The spotlight of the market undoubtedly fell on Apple when it announced the highly anticipated iPhone 5s and 5c on Tuesday. As I covered in my last Instablog, Apple (AAPL) is still the technology company with the highest brand image and the best ability to charge premium prices for its products. However, since its legendary ex-CEO Steve Jobs passed away, Apple has been struggling to maintain its high growth rate and has lost some market share to Google (GOOG), Samsung (GM:SSNLF), Huawei, and other competitors over the past couple years. Some die-hard Apple fans have been saying that iPhone 5s and 5c are long-awaited new engines of super growth for Apple. While the 5s features the fastest processor, the best photographic capability in the history of iPhones and comes with a fancy fingerprint-scanner that unlocks the phone with a touch, in my opinion the extent of improvements over the previous generation is not unprecedented. As for the 5c, I don't think the price tag of $549 is low enough to significantly seize customers away from Samsung, HTC (OTC:HTCKF), Huawei, and other brands that have tons of phones with higher specifications than the 5c and are priced below $500.
Rather, I think Apple's new engines of super growth might come from two other sources - its just announced deal with NTT DoCoMo (DCM) and its potential deal with China Mobile (CHL). On the same day that Apple announced the new iPhones, it also announced that for the first time the new iPhones will be available on the DoCoMo network. Being the biggest mobile network carrier in Japan, NTT DoCoMo has over 60 million customers! In addition, rumor is that China Mobile, the biggest mobile network carrier in China, will also offer iPhones to its customers for the first time in history because Apple has made both the iPhone 5s and 5c to be compatible with the TD-LTE bands used by China Mobile. According to South China Morning Post, China Mobile currently has over 740 million total subscribers and 138 million subscribers on its 3G network.
So, how much potential revenue will land on Apple from its deals with NTT DoCoMo and China Mobile (if signed)? One way to tackle this question is to apply Apple's market share in the U.S.- a market of free competition that better represents Apple's natural share of a market-to the subscriber's base of the two big carriers. According to an AppleInsider report, Apple has 25% market share in the entire U.S. cell phone market. If we are looking at just smartphones (only 56% of phone users in the U.S. use smartphones as of May), Apple commands about 44% of the smartphone market in the U.S. Applying 44% to 60 million smartphone subscribers on the DoCoMo network (I assume almost all of DoCoMo phones are smartphones) and 138 million smartphone subscribers on the China Mobile network gives us 26.4 million new iPhone users from DoCoMo and 60.7 million new iPhone users from China Mobile. A total of 87.1 million potential new iPhone users!
Now in order to calculate revenue, I need to estimate the average selling prices of iPhones purchased by these new subscribers. Because Japan is a developed country and has a similar per capita income as the U.S., I'll assume a 50-50 spread between the iPhone 5s and 5c on the DoCoMo network, implying an average selling price of $599. Because China is a developing country, I'll assume that all new iPhone subscribers on China Mobile choose 5c, which has a price of $549. Of course, NTT DoCoMo and China Mobile may offer subsidies to subscribers signing up for multi-year contracts, but these subsidies will most likely be out of the carriers' own pockets. In the end, Apple will probably still get the full price for each phone it sells.
If the above estimates hold true, Apple will sock in $15.8 billion from NTT DoCoMo (26.4 million times $599) and $33.3 billion from China Mobile (60.7 million times $549). This is an almost 30% increase to Apple's current yearly revenue run rate, an increase that, in my opinion, is very significant to the valuation of its stock. From this point alone, I think Apple stock is a buy over the short-to-mid term (3-to-6 months) particularly if it does land the deal with China Mobile.
Over the long term, Apple still faces fierce challenges form Google's Android and Microsoft's (MSFT) Windows Mobile. One particularly dangerous development is the emergence of the platform and hardware independent SaaS solutions that I mentioned in my first article. Many people still stick with iPhone today because they love Apple's well-designed, proprietary software such as FaceTime. If a SaaS product that allows people to freely use Apple applications on Android and Windows phones becomes popular and widely adopted, Apple will probably lose quite a lot of customers to the Android and Windows camps. That would probably be a good time to press the sell button on Apple stock.
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