Apple's $1.1T bet: You want an iPhone payment

Matt Krantz | USA TODAY

You already have a car payment and a mortgage. Why not add an "iPhone payment," too?

That's what Apple and Apple investors are betting on. Apple's move to allow consumers to finance their iPhones by creating a lease program called Apple Upgrade Program turns Apple into a bond-like source of cash -- rather than a tech company that must deliver annual innovation.

The rising conviction Apple's financing plan will continue to get consumers to pay up for its smartphones is driving the stock higher. Shares have been up for days, and Apple (AAPL) Wednesday is up 19 cents to $116.42 Wednesday despite news that a bug has forced it to delay its Apple Watch software upgrade.

In Apple's financing deal, consumers would agree to pay $32 a month for a 16 GB version of the latest iPhone. That includes a warranty and the right to upgrade to the latest handset in a year. But the biggest impact is on Apple's surging finances because consumers sign up for a payment plan much like they do with car leases. Most important, Apple continues to get consumers to pay $650 for a smartphone in an era in which smartphone prices are falling.

If Apple is successful in convincing consumers to sign up for iPhone payments, the impact could be huge, analysts say. UBS estimates that Apple's stock would be worth $200 a share -- or about 70% more than it is today -- if valued as a recurring revenue stream. Investors love predictable cash flow and are willing to pay higher multiples for predictability.

If the financing plan provides the power to push Apple's stock to $200 a share, it would give Apple a market value of $1.1 trillion. Apple would finally become the first $1 trillion company as bulls have said it can be. "The iPhone Upgrade Program could be a big deal," says UBS analyst Steven Milunovich in a note to clients. UBS has a $150 a share price target on Apple stock.

Apple's move is also a threat to the carriers' lock on iPhone customers. Currently, just 10% to 15% of iPhone users buy their phones from Apple. That puts the carriers in the position to control pricing, and many have moved to reduce subsidies and push the price of the phone to users. But Apple's move could displace the carriers' importance in the transaction.

Bullishness over Apple's financing program also led Angelo Zino, analyst at S&P Capital IQ, to boost the firm's rating to "buy" from "hold" on Apple stock. "Our upgrade primarily reflects (Apple's) compelling valuation ... our favorable view of leasing programs and other promotions by carriers and Apple and belief that downside to near term estimates now appear less likely."