May 26 (Bloomberg) -- Apple Inc.’s success with the iPhone will fuel profit growth for the next two years, topping analysts’ estimates, Morgan Stanley said as it raised the company’s rating to “overweight.”

The market is “underestimating iPhone unit demand,” analyst Kathryn Huberty wrote today in a report to clients. The market for smart phones will expand 3.4 percent this year while the mobile-handset market overall shrinks for the first time since 2001, according to a projection by researcher IDC in Framingham, Massachusetts.

Apple doubled the number of iPhone’s sold last quarter from a year earlier as it began offering the device in more countries. The Cupertino, California-based company continues to sidestep a slump in consumer spending as it introduces more applications for the phone and newer models. Apple has sold more than 21 million iPhones since their debut in 2007.

The company is expected to spotlight a new iPhone operating system at the Worldwide Developers Conference on June 8. It may introduce two versions: a higher-priced phone that adds more memory and improves features such as the camera and a model tied to a less costly service plan. Apple now sells an 8-gigabyte iPhone 3G for $199 and a 16-gigabyte model for $299 in the U.S., according to Shaw Wu, a Kaufman Bros. analyst in San Francisco.

Apple, based in Cupertino, California, rose $8.28, or 6.8 percent, to $130.78 at 4 p.m. New York time in Nasdaq Stock Market trading.

Lower Prices?

The company will probably cut prices for the current model of the device, said Huberty, who projected a 50 percent boost in demand for a $50 reduction and 100 percent for $100. She lifted her forecast for calendar year 2009 iPhone sales by 42 percent to 24.8 million and 2010 by 61 percent to 36.2 million.

Growth in iPhone revenue would offset potential sales slowdowns and smaller margins for Apple’s iPod music player and Macintosh computers, the analyst said. The iPhone is Apple’s most profitable product, with a gross margin of about 50 percent to 55 percent, Huberty estimates.

She raised her forecast for Apple’s calendar-year 2010 earnings to $7.50 a share from $5.52, based on generally accepted accounting principles. Her estimate for profit excluding some items is now $9, up from $5.67. Apple operates on a fiscal year that ends in September. Huberty also lifted the share-price estimate for Apple, which had rallied 44 percent this year before today, to $180.

Separately, China Unicom (Hong Kong) Ltd., the country’s second-biggest mobile-phone company, said today it hopes to reach an agreement with Apple to offer the iPhone in China.

While the iPhone is already available in Hong Kong, Taiwan and Macau, it hasn’t cracked mainland China -- the world’s largest wireless market. Unicom is seeking exclusive rights to sell the phone there, while China Mobile Ltd., the country’s largest mobile provider, wants to sell its own applications for the iPhone, Toni Sacconaghi, an analyst at New York-based Sanford C. Bernstein & Co. said in a report earlier this month.

To contact the reporter on this story: Rita Nazareth in New York at rnazareth@bloomberg.net; Kelly Riddell in Washington at Kriddell1@bloomberg.net

Last Updated: May 26, 2009 16:24 EDT