Pacific Crest: 'We Recommend Buying Apple'

Pacific Crest recommends buying Apple Inc. AAPL, saying that the iPhone 7 updates are meaningful enough to drive F2017 unit volume at least in line with its current estimates. In addition, the expansion to wireless headphones and Apple Watch improvements create the potential for upside.

"New features in iPhone 7/7 Plus were largely in line with our expectations. Nonetheless, the improvements to the camera, addition of stereo audio, the water and dust resistance, and the increase to entry-level storage are all meaningful updates that should help compel upgrades and drive more modest declines in sales to new users versus the iPhone 6s cycle," analyst Andy Hargreaves wrote in a note.

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The analyst said the new features should help Apple meet their F2017 estimate for iPhone units to increase 10 percent to 230 million and the higher price for the iPhone 7 Plus versus the 6s Plus should boost revenue and maintain gross margins for the segment.

Meanwhile, the introduction of wireless headphones should boost revenue and profit per iPhone customer. The company will launch wireless AirPods and wireless Beats-branded headphones.

The wireless headphones help Apple capture incremental share of aftermarket headphone sales, which should add incremental revenue and gross profit per iPhone customer. Significant increases in the attach rate for Beats headphones could be meaningful to EPS.

"We estimate an incremental 5% attach rate of wireless headphones to iPhone units through F2017 could add $0.15 to our current EPS estimate of $9.01," Hargreaves highlighted.

Commenting on Apple Watch 2.0, the analyst said though meaningful functional improvements should drive incremental demand, but do-it-all concept still misses the mark.

Hargreaves expect the added fitness functionality (GPS and 50 meter water resistance) to spur incremental demand, which could drive unit sales above our current estimate 9.7 million in F2017.

"However, any upside is likely to be relatively modest at Apple's scale, as each 1 million units is approximately $0.02 to EPS in our model," the analyst continued.

To capitalize on the wearables trend, Hargreaves added that Apple will have to expand the Watch category to include a broader base of devices with more specific applications, and likely lower functionality at lower price points.

The analyst has a price target of $121.