Apple reported quarterly earnings and revenue that barely beat analysts' expectations on Tuesday.
The company posted third-quarter earnings per share of $1.85 on revenue of $49.6 billion.
Analysts expected Apple to report earnings of $1.81 a share on $49.43 billion in revenue, according to a consensus estimate from Thomson Reuters. (Tweet This)

Apple Shares Could Rally 50% on New iPhone Plan

Leasing phones and offering annual upgrades could win big and pit the company against wireless carriers.

Apple likes to keep customers guessing about its latest products, but investors are rarely surprised by what they hear. Except for last week, that is, when Apple went off script.

The company announced that its latest iPhone would soon be available through monthly payments, starting at $32, with customers getting free upgrades every 12 months. The leasing and upgrade news overwhelmed the company’s long list of new products, including a 12.9-inch iPad Pro, a sophisticated stylus, a revised Apple TV, and the refreshed iPhone.

Those devices were never likely to move Apple’s stock (ticker: AAPL). That’s why the iPhone upgrade announcement makes things interesting for investors, especially as iPhone sales accounted for 56% of Apple’s revenue last year. “It takes what could have been negative sentiment—a sell-on-the-news event—and potentially turns it positive,” says Peter Karazeris, a senior equity analyst for Thrivent Asset Management, which owns $400 million worth of Apple’s shares.

That, it did. Apple’s shares finished the week up 4.5%, to $114.21, although the stock is still down 14% from its summer peak, making a cheap stock even more compelling. If the leasing program proves to be popular, Apple could soar 50% in the coming year.

At its current price, Apple trades for 11.8 times earnings projections for the next 12 months. Back out the company’s $150 billion in net cash, and the forward multiple drops to just 9.1.

That multiple is roughly in line with future profit-growth estimates. Wall Street expects Apple’s earnings to jump 34% in the fiscal year that ends this month, to $53 billion, or $9.12 a share, on sales of $233 billion. But analysts are forecasting a gain of only 6.5% in fiscal 2016, to $9.71 a share. Apple has a habit of beating estimates, however.

To be fair, Apple’s shares consistently have been cheap. “Apple has been undervalued for six years,” says Mark Mulholland, portfolio manager of the $609 million Matthew 25 fund (MXXVX).

But the leasing program could be a game changer for the stock. Mulholland thinks Apple shares are worth $170, 49% above their current quote, based on a multiple of 11 times enterprise value to estimated 2015 pretax profit.

The leasing program attacks the primary bear case on Apple—slowing iPhone growth. Amit Daryanani, an analyst with RBC Capital Markets, estimates that the upgrade cycle for iPhones has stretched to 26 months from 22 months in 2013. After getting a jump-start from the larger iPhone 6 this year, analysts expect iPhone sales to flatline at 235 million units in 2016. The iPhone Upgrade Program, Apple’s official name, has the potential to reverse the trend, and more.

“You essentially create a certain group of your user base that is going to be on a 12-month upgrade cycle,” Daryanani says. The big question is how large that group becomes.

Apple’s program provides unlocked phones, so leasing customers, in theory, can move between carriers as often as they like. Over time, it is conceivable that Apple could add other perks, as well, although the company didn’t respond to a request for comment. Think: priority access to new phones, or iCloud storage, which improves the iPhone experience but carries little incremental cost.

Here’s that math, according to Daryanani: A typical iPhone sells for $700 (a portion of which was previously subsidized by the carrier) and costs $350 to make, for a gross margin of 50%.

In the first year of the leasing program, a new iPhone’s revenue will come to $384 ($32 times 12 months), against a cost of $175. (He amortizes the full cost over two years.) That’s a 55% margin, or 500 basis points better than Apple’s status quo.

The bigger difference comes in year two, after the leasing customer returns the phone to Apple in exchange for a new model. Apple can then refurbish and sell this phone for about $500, Daryanani estimates. “The cost of goods sold is [another] $175, for a year-two gross margin of 65%,” he says.

Thus, in a two-year time frame, each could phone could produce $884 in revenue, with a 60% gross profit margin.

“Today, Apple’s fair price is $170-plus,” Mulholland says. “Three to four years down the line, it is easily $200 to $250. And these aren’t aggressive numbers.”

Apple: We are on pace to beat last year's iPhone first-weekend record

Apple on Monday said it's on pace to beat last year's iPhone first-weekend record, and the stock opened higher on the news.

"Customer response to iPhone 6S and iPhone 6S Plus has been extremely positive and preorders this weekend were very strong around the world," the company said in a statement. "We are on pace to beat last year's 10 million unit first-weekend record when the new iPhones go on sale Sept. 25."

According to an iPhone Inventory blog which tracks the back-order status of the various iPhone models, the wait time for the big-screen iPhone 6S Plus in China is running at three to four weeks, and two to three weeks for the 6S, Re/code reported Saturday.

"As many customers noticed, the online demand for iPhone 6S Plus has been exceptionally strong and exceeded our own forecasts for the preorder period," the company also wrote. "We are working to catch up as quickly as we can, and we will have iPhone 6S Plus as well as iPhone 6S units available at Apple retail stores when they open next Friday."

The company's release this year differs somewhat from 2014, when it announced how many units it sold in the first 24 hours of preorders.

Tech analyst Walter Piecyk at BTIG said Monday it's not clear how to compare initial preorders to 2014.

"Last year, it started on a Thursday night at midnight. This year, because of a late Labor Day, it was Friday night," he told CNBC's "Squawk Box" in an interview. "So we don't know what the comp is, whether they have to wait through the end of Monday to find out exactly what the actual number is going to be."

Meanwhile, FBR Capital Markets senior analyst Daniel Ives said the preorders suggested a strong trajectory for the iPhone 6S and iPhone 6S Plus.

He said he was encouraged by the response in China, where Apple's website showed particularly long wait times for the phones. "It shows that they are off to a white-hot start, with China really being front and center as a main driver of initial demand."

Amit Daryanani, equity analyst at RBC Capital Markets, said Monday his firm believes sales of 12 million units in the first weekend are a "reasonable expectation."

He noted that 60 percent of incremental revenue came from China in the most recent financial reporting period, so Apple likely anticipated strong demand and positioned a lot of inventory for the market.

"The fact that you're sitting at two to four week lead times already in China and across the world is probably a sign that demand is a lot stronger than people were expecting out of it right now," he told CNBC's "Squawk on the Street."

The real question, he said, is whether the data from China reflect firm purchase orders—meaning customers have submitted their financial information—or merely soft commitments to buy the 6S and 6S Plus when they become available.

"That's a little unclear candidly, and that's probably one thing that everyone needs to figure out," Daryanani said. "But barring that, I think the numbers sound fairly positive for them."