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Why Apple Will Rock in the Second Half of 2014

NEW YORK (TheStreet) - Apple (AAPL - Get Report) iPhone demand could "surprise to the upside" in the back half of the year, according to UBS, as sales get a boost from the China Mobile (CHL) deal and following the release of the iPhone 6. Speculation of a new version of its popular iPhone comes to market is heating up, with one analyst expecting it late in the fiscal year.

UBS analyst Steven Milunovich expects the latest version, that the industry is dubbing the iPhone 6, to be released in August or September (Apple's fiscal fourth quarter), rather than June, fueling sales for the end of the year. Apple iPhone demand in the second half of the year could also surprise to the upside once the China Mobile deal starts to resonate with customers, he wrote.

"Our iPhone model is up just 10 million this year at 172 million vs. 162 million last year. China Mobile, which appears to be off to a slow start at about 1 million iPhones in February, could be sufficient to account for the entire change," he wrote in a note to clients. "The second calendar half may surprise to the upside if either China Mobile or the iPhone 6 gain traction."

Apple shares were rising 1.3% to $539.58 following news that the company is in talks with Comcast (CMCSA - Get Report) to team up for a streaming-television service that would use an Apple set top box.

"We continue to believe that two models -- a 4.7" and 5.5" with in-cell displays -- are in the works," the analyst penned in the note. "While the 4.7" seems certain, the 5.5" may or may not launch at the same time and could be of the same resolution (lower ppi), which would help app developers. iPhone 6 units are expected to exceed 5s sales year-over-year when it ships."

Milunovich rates Apple shares "buy" with a $625 price target. "Although the iPhone 6 could carry a lower margin since we would be surprised if it is priced at much of a premium, unit demand could be strong as surveys suggest Apple users want larger screen sizes and carriers' 24-month enforced contracts roll off for 4s owners," Milunovich noted.

That said, Apple's March-ending and June-ending quarters (its fiscal second and third quarters, respectively) could have some risk. Milunovich expects Apple to earn $10.30 a share and $8.69 a share, respectively, which is below consensus estimates for the two quarters. Analysts surveyed by Thomson Reuters expect Apple to earn $10.14 and $8.60 in those quarters, respectively.

"In the near term, we believe 1Q procurement, though not fully correlated to sell-in, is coming down a bit. In phones, the primary difference likely is the 5c, which has not sold well. Overall volumes are reflecting a maturing high-end smartphone market," the note says. In addition, "iPad volumes appear to be lower than expected ... We model iPad units declining to 19 million in March and 16 million in June."

Apple is rumored to be upgrading the set-top box in time for the 2014 holiday season, but it has competitors in the space, including Google's (GOOG) Chromecast and Roku. Google announced last week that it was expanding Chromecast to 11 countries. Adding competition to the space, Amazon (AMZN) is getting ready to ship its streaming TV service next month.

As part of the Comcast deal, Apple would get preferred treatment on the nation's largest cable provider's cables to ensure it bypasses congestion on the Web, people familiar with the matter told The Wall Street Journal. However, the paper noted those talks are in their early stages.

--Written by Laurie Kulikowski in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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