Summary

• Apple will gain significant momentum in FY 2015 due to several catalysts.
• A combination of shipment growth, markup on products and new products will drive both top and bottom line growth.
• As such, I project $240 billion in revenue, $63.76 billion in net income and $11.56 EPS for FY 2015.
• My price projection increases incrementally from $165 to $174 as a result.

Apple (NASDAQ:AAPL ) had an amazing year in 2014, and I believe that there’s quite a bit of momentum left in the stock going into 2015. The valuation, while higher than it was in 2013, is modest in comparison to other technology names. Needless to say, some speculators make the assumption that the market has priced the stock to near perfection, but I’m dubious of these conclusions. Given the management team has a solid tool box for fattening margins, returning capital and growing revenue I’m confident Apple will have another amazing year.

Going into FY 2015, I remain one of the more ardent AAPL bulls. While the stock generated solid returns for bargain bin hunting value investors, 2015 is more for the growth/momentum-oriented investor. In other words, if you have to screen a stock based on it having less than a 15 P/E multiple with a certain amount of assets on the balance sheet and less debt, along with XYZ dividend yield, I can almost assure you that AAPL will leap out like some wildly speculative investment such as Tesla (NASDAQ:TSLA ) in 2014, and Facebook (NASDAQ:FB ) in 2013. Growth is my forte, and I will continue to preach the gospel of growth being the most indicative of future returns.

Apple’s Year In Review

To start off 2014, Apple was pretty darn cheap. And, quite frankly, most of it was driven by the fear mongering of various professionals and amateurs with regards to market saturation of the iPhone in the high-end as well as competitive challenges from both low-end and high-end smartphone manufacturers. Earlier in the year, some eagerly criticized Tim Cook for the lack of innovation coming out of Apple. Some even mentioned that the company needs a new CEO. By June’s WWDC and September’s iPhone and Apple Watch event, those concerns were more or less squashed, as various developments indicated that the company could grow earnings by out-innovating or outmaneuvering companies in both smartphone and wearable devices.

No one anticipated Apple would generate the same level of excitement as the Apple iPhone over the course of the September event, but needless to say various analysts (including me) started to factor back in the effect of an Apple Watch into their revenue and earnings estimates for FY 2015. When factoring in a higher-priced iPhone, and the potential impact it would have on gross margins, which trickles down to net profit margins, the company started to look very cheap on a forward earnings basis (which I explain in further detail later).

Source: Morningstar

Investors are fairly aggressive when they know they’re onto something. So the stock experienced a late year rally, while various other sectors, such as financials, energy and telecom, wobbled. Needless to say, there were pockets of growth and, of them, semiconductors, along with software and services, show considerable promise.

Apple outperformed the S&P 500 by wide spread — around 3.6 times. Anyone who owned Apple was able to earn solid risk-adjusted returns. Inclusion of Apple into a portfolio for 2015 requires courage because you’re basically chasing after a stock. Various investment books explain that it’s foolhardy to chase after a well performing stock due to various statistical theories like reversion to the mean or the premise of fear versus greed. But from my perspective, statistical analysis doesn’t really uncover the true growth prospects of the stock, and I believe that while 2014 was a major re-pricing event for Apple, the actual growth in investment capital between the peak in 2012, trough in 2013 and rally in 2014 wasn’t all that impressive. In other words, the stock looks relatively undervalued.

Why 2015 Will Be Another Big Year

2015 will be another major year for Apple due to various factors, but of them the higher pricing of the iPhone will drive both top and bottom line growth. A trend line in declining handset/computer prices based on the decision making of a few firms that engage in a marketplace hardly ever indicates anything. When we look at various theories in the school of economics, whether it is the duopoly matrix that’s famously known as Nash Equilibrium, it’s entirely possible that the remaining firms will push prices higher, instead of lower. Remember, it’s a quick race to the bottom when you compete on price, so it’s probably better not to.

Even if we were to adhere to Moore’s law, and anticipate that various efficiencies can drive densities on an integrated circuit with declining incremental cost, it doesn’t mean Apple has to lower the pricing on its handsets just because it was cheaper to make the same components this year than last year. Needless to say, the bill of materials remained relatively stable over the trailing three-year period, with each add-on component offset by significantly higher pricing. This ran counter to trends that indicated the average selling price of a handset or computer would drop just because component cost would drop. Some firms will engage in this rapid commoditization, but for the most part, Apple avoided it.

This all goes back to why Apple remains an incredibly sound investment opportunity. Because now we have to assume a mix-shift to higher-priced devices along with falling component costs. Falling component cost paired with a higher markup will drastically improve gross margins. Furthermore, unit shipments are likely to accelerate, as Apple remains an aspirational brand with many first-time device activations indicative of significant unit shipment growth. Hence, the revenue growth rate is exponentially higher than it was in prior years. As such, EPS metrics are likely to be even greater as a result of falling share count and widening of margins.

Based on my revenue breakdown, 31% year-over-year revenue growth is feasible, due to significant growth in the iPhone segment and more modest growth from other areas of the company. iPhone shipments should be robust going into the next year, as a result of the major refresh and new device activations. The other factor driving sales growth is the increase in pricing, which is driven by a mix shift to higher memory configurations and the 5.5-inch form factor. Following that, I anticipate a moderate refresh in the iPad segment, driven by new device activations, which will come from emerging markets. The company’s software and services business should see sustained growth due to Apple Pay and app installs as a result of a larger installed base in Macs, iPads, and iPhone devices. Needless to say, rapid deterioration in demand for iPods will likely continue. However, PCs should grow due to a major CPU refresh from Intel (NASDAQ:INTC ), paired with a long overdue update in Apple’s MacBook lineup. The MacBook has gotten a little stale since 2012 and it would not be surprising to see a major update in aesthetics and performance in 2015.

Going into FY 2015, I anticipate fairly robust revenue growth and gross margins to return to around 45% due to higher pricing of the iPhone, paired with stable pricing dynamics in many of its other product segments. The software and service segment, coupled with the Apple Watch, also have abnormally high gross margins, which is why the estimated gross profit could end up conservative. I anticipate operating expenses will increase moderately and income tax will stay in the mid-20s.

Income tax is relatively low due to varying tax rates in international markets. Apple’s unwillingness to bring cash back to the United States helps keep the effective tax rate significantly lower. This might change if some sort of tax holiday were to happen next year. Operating expenses won’t increase by much, as the company has demonstrated it’s extremely productive, which can be proven by operating costs increasing at a very slow rate when compared to revenue. The company may go on an hiring spree when it opens its new headquarters in Cupertino, but it’s unlikely the financial impact will be material or that it will alter my financial assumptions by much.

The share buyback figure will stay at or around $45 billion. I don’t anticipate Tim Cook to open the floodgates for share buybacks, as there are still significant complications to bringing cash back to the United States. Given the $45 billion in actual capital returned in FY 2014, I expect something similar to last fiscal year’s capital return program. The impact has been included in my EPS estimate.

The EPS estimate seems insane. However, this is driven by higher profitability (26.6% net profit margin versus 21.61% in FY 2014) and robust revenue growth (31% year-over-year). These two factors, along with continued capital returns, will drive EPS to $11.56. This sounds rather aggressive, but after picking apart the various areas in which Apple will widen its margins, while also growing sales, I think it’s attainable. Yes, even if it means EPS will grow by 79.7% year-over-year. This isn’t going to be a phenomenon you see on a yearly basis. Remember, EPS stayed stagnant for a couple years, so to see a sudden spike in performance has more to do with device refresh cycles.

Because Apple’s performance tends to be somewhat cyclical, and given FY 2016 growth rates are likely to taper as margins aren’t going to increase by much, and sales growth will be limited to a couple areas I’m going to price the stock at a 15.04 earnings multiple. Hence, I arrive at a $173.93 price target, which is above my earlier price target set at $165.

The stock has plenty of upside in FY 2015, and things will obviously slow down in FY 2016, so be sure to keep that in mind.

Final Thoughts

Apple had a pretty solid FY 2014, in which year-to-date returns were pretty unprecedented given the historical five-year return. However, the stock has further upside in FY 2015, as new products and markups on existing ones will drive significant revenue growth. With better gross margins and continued share buybacks, along with foreign tax policy staying more or less the same, the company’s cost structure will likely improve, which will drive net profit margins into the mid-20s, giving the stock significant upside both in terms of earnings and revenue growth.

I don’t price the stock at a premium relative to growth, which is why my projected forward PEG ratio is .18 (extremely cheap). The company tends to trade at a significant discount when compared to broader indices. Based on my estimate, Apple’s market cap will reach $958 billion, nearing the $1 trillion market capitalization mark. Many may criticize the idea due to various statistical models showing how far Apple’s market cap is from the mean, however, outliers to data points exist and Apple will remain one of them. After all, who remembered the first company to reach a billion dollar market cap?

To close out the year, Apple remains my best investment idea for 2015. The stock will easily outperform the broader market.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More. ) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.