The current street consensus earnings estimates for Apple (NASDAQ:AAPL) do not appear to reflect the potential upside from iPhone sales through 2008. The street expects Apple’s earnings to increase to $4.05 or 14.7% in the fiscal year 2008 (ending September 2008) from $3.53 in the fiscal 2007. This represents a significant slowdown in Apple’s annual EPS growth from fiscal 2007, where earnings are expected to grow by 55.5% to $3.53 from $2.27 in the fiscal 2006.
However, the expected fiscal 2008 EPS growth rate appears too conservative and Apple could earn $4.05 per share even without any contribution from iPhone sales. Therefore, the current estimates likely factor in a weak, if any, mobile handsets market penetration through 2008.
With about 1.15 billion of mobile handsets expected to be sold in 2008, even modest market share gains could bring significant incremental revenues and profits to Apple in fiscal 2008. A gain of 3.0% in the global mobile handsets market share would translate to about 33 million iPhones sold in the fiscal 2008. Assuming that revenues and earnings from the first 10 million units would offset those from cannibalized iPod sales, the remaining 23 million iPhones sold at an average selling price of $549 (midpoint of the expected retail prices for the two iPhone models), would generate about $12.6 billion in incremental revenue in the fiscal 2008.
Assuming 20.0% operating margin on iPhone, 35% tax rate, and 900 million shares outstanding, Apple could earn about $1.82 in incremental EPS from iPhone sales and about $5.87 in total EPS in the fiscal 2008. Applying a 35x P/E multiple to the fiscal 2008 EPS gives a potential AAPL share price of $205.6 or about 65% upside from the current AAPL price of $124.5, in the next 12 to 18 months. Although these assumptions may seem too optimistic to some, AAPL shares offer an attractive risk/reward profile to those who believe in the success of Apple’s latest gadget.
AAPL 1-yr chart
Disclosure: The author of this article does not own shares of Apple.