Analysts at Needham & Co this morning raised their target price on Apple stock from $115 to $135 on strength of anticipated iPhone sales.

In a note to clients, analyst Charles Wolf warned that initial iPhone sales will be modest, but observes: "Price is likely to fall at a 20 per cent annual rate in line with the decline in component costs and rising carrier subsidies."

The analyst believes this price decline will "accelerate demand as the iPhone invades the sweet spot of the mobile phone market". Wolf believes the iPhone will cost around $75 within the next decade.

"We’re forecasting sales of 135 million iPhones in 2016, equivalent to a 7 per cent market share.  The iPhone adds $20 net to our Apple target price."

Wolf does agree that price is the point at which iPhone's fortune will be made. His valuation on Apple stock depends on price falls, carrier subsidies and "the price elasticity of demand for the iPhone".
"Based on Apple’s strategies in pricing the Mac and iPod, the price at which Apple sells the iPhone to carriers should decline at a 12 per cent annual rate," he points out.

Apple has set itself a target of selling ten million iPhones by next year. Wolf believes Apple may miss the mark, but believes there's a 40 per cent chance the company will exceed the sales target.

Furthermore, the analyst believes: "There’s about a 20 per cent chance that Apple will sell at least 20 million iPhones in 2008. To provide some perspective, Apple sold 40 million iPods at an average price of $200 in fiscal 2006."