Analyst Upgrade: Does China Make Apple a Buy?

source: http://www.flickr.com/photos/julialeiby/

Source: http://www.flickr.com/photos/julialeiby/

Shares of tech giant Apple (NASDAQ:AAPL) climbed as much as 1.8 percent in morning trading Tuesday after analysts at UBS upgraded the stock to Buy from Neutral. The firm increased its price target to $650, about 18 percent above Monday’s closing price. The firm’s previous price target was $540, which shares shot past late in November, when the price broke from a multi-week plateau around $520.

In a note seen by MarketWatch, UBS suggested two tailwinds that could support the stock over the next 12-month period and drive the price toward its target. First, at 61 percent, institutional ownership is relatively low. This is down about 9 percent from April 2012, when Apple stock hit a mini peak of about $630 per share, and just a few months before shares hit their all-time highs in September, after which many institutional investors trimmed their positions.

But the stock appeared to bottom out about halfway through 2013, and UBS thinks the time is right for some big buyers to shore up their positions in the company. “Our sense speaking with investors is that many are now equal or underweight Apple relative to their benchmark, which could result in new money supporting the stock,” said the firm.

So it’s possible that institutional investors could bid up the stock, and it’s possible that bullish analyst notes could compel the herd to bid up the stock on high expectations, as well. This is OK, but a thin argument for any bullish thesis. If real support is coming, it will probably be from a new product launch or developments in China.

In their note, the UBS analysts suggest that support from China could help support the company through the dog days of summer. Not only is Apple’s presence in the market growing organically (Greater China segment revenues climbed 24 percent on the quarter and 6 percent on the year in Apple’s fiscal fourth quarter), but possible deal with China Mobile (NYSE:CHL) is a popular topic attracting speculation.

China Mobile is the world’s largest wireless carrier with more than 750 million subscribers. A company executive recently told The Wall Street Journal that the carrier is ready to begin 4G mobile services despite the lack of an operating license from China’s Ministry of Industry and Information Technology. Apple’s iPhone 5S and iPhone 5C have already been licensed by China’s Telecom Equipment Certification Center.

China has become an increasingly important market for Apple and was even included in this year’s iPhone launch event for the first time. A distribution deal with China Mobile is widely viewed as an essential next step for Apple’s expansion.

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