Apple: The Microsoft of Smartphones?

Apple (AAPL) “should be able to grow faster than the overall handset market without materially lowering prices,” concludes Sanford Bernstein analsyt Toni Sacconaghi, in a note Tuesday in which he raised his price target on Apple from $165 to $185. Sacconaghi has an “Outperform” rating on Apple shares.

Apple holds just 8% of the global handset market’s sales but made 32% of the profit in the industry in the first half of this year, writes Sacconaghi. Apple had an operating profit margin of 40% in handsets in the first half, he writes, versus 11.3% for Nokia (NOK), 20.7% for Research in Motion (RIMM), negative 18.5% for Sony (SNE) and Ericsson’s (ERIC) Joint venture, Sony-Ericsson, just 10.5% for Samsung (SSNLF.PK), negative 21% for Motorola (MOT), and a mere 7.1% when you average out all those players.

Apple has a “first mover” advantage in smartphones, writes Sacconaghi, in contrast to the PC market, where the company is still fighting a first mover, the IBM (IBM) PC-style microcomputer powered by Microsoft (MSFT) Windows. In other words, Apple is kind-of the Microsoft of smartphones. Not to mention the fact that Apple consumes 20% of the world’s NAND flash memory supply, which Sacconaghi observes gives the company tremendous advantage as a component buyer.

In a growing market, which the smartphone business certainly is, with iTunes and achieving a lock-in akin to Microsoft’s dominance of desktop compatibility, Apple can keep growing faster without lowering prices.

Still, Sacconaghi does offer one challenge for Apple: only 28% of the world’s cellular subscribers are post-paid. Most are pre-paid, and the average revenue per user is $20 globally, nothing like the $50 and up that carriers enjoy in the developed world.

Therefore, “We believe Apple will ultimately need to lower price (and margins over time) to expand its addressable market opportunity, including offering a lower-cost, non-data plan iPhone,” concludes Sacconaghi.

The one rather perplexing aspect about Sacconaghi’s note is that he justify’s the new price target via an Enterprise Value-to-Free Cash flow multiple of 15 to 17. Which is in line, he writes, with the S&P 500’s 16.7 times EV to FCF. But if Apple has higher-than-average margins and potential for large cash earnings, as Sacconaghi notes, why not give the company a higher EV to FCF multiple than just a market multiple?

Apple shares Tuesday are down $1.03, or .6%, at $165.40.

Original post

Comments

[Frank Castle:]

Once they stop getting the sub from at&t what will their profit margin be per iPhone? I'd really like to hear some sales on the 3G and what margin that is getting them.

Once they leave at&t (which I doubt before mid 2010 if not later) they will have the same slim margin all other cell phone makers deal with.

Aug 04 06:12 PM

[Jon T:]

It's not hard, research it - 60% estimated margins on the iPhone 3Gs.

Apple is no Microsoft under anyone's definition. Chalk and cheese spring to mind. Apple will be happy never having Microsoft-like market share and control.

Aug 05 08:06 AM

[Uncle Miltie:]

Do you have ANY clue how any cell phones are paid for here in the US? It's called subsidies. The same subsidy they get from AT&T is similar to the ones Verizon, Sprint and T-Mobile give out for their phones. Apple's may be a bit higher, but that's almost exclusively due to the demand for their product. And bash AT&T all you want, but they are at least smart enough to understand how much the iPhone has positively impacted their bottom line.


On Aug 04 06:12 PM Frank Castle wrote:

> Once they stop getting the sub from at&t what will their profit
> margin be per iPhone? I'd really like to hear some sales on the
> 3G and what margin that is getting them.
>
> Once they leave at&t (which I doubt before mid 2010 if not later)
> they will have the same slim margin all other cell phone makers deal
> with.

Aug 05 08:53 AM

[brewer:]

When it's from Tony S., you can assume it might start out somewhat complimentary, but then inserts a huge FUD device. This time it was that Apple's iPhone margins would somehow fall off the map any day now.

Meanwhile, iPhone commands 68% margin and that can't go down for months at the very least (in fact, millions of payments are there, deferred from the books, even if they never sold another iPhone). Sure, margins can drop, even significantly, with a growing market. But, that is a good thing overall, just another stage for the product.

It's still the phone that made 'smartphones' look dumb. It still has the best technology+ecosystem.

Aug 05 09:56 AM

[TCK:]

How much more can Apple gain with the highest priced phone on the worst network ?

Aug 06 07:16 AM