Apple's iPhone Should Boost Stock Value By 25%

Bear Stearns analysts Andy Neff, Bill Hand and Ted Chung sent a note to clients concerning Apple's (AAPL) iPhone announcement at MacWorld yesterday. Excerpts follow:

Transforming Macworld Event: iPhone Later This Year, Video On The Horizon; Raising Ests and Target From $100 To $125

• TRANSFORMING EVENT. Transitioning beyond Macs/music, AAPL previewed its revolutionary iPhone (3-in-1 phone, widescreen iPod & Internet device) at Macworld, highlighting its next wave of growth is beginning to take shape. While the Apple TV launch was overlooked, we think video is only beginning to ramp and could be a multi-year story. We’re raising our ests and target given new growth opportunities (iPhone, video).

• SOME CAVEATS. Despite the compelling features of iPhone, we note that we have yet to see/use the device, execution risk remains (FCC approval, testing/qualification process at carrier), and the competitive backdrop remains fierce w/ entrenched players.

• COLLATERAL IMPACT. We view iPhone as positive for SYNA, as SYNA is either in the new device or other vendors will want to adopt SYNA’s Onyx technology. While iPhone may emerge as a competitive smartphone, we would buy RIMM on weakness given iPhone’s lack of corporate email, price premium vs. RIMM, and sole availability at Cingular and in US (until 4Q). Finally, we see iPhone launch as negative for PALM given its device-only model and lack of innovation.

• RAISING ESTS. Reflecting iPhone intro (we’re assuming 7.2mm units in 1st year along w/ iPod cannibalization) and Apple TV (minimal contribution), we’re raising our post-option EPS for FY07 from $2.75 to $2.83 and for FY08 from $3.20 to $4.00 -- we highlight that every 1mm iPhone units adds $0.10-0.15 to FY08 EPS. We’re maintaining 1Q07 EPS of $0.78 on revs of $6.42bn (vs. guidance for EPS of $0.70-0.73 on revs of $6.0-6.2bn) but note that AAPL could show upside given strong holiday demand -- AAPL will report 1Q07 on 1/17.

• RAISING TARGET. We’re raising our CY07 target from $100 to $125 reflecting a P/E multiple of 28x on CY08 oper EPS of $4.05 and adding net cash/sh of ~$12. Despite its existing dual drivers (Macs, iPod), we see AAPL on the cusp of several major growth opportunities that can fuel ’07 and beyond.

click to enlarge

Collateral Impact From iPhone. As to collateral impact from Apple’s announcement of iPhone, we see it as a positive for Synaptics, Incorporated (SYNA), mixed for Research in Motion (RIMM), and negative for Palm, Inc. (PALM).

• SYNA: Win-Win Scenario. While it is not clear whether iPhone incorporates SYNA’s user interface solution – although iPhone and SYNA’s Onyx concept phone have strikingly similar features – we see the introduction of iPhone as positive since: 1) if iPhone is using SYNA’s user interface, SYNA could see significant upside to its results, and 2) if iPhone is not using SYNA’s solution, then SYNA’s solution could become an attractive choice for handset vendors to catch up to Apple, since no other interface vendor has a solution similar to Apple or SYNA.

• RIMM: Still Leader In Wireless Email. We believe that iPhone could have a mixed impact on RIMM. On the one hand, we see minimal impact on RIMM from iPhone in the near term since 1) iPhone will be available through Cingular only for several years and strictly in the US (until the late-4Q launch in Europe), 2) pricing of iPhone is significantly above RIMM (e.g., Pearl at $199 vs. $499 for 4GB iPhone), 3) RIMM could see strong growth driven by new product launches (Indigo and Crimson), 4) iPhone does not support enterprise push-email, and 5) the smartphone market is in its early growth stages and is expected to grow by 38% to 125 million units in 2007. On the other hand, given iPhone’s innovative design and features, Apple could emerge as strong competitor to RIMM in the consumer segment of the market, which is expected to drive next leg of growth for RIMM.

• PALM: Potential For Stronger Competition. We believe that iPhone represents a significant risk to PALM given its device-only model with similar ASP to iPhone (Treo 750 at $399 vs. iPhone at $499) and its carrier concentration with Cingular (which represents 25%-35% of sales).

Apple's long-term picture:

Positives
• Strong brand name, fiercely loyal customer base, defensible installed base
• Innovative products and design strategies
• Incremental opportunities through “digital lifestyle” (iPod, iTunes, iDVD, iMovie, iPhoto, iPhone)
• Ongoing efforts to monetize beyond-the-box revenue streams (e.g. software, paid subscription services, iTunes Store downloads) to help offset cyclicality of hardware business
• Excellent cash position and balance sheet – exited fiscal 4Q06 around $11.50 per diluted share in net cash
• Intel-based hardware and “Boot Camp” could spur upgrade cycle and new wave of demand
• Multiple growth drivers (e.g., iPhone Intel Macs, iPod nano, iPod video, iPod points of distribution)
• Improving consistency and execution (exceeded results in 14 consecutive quarters)

Concerns
• Growth rates may have peaked and could slow which can hurt a stock’s P/E multiple
• Ultimate size of the music/MP3 player market is unknown along with increasing competition from multiple vendors
• Historical inability to capture a wider customer base and grow market share without a more compelling product offering to attract new users and penetrate the Wintel world, although “halo” effect appears to be playing out
• “Hit-driven” nature of business model which can produce erratic results
• Overhang related to stock option grant practices and any risk to CEO Jobs

AAPL 1-yr chart:

Comments

[Tom B:]

The halo effect should accelerate, as the iPhone has its own stripped-down version of OS X. This will invite comparisons to MSFT's efforts in the cell phone space, if nothing else.

2007 Jan 10 04:56 PM

[mike hough:]

Is it just me or has anyone else noticed the similarity (apart from the form factor) of the iPhone to a 'tablet' ? It runs MacOSX and therefore presumably any application from: MS Office, Photoshop, Quake etc etc. MacOSX has had handwriting recognition built in for years. The 'accessibility' features of VoiceOver would very useful etc etc. Presumably the iPhone UI could be extended to be a tablet UI, including the 'pinching' gesture like controls.

I am not sure we have seen the full significance of the announcement yet.

2007 Jan 10 05:32 PM

[Tom B:]

It has been noticed. A tablet with OBVIOUS utility; unlike, say, the "Origami".

2007 Jan 11 09:19 AM