the analyst expressed concern regarding the possibility of Watch sales for the full year coming in below expectations.

Although Apple has refreshed its iPod lineup, the analyst does not expect iPods and iPads to have a meaningful impact on earnings, with overall tablet demand remaining soft through 2015.

The stock's valuation range is expected at $125-$135, due to Apple's "compelling & innovative new products, better than expected gross margins, aggressive capital allocation," according to the Wells Fargo report.