Analyst: Apple Will Release Two Larger iPhones This Summer

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ISI Group upgraded Apple (NASDAQ:AAPL) shares to a “Strong Buy” rating and a $600 price target in a note issued to investors this morning, reports TheFlyOnTheWall. ISI Group based its bullish note on the likelihood that Apple will release two large-screen iPhones this summer. Multiple media outlets have reported rumors that the next-generation iPhone models will be available in two larger screen sizes. In January, the Wall Street Journal said that one of the upcoming iPhone models will feature a screen size larger than 4.5 inches and that the other will have a phablet-sized screen larger than 5 inches.

In a research note obtained by Business Insider, ISI Group wrote that the screen size upgrades will trigger “the ‘mother lode’ of all Apple upgrade cycles” due to a pent-up consumer demand for larger iPhone sizes. The firm predicted that Apple would release a 4.7-inch iPhone and a 5.5-inch iPhone this summer. “‘Large-screen envy’ is prevalent among the iPhone installed base and we believe a ~5” form-factor iPhone would spark a massive upgrade cycle as well as many ‘Android switchers’ returning back to the iPhone,” wrote ISI Group in the note seen by Business Insider.

In September, Apple released two iPhone models simultaneously for the first time in the company’s history. However, while the iPhone 5S included new features like a Touch ID fingerprint scanner and a 64-bit processor, the iPhone 5C was essentially an iPhone 5 with a new plastic casing. If Apple releases two larger iPhone sizes this summer, it would mark the first time that two completely new models were released at the same time.

“We estimate the current iPhone installed base to be about 260mil users (roughly equivalent to the last 7 quarters worth of iPhone units). By our calculations, we estimate slightly over half of iPhone sales today go to upgrades (with the majority of new users coming from international markets),” said ISI Group, per Business Insider. According to ISI Group, Apple could see an even larger increase in iPhone upgrades from the release of two larger iPhone models.

“However, we believe that while the upgrade rate (i.e., % of installed base upgrading their device in a given quarter) had hovered in the 10-11% range over 2011-12, it has now dropped closer to 9% as users find few compelling reasons to upgrade,” wrote ISI Group. “In peak quarters, the upgrade rate has reached the ~12-14% range and we expect a similar upgrade rate in 2H14 for iPhone 6, if not better.” Based on this upgrade estimate, ISI Group believes that the two new larger iPhone models “could drive ~$3.00 (or ~10-15%) EPS accretion over 2H14 assuming an incremental ~3% of the base upgrades each quarter.”

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