Apple shares will rally because the company will benefit from falling component costs for its phones, according to Citi Research.

The firm raised its price target to $265 from $230 for Apple shares, predicting the smartphone maker will report earnings per share above expectations next year. The new forecast represents 18 percent upside to Friday's closing price. Citi also reiterated its buy rating for the stock.

"We increase our financial model primarily due to higher ASPs [average selling price] & stronger gross margins given the consumer preference for higher memory configurations of iPhones coupled with the new falling memory prices," analyst Jim Suva said in a note to clients Monday. "We believe Apple shares are now setup as an attractive value investment with right-sized expectations."

Apple shares closed down 0.2 percent Monday.

The analyst said memory represents 10 percent to 15 percent of the component costs in base iPhone models. But when a consumer buys a higher memory configuration that costs $100 more, it costs Apple only an incremental $20, he said. He noted flash memory prices are down 18 percent since March.

"Our checks suggest solid demand for iPhone XS & XS MAX and importantly most consumers opting for higher memory iPhone configurations," the analyst said.

Suva raised his Apple fiscal 2019 earnings per share estimate to $14.43 from $13.92 versus the $13.61 Wall Street consensus.

Apple shares are significantly outperforming the market this year. The stock is up 32.5 percent year to date through Friday versus the S&P 500's 7.9 percent gain.

In August, Apple became the first publicly traded U.S. company to reach $1 trillion in market value.