Apple: Six Factors To Watch Beside The iPhone

A prominent RealMoney.com commentator wrote Wednesday that AT&T's (T) uber bullish commentary on its conference call about the iPhone is a reason that Apple (AAPL) shorts will have to cover. While I am bullish on the iPhone, I have not once argued that owning AAPL requires the iPhone to be a monster. (Note that less than 5% of the float of AAPL is short, and I doubt those short are doing so based on the iPhone, which is still a few months from pre-orders at best).

While the iPhone is an important product transition/branding tool for Apple, ATT's bullish iPhone commentary is representative of nothing more than a carrier looking to create buzz for its brand by piggybacking the hottest brand at the moment. Verizon (VZ) did the same thing with the Motorola Q, which has been a big disappointment and Vodafone with Palm in Europe for the 700 series which was co-marketed with Microsoft, another powerhouse that anyone would want on their side though results were modest at best.

While the iPhone will be a key product for Apple, it won't be the revenues from the iPhone that will matter most. It will be the idea of a ubiquitous Mac OS platform with the iPhone serving as just one medium to increase consumer awareness and comfort with non-Microsoft operating system. Back of the envelope math using my aggressive 30 million units for 2008 at an ASP of $400 to $500 dollars yields a pretty nice chunk of short term cash flow for Apple, but three years from now what will matter is whether or not the Mac OS is able to break Microsoft's monopoly.

Given that long-term, stocks are valued more favorably when cash flow is predictably consistent and growing with high ROEs, the short term pop from iPhones will only be one element of Apple's evolution.

Here is a list of things I pay attention to in Apple in order to determine the merits of an investment:

* Adoption of Apple's .Mac training program
* Participation in in-store workshops and education programs
* Market share in notebooks
* Intel units as a percentage of total units shipped
* Potential launch of Santa Rosa platform in Mac's before competitors
* ASPs, which I believe need to come down a bit more as total cost of ownership when dual OS's are included is still too high for mass market.

AAPL 1-yr chart:

Comments

[Tom B:]

"* Adoption of Apple's .Mac training program"

As a Mac fan, I don't think I am alone in considered ".Mac" to be a waste of money. You can do better for less (Gmail, etc.)

"* Potential launch of Santa Rosa platform in Mac's before competitors"

Please clarify-- what is Santa Rosa?

"* ASPs, which I believe need to come down a bit more as total cost of ownership when dual OS's are included is still too high for mass market."

Possibly. Once you add Windows to any mix, TCO skyrockets. Best just to wipe that partition, if you can.

2007 Jan 25 09:00 AM

[David Lentz:]

I agree, the .Mac program is insignificant in determining whether AAPL is a buy or not. Does anyone look at paid Hotmail subscriptions or paid MSNET memberships when evaluating Microsoft? While if these subscription-based programs ever really took off, they might add to the bottom line or increase the brand attraction to potential customers, but in the real world these things never seem to work out for any company -- except RIM or Tivo, whose subscriptions are essential to their existence. I think that for a subscription to be material to a company's success, the company must be in the service business and not using a service to sell a product that has many better alternative services available to complement it, and doesn't really require any services at all to express the value of the product.

Santa Rosa is the name for a future Intel cpu that includes an integrated HSDPA modem. I think assuming that HSDPA is a make-or-break technology, in the face of all the competing wireless connectivity schemes, is pretty dicey. The only thing HSDPA has going for it today is that it is at&t's designated (for now) high-speed broadband wireless technology, with only a minor rollout to date. It's certainly within the realm of possibility that at&t would change direction, given their weak push toward getting broadband wireless as a major part of their networks. When I see ubiquitous HSDPA service and lots of people rushing to sign up and use it (the recent Cingular numbers certainly show lots of people signing up, but I see no indication that HSDPA has any part of that increase), then I'll be a believer instead of an agnostic towards HSDPA. Show me the users.

I too agree that dual OS's (Windows and OS X) is an infeasible model for an ongoing ownership. The only reason Boot Camp is offered is to provide an easy migration path to OS X. If it turns out that customers do not accept OS X as a complete replacement for Windows, then Apple has real problems in growing its market share beyond 20% or so. But that's quite a ways off in terms of Macintosh revenue. This is something that no one can predict, as the dyed in the wool MacHeads will not be able to comprehend how anyone would want to stay with Windows, and the dyed in the wool Windozers will have the same reaction to OS X.

What is unknown is how large is the fraction of users who could care less what OS they are using, and will accept whichever one provides them the lowest cost, easiest to use option. If that fraction is significant, and Apple is able to deliver the goods and communicate its message, then their future has vast potential in personal computers, as well as in consumer electronics.

When one considers the consolidation of consumer electronics and personal computing, and factor in the strong position Apple has in entertainment media (music, video), it is entirely possible that they might fail to make significant inroads into corporate computing and yet still own the consumer side of the business.

The AppleTV should be closely watched as an early indicator of how well they are doing here. Thus far, despite having had Windows Media Server on the market for quite a while, Microsoft does not appear to be making any inroads into the living rooms of Joe and Jane Consumer. Apple may or may not do any better. We'll just have to watch and see.

2007 Jan 25 01:08 PM

[Tom B:]

"What is unknown is how large is the fraction of users who could care less what OS they are using,"

Ironically, MSFT could help here (and Sony and Nintendo). One reason Macs have not done better in the past was the platform's relative weakness in number of game titles. The game consoles somewhat ameliorate these considerations. Moreover, I expect the Mac to get more titles, given the growth in Mac sales.

It is one factor out of many.

2007 Jan 25 01:16 PM

[carleast:]

And why is the iPhone insignificant to whether you buy Apple stock or not? Are you missing the boat completely here or what?

What drives Apple's profits, business, and stock? The Mac? Don't so foolish. The iPod is the only reason Apple is now one of the worlds biggest companies. But this is where Apple have a problem. They know that in a few years time stand a lone mp3 players will be all but dead. You will have you mp3 player on your phone. Research has already shown a growing number of European and Japanese consumers who are using mp3 players on their phones. But once battery life is sorted and 8gb+ is standard on phones (which is only a year or so away) then the iPod is dead.

The problem is that Apple sell their iPods for a lot of money. These phones will come free from mobile phone operators while Apple try and flog theirs for $500.

I see a continuing good upward trend of AAPL for the next year but the iPhone will not continue that trend in it's current form. For $500 it should not only be shinier than it's rivals but it should be better spec'd. And that's where it fails.

Compare the new Nokia N95 to the new iPhone and you have a one horse race. Particularly when you consider that a few months after the N95's release it will be free on contract. Let me see...

5 megapixel, mp3 playing, 3g, GPS navigating phone that is smaller, lighter and much cheaper than a phone with 2 megapixel camera, 8gb mp3 player and is shiny. And that's even before we go into the fact that Nokia phones are almost indestructible and will last years compared to a company who has never made a phone in it's history.

2007 Jan 29 08:53 AM