Citigroup Offers 5 Reasons Why Apple Will Trade Even Higher

Jim Suva of Citigroup on Wednesday commented in a note that there are five reasons why shares of Apple Inc. AAPL will continue trading higher following its better-than-expected quarterly report on Tuesday.

1. Device Acceleration.

As wireless carriers shift to a move that allows customers to upgrade their cell phones earlier than usual, customers will continue to be treated with attractive promotions to stay at their current wireless provider while obtaining an upgraded iPhone rather than waiting two or more years for an upgrade.

Suva notes that “investors do not fully grasp this change in behavior by the wireless carriers and the positive impact to Apple.”

Related Link: Apple Q1 Earnings: A Chronological Recap

2. Consensus Earnings Per Share Revisions.

According to Suva, Apple's consensus estimates will move higher following its 11 percent beat on sales and 18 percent beat on earnings per share.

The analyst stated that shares of Apple aren't expensive as it trades at 13x forward earnings or 10.4x excluding cash of $25 per share versus the S&P 500 trading at 16.7x forward earnings.

3. Gross Margins To Stay Higher

Suva believes that increased usage of apps along with higher quality camera resolutions will result in consumers permanently shifting their preference to higher memory devices at an $100 incremental cost which actually only costs the company $20.

“Therefore we do not believe Apple will see a core fundamental gross margin decline excluding foreign exchange factors,” Suva argues. “This is supported by Apple's gross margin guidance of 38.5 percent to 39.5 percent in the March 2015 quarter compared to 37.5 percent to 38.5 percent in the December 2014 quarter.”

4. Apple Pay To Provide Further Upside

Suva continues to emphasize the importance of Apple Pay and Passbook that provide “tremendous upside potential” as the technology can be expanded in to many new categories including healthcare identification, consolidated financial information, automobile keyless entry, airline boarding pass verification and more.

Related Link: What Comes After The Apple Watch? 12 Patents Provide Clues

5. Enterprise Opportunity

Apple has made a best-in-class consumer desire product and operating system, according to Suva, who suggests that now is the time for Apple to move in to the corporate environment.

Specifically, the company's announcement to join forces with IBM IBM to build mobile enterprise applications could at one point “become an enterprise grade mobile solution which will not only help drive future hardware sales but also increase user stickiness coupled with the potential for future revenue streams.”

Bonus – Apple Watch

Apple stated it will begin shipping its much-anticipated Apple Watch in April. Suva does argue that he is “not impressed” with the rumored one-day battery life or lack of built-in GPS capabilities and the company may address these concerns in the second generation of Apple Watch. As such, the analyst views Apple Watch 1 simply as a “launch into a new product category which provides bonus upside.”

Shares are Buy rated with a $135 price target.