Why Jefferies Remains So-So On Apple

Jefferies raised its price target on Apple Inc. AAPL Tuesday from $124 to $130 and maintained a Hold rating.

Analysts led by Sundeep Bajikar expected Q2 results to be strong with a 10+ percent EPS beat due to iPhone momentum in China.

Bajikar forecasted that second quarter iPhone shipments would come in a 60 million units, above consensus of 52 million, with an ASP $685.

The strong sales were expected to lead to higher cash returns which could support 5-10 percent dividend growth and share repurchases that could lower share-count by approximately 5 percent, according to the analysts.

Beyond the second quarter, however, the analysts saw iPhone sales decelerating in Q3 as the market becomes saturated with the iPhone 6 and competition increases from Samsung's Galaxy Note 4/Edge and S6/Edge. Bajikar expected YoY iPhone revenues to fall from 46 percent in Q1 to 7 percent in Q4.

Discussing cloud services, the analysts felt there was a risk for iTunes and other non-hardware revenues to "grow at a slower pace, given dominance of domestic Cloud Services in China."

Investments in other services, such as Web TV, would be viewed "favorably" by the analysts as they could help drive ecosystem monetization which may have decelerated based on Q4 results.

Over the long term, Bajikar believed that while "Apple's brand position is robust, an adverse change in consumer sentiment toward the brand could have a dramatic impact on Apple's revenues and gross margins."

Apple Inc. recently traded at $126.96, down -0.06 percent.