NEW YORK (TheStreet) –– Apple (AAPL) has had a banner 2014, vastly outperforming the Nasdaq and its chief rivals, including Google (GOOG) , gaining more than 30%. Yet, with the launch of the iPhone 6, new iPads, Apple Pay and the Apple Watch announcement, investors are wondering what the world's largest company will have to do in 2015 to repeat 2014's outperformance.
Goldman Sachs analyst Bill Shope, who rates Apples shares a "buy" with a 12-month price target of $124, says the risk-reward for Apple is still "very favorable," noting that there's upside through the March quarter. Moving into the second quarter, though, things become less clear as it's uncertain whether demand for the iPhone 6 and 6 Plus, which was launched in September, as well as the Apple Watch can be sustained.
Shope expects Apple to earn $8.25 a share in calendar 2015, with fiscal year earnings at $7.91 a share on $208.58 billion in revenue. Analysts surveyed by Thomson Reuters expect the company to earn $7.76 a share on $210.99 billion in revenue for fiscal 2015.
With the demand of the iPhone 6 and 6 Plus currently so strong (a look on Apple's website still shows a wait time of 1-3 business days for the 16GB and 64GB iPhone 6 models and 7-10 business days for the 128GB iPhone 6 model on the AT&T T, Sprint S and Verizon VZ), Shope says more consumers are buying the new phones than the refreshed iPhone 5, and adding new customers to the Apple ecosystem.
"Apple's leading Android competitor, Samsung, appears to be suffering from a muted high-end product cycle relative to what we saw in 2012/2013," Shope wrote in the note. "In addition, Apple has previously announced that it is increasing its target channel inventory from 4-6 weeks to 5-7 weeks to better address distribution requirements in emerging markets; given that iPhones are supply constrained, we are likely to exit the year below the prior 4-6 weeks target, requiring several weeks of channel fill in the March quarter.
"This tailwind for iPhone sell-in has little impact on the long-term story, but it provides an important and positive distortion to normal seasonal weakness in early 2015," Shope added.
The question remains, once Apple has met demand with its supply, something CEO Timothy D. Cook said has been staggering" on the Oct. 20 earnings call, how much will demand drop in the first half of 2015?
Shope expects a sequential decline in the March quarter of 17%, compared to the average decline of 14%. Many analysts have expected Apple to sell around 65 million iPhones in the quarter (Shope expects 62 million iPhones sold in the Dec. quarter), which would mean Apple would sell around 51 million iPhones in the March quarter, though he notes that may be conservative given the need for channel inventory increases with every week of channel inventory adding around 3 million units.
There's also potential for a sharp decline in the June quarter to the tune of 29% as we get closer to the next iPhone refresh and further away from the launch. Then again, there's still the potential for upside due to demand.
"On balance, March and June quarter estimates have upside on an absolute basis; nevertheless, it will be crucial that any upward revisions to March quarter estimates in the coming months have a commensurate sell-in adjustment to June quarter seasonality," Shope wrote.
The iPhone 6 and 6 Plus have largely been seen as something of a revelation for Apple, with the introduction of larger screen sizes (4.7-inches and 5.5-inches, respectively), as well as the introduction of Apple Pay, Apple's mobile payments initiative. However, not much is known about the next iPhone cycle, but Shope says the next cycle will be iterative, rather than revolutionary.
"With that said, some of Apple's strongest years have occurred with such iterative cycles (e.g. iPhone 4s). This strength is largely due to the fact that "s" cycles tend to enjoy a much lower cost structure, as Apple is able to leverage prior cycle component and manufacturing efficiencies; indeed, in the first two quarters of the iPhone 4s cycle, overall corporate gross margins increased 712 basis points from the quarter prior to launch to a peak of 47.4% in March of 2012," Shope wrote.
If Apple can continue to fend off the competition, including Google, which has worked hard to get its Nexus smartphones close to the quality of the iPhone, it's possible that Apple could even begin to retake market share, something Apple has not focused on in the past.
"If Apple can hold its competitive momentum in 2015, it is reasonable to assume that the company can begin to regain share in 2015," Shope wrote.