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Apple Conviction Sinks at Goldman Sachs (Update 2)

Stocks in this article: AAPL

Shope also said Apple "could reinvigorate its high-end momentum" with a larger iPhone. The iPhone 5 has a four-inch screen while the recent Galaxy S4 from Samsung, which runs Google's (GOOG) Android operating system, has a larger screen. Cook has squashed the idea of a larger iPhone in the past, saying Apple has done extensive work and feels a four-inch screen is the right size.

In addition to a refreshed iPhone, Shope also expects Apple to update its iPad products in the second quarter.

"This will be a critical refresh as it will allow for channel fill in the June quarter and it has the potential to slow some of the cannibalization effects from the iPad mini," Shope said in the note. The tremendous success of the iPad mini has weighed on the larger iPad, which has hurt the company's gross margins, due to lower cost. The iPad mini starts at $329, while the 9.7-inch iPad with Retina Display starts at $499.

He now believes the iPad mini could account for as much as 53% of total iPad sales in both 2013 and 2014. That's way up from previous estimates when Shope expected the iPad mini to account for 31% of iPad sales in 2013 and 27% in 2014, respectively. The Goldman analyst remains cautious "on traditional iPad demand unless we see data suggesting the next refresh is indeed reinvigorating demand in this category."

There has been much discussion about Apple's $137 billion in cash, with shareholders calling for a much larger return of cash. Activist investor David Einhorn called for Apple to issue preferred stock, called iPrefs, to unlock the value of Apple's cash. Cook has stated in the past Apple is in "very, very active" discussions on what to do with its billions.

If or when Apple does announce a new capital allocation plan, Shope said this could provide "a healthy floor for the stock price." Should Apple use its international cash, Wall Street may be pleasantly surprised.

Concerns over innovation are nothing new with Apple, and as a result, investor sentiment has drifted lower. Recent rumors have focused on the possibility Apple could expand its product offerings by moving into smart watches and television. Dubbed the iWatch and iTV, Shope said that these new products could expand the company's platform allowing it to further monetize its user base.

Recent reports have put the iWatch as being more than likely, with Bloomberg reporting the company has a team of 100 people working on the product.

Apple shares were higher in early market trading, up 1.3% to $434.48.

-- Written by Chris Ciaccia in New York

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