Analysts at Needham & Co yesterday raised their target price on Apple stock from $115 to $135. The move was made based on the strength of anticipated iPhone sales.

In a note to clients, analyst Charles Wolf suggested that at first iPhone sales will be modest. However, he went on to say: "Price is likely to fall at a 20 percent 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 percent 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 percent annual rate," he points out.

Apple has set itself a target of selling 10 million iPhones by next year. Wolf believes Apple may miss the mark, but believes there's a 40 percent chance the company will exceed the sales target.

Furthermore, the analyst believes: "There’s about a 20 percent 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."