MORGAN STANLEY: This Is How Apple Is Going To $1,000

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Photo: AP

Apple could be worth $960 by this time next year, argues Katy Huberty at Morgan Stanley in a big report.Her official 12-month price target is $720, but she laid out a “bull case” for how Apple could soar to $1,000.

In her bull case, revenue for calender year 2012 is $200 billion, a 56% increase over calender 2011. She forecasts $271 billion in revenue for 2013, a 36% increase.

For some context, Apple’s revenue grew by 68% in 2011, and that’s in a relatively quiet year for the company. iPad 2 was a redesign, it added Verizon, but iPhone 4S wasn’t a big refresh.

Apple would have to sell 165 million iPhones in 2012 (77% growth), and 246 million in 2013 (49% growth). InĀ  2011, iPhone unit sales grew by 96%.

iPad unit sales would be 80 million in 2012 (98% growth), and 128 million in 2013 (61%). iPad unit growth for 2011 was 174%.

Are those insane targets for Apple to clear? Well, Apple easily Huberty’s “bull case” last year. So, it’s doable.

The future is always uncertain, but this year is shaping up to be really big for Apple. It’s already revealed a new iPad, while at the same time cutting the price of the iPad 2 down to $400. There is zero competition for the iPad, and no reason to think that’s changing this year. (We’ll believe Windows 8 is a threat when we see it. And we don’t think we’ll see it until November at the earliest.)

The next iPhone is coming at some point later this year. It is expected to support LTE, which Huberty believes will drive a ton of upgrades. The new iPhone is expected to be a complete revamp. Apple sold a record number of iPhones when it was an incremental upgrade. Imagine how well it will do when it’s totally revamped and runs on a fast new network.

And then there’s the Apple television, and upgraded Mac line up, neither of which Huberty mentions, but each of which could drive even more sales for Apple.

In short, Huberty’s bull case doesn’t sound all that outrageous. And therefore, $1,000 a share sounds reasonable.

Here are the three scenarios for Apple's stock

BULL CASE ($960): Apple continues to dominate in the tablet business, the iPhone continues to sell well, and growth accelerates in China as the iPhone hits more carriers. In 2013, iPhone sales reach 247 million units. iPad sales reach 129 million units. Revenue grows 56% in calender year 2012, and 36% in 2013.

BASE CASE ($720): Revenue growth of just 37% in 2012, and 20% in 2013.

BEAR CASE ($405): Microsoft's Windows 8 clobbers the iPad, and growth slides into single digits.

And here is the bull case for Apple to get to $1,000 ...

The iPad is big in enterprise, and it could generate $5 billion in extra sales

It's not just the enterprise, consumers love the iPad, and Apple could sell 128 million iPads in 2013

How reasonable is 128 million iPads? According to Morgan's survey, it's very doable.

And then, there's the new iPhone with LTE ...

Here's Huberty explaining how many iPhones Apple could sell: 'iPhone estimates don't credit Apple for the potential share gains when it launches an LTE-capable device in 2H12. Our supply chain checks suggest Apple's sixth generation iPhone could include several changes that, in our view, will increase the upgrade rate relative to past product cycles. In particular, iPhone 5 is likely to include a higher-resolution and potentially thinner screen, new casing material, faster processor, and quad-mode baseband chip that works on multiple flavours of 3G and LTE. Our December US survey indicated that 62% of iPhone owners planned to upgrade to the new version, iPhone 4S. Assuming a similar upgrade rate for the LTE iPhone due out later this year, this implies 148M and 160M upgrade purchases in our base and bull case. The remaining 38M and 86M shipments would come from new users, roughly split between emerging markets and mature markets. For perspective, the same maths implies Apple added roughly 48M new users in CY11.'

Here's a breakdown of the iPhone estimates

If you think the bull case is too bullish, don't forget Apple easily beat last year's bull case

The iPhone and iPad are the keys to bull case, they make up 88% of Apple's profits

Here's a complete breakdown of what it will take to get to the bull case

China is a big deal for Apple and will contribute a lot in sales

The emerging markets will account for 46% of Apple's iPhone units by 2013

Tablets take over PCs in 2015, and Apple will have ~60% of the market

In conclusion ...

Apple will have to sell a lot of iPhones and iPads to become a $1 trillion company, but it's not unreasonable. It's attacking two big new market opportunities, and it has very little competition.

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