Goldman's Three Reasons To Own Apple: iPhone, iPad, Internet Of Things

• Shares of Apple Inc. (NASDAQ: AAPL) were trading lower by nearly 1 percent during Tuesday's pre-market session despite a bullish note from Goldman Sachs.
• Simona Jankowski of Goldman Sachs assumed coverage of Apple with a Buy rating and $163 price tag, implying a 41 percent potential return.
• Jankowski is positive on Apple's near-term earnings potential while a longer-term switch to the Internet of Things will add "significant" value to Apple's ecosystem.

Shares of Apple traded as high as $134.54 in 2015 but have lost momentum as of late due to macro economic concerns in China, questionable growth forecasts for its iPhone releases, among other reasons.

Simona Jankowski of Goldman Sachs isn't buying into the bearish thesis and assumed coverage of Apple with a Buy rating and $163 price target. The analyst's bullish stance stems is based on expectations for a "meaningful" upside to consensus estimates in fiscal 2016 (September) on higher units and average selling prices for both iPhone and iPad devices. Over the longer term, a transition to the Internet of Things (IoT) will add "significant" value to Apple's platform and ecosystem.

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iPhone 6s Consensus Estimates Are Too Low

According to Jankowski, the Street is modeling flat iPhone revenues in fiscal 2016 after a 51 percent surge with the iPhone 6 cycle throughout fiscal 2015. Meanwhile, the analyst is modeling a 6 percent iPhone revenue growth in fiscal 2016 as her proprietary replacement cycle model shows that units can growth just on the strength of upgrades in the installed base.

Jankowski said the current iPhone base stands at 457 million, up 32 percent year-over-year. Her model has found a 90 percent correlation between growth in the installed base and growth in upgrades – further solidifying a positive stance on the iPhone upgrade cycle.

Finally, the analyst's revenue expectations for the iPad is 14 percent above the Street's estimates given a view that the iPad Pro will "drive" a consumer refresh, expansion into enterprise, and command a higher average selling price.

iPhone ‘At The Center Of Your Connected World'

Back in 2010, smartphone owners used their devices for communicating, getting information, and entertainment. By 2020, smartphone owners will be using their devices for all of that, and many more critical tasks, such as remotely monitoring homes and cars, tracking children, and managing health. At the center of that will be the iPhone.

Even though the smartphone market is maturing in terms of growth rates, Apple's value generation opportunities will rise as we enter the era of the Internet of Things, which will be the next "mega-trend" and the iPhone will become the "gatekeeper" to one's home, car, health, bank account and more.

Jankowski noted that Apple's business model differs from those of Google's which relies on advertising. Approaching the era of the Internet of Things, privacy concerns are likely to increase and that bodes well for Apple.

"In other words, we believe the trust and security that Apple has built into its ecosystem by maintaining its users' privacy and curating content will become an increasingly important competitive differentiator and source of value creation," Jankowski concluded.