iPhone Earnings Could Push Apple Above $200/Share

The current street consensus earnings estimates for Apple (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.

Comments

[jbs:]

Then why don't you own shares of AAPL?

2007 Jun 14 08:50 AM

[Julian Ivan...:]

Great take.. finally, someone who can "do the maths."

However, you're forgetting a MASSIVE additional earnings driver: the fact that Apple is sharing subscriber revenues with AT&T, to the tune of somewhere between $5-10/month, all of which is pure profit.
So, add in 5M iPhones sold in FY07, and you're looking at between $25M - $50M in pure profit every damn month, this year. If AAPL sells sells 20M iPhones in 2008 and 45M in 2009, that totals 65M iPhones on-line.

At $5/month, that's an incredible $325M every month in pure profit in 2009 - just from iPhone airtime subscriptions. At $10/month, a whopping $650M in subscriber revenues, every month.

Or to put it another way, $3.9 - $7.8 BILLION DOLLARS in earnings just from iPhone airtime subscriber revenues, let alone all its other activities.

Factor that in, and you have AAPL as a $300B company with its stock approaching $450.

2007 Jun 14 09:18 AM

[Carl Howe:]

Overall, I think you've got the direction right, but the magnitude wrong because of Apple's April accounting decision to defer iPhone revenue.

Apple has announced that it will amortize iPhone sales dollars over 24 months to avoid accounting issues associated with providing future software upgrades. The result: While Apple will garner billions in sales from the iPhone in FY2008, it will actually only recognize about $800 million in iPhone revenue in FY08; the rest of the value of those sales will end up on the balance sheet. You can read my analysis of this accounting change as part of my April Analyzing Apple report here and here.

I believe iPhone will be huge, but Apple's going to show most of that on its balance sheet instead of its income statement for several years.

Best,
Carl
blackfriarsinc.com/blo...

2007 Jun 14 10:23 AM

[John Lazerow:]

But, the monthly payments of say $5 (I think $10 is too aggressive) will be recognized as they are received. This is what will drive the upside in earnings estimates in addition to balance sheet growth.

Oh, and a nice little anecdote I would like to share about that other business they are in. I walked in to my local Best Buy (Rockville, MD a few miles out of DC) and there was a little Apple boutique (I guess they are expanding that concept from just a pilot program) armed by an Apple employee. I asked him about sales and he said they were very good and they are selling a lot of computers. More importantly though was an unsolicited comment he made that 9 out of 10 people he sells to are new to the Mac platform. I asked him again because I thought I didn't hear that correctly, but it was true according to this employee. And it just so happens that as he was saying this, a customer walked up and said, again unsolicted, that after years of PCs he switched recently and is so much happier and wondered why he hadn't done it sooner, etc. The usual stuff.

So, extrapolate that out and it is plain to see that Apple's focus on increasing distribution points is working.

2007 Jun 14 10:48 AM

[Mark Connolly:]

True about the "subscription" revenue recognition over a rolling 24 mos period. One item you overlooked is the 24 mos recognition accounting procedure will be recognizing net revenue from iphone sales i.e. Gross - cost of sales (cost of sales will also include the amortization of capitalized R&D incurred over the projected life of the product....amazingly the projected life of the iphone = 24 mos!!). I also believe sometime before the two years elapses an accounting statement issued by AAPL's auditors will be released saying it is no longer necessary to amortize the monthly net revenue from the Iphone due to no need for additional software enhancements or upgrades. Still, there will be a lag to the P&L for an extended period, but if the AT&T deal is as good as discussed that revenue should provide nice cover for the delay in rev recognition. Starting in July of 09 the monthly iphone revenue annuity along with all other product sales SHOULD make this a $200 stock then, if not earlier.

2007 Jun 16 10:13 AM

[Dan Poarch:]

Look at the other posting about daily sales growth at the Apple Store. There is a hype-halo going on here that I didn't expect. Mind you, I just ran out and bought my first new Mac in 5 years [personal Mac, I update at work every two years]. Perhaps because of my own excitement?

True enough, to not confuse the company with the stock. But I'd wager that mistake has been made for the past five years on Wall Street, not amongst us faithful.

2007 Jun 14 01:58 PM

[samij:]

For Apple to sell 33m iPhones, the price must come down from $500-$600. That sort of volume needs a phone in $250 price range, as well as having multiple operators in each market to sell it. Also, the subscription fee can't be at $100/month.

2007 Jun 14 02:24 PM

[Mark Connolly:]

Have you investigated the monthly fee for a Crackberry? $100/mos for the Iphone would be a deal in comparison (as long as the product meets most expectations). Touch screen stability and repair life still has me a bit concerned, however. Look for AT&T to work with AAPL (probably have a provision in the royalty agreement already) to "soften the blow" from customers who must switch from another provider. What AAPL doesn't already know about marketing a cellular provider and burying fees, AT&T sure does. Jobs has, since day 1, marketed his products exclusively. Almost like saying if you want a Lexus, we're here for you. Want a Chevy? You probably need to look elsewhere. That theory has been debated for over 20 years now and just like religion and politics, there are good arguments on both sides.

2007 Jun 16 10:30 AM

[Malkiel:]

I haven't read much about the Best Buy connection since its' announcement but to me that's a huge story. With the wilting away of competitors like CompUSA and Circuit City Best Buys are almost a public utility when it comes to getting current electronics into the hands of America's consumers. Having Mac computers sold in the 3000 Best Buy stores adds vast leverage to Apple's Mac sales and perhaps lots of yet-uncalculated revenue to their bottom line.

2007 Jun 14 04:46 PM

[Rob W:]

I don't think people take into account the increased revenue through iTunes.

Can you imagine 10 million Americans with iPhones:

ringtones = currently a billion dollar business
music sales = currently a billion dollar business
movie rentals = currently a billion dollar business

and all on your iPhone through iTunes?

WOW.

2007 Jun 14 06:33 PM

[Neil Anderson:]

Wow, look out Google!

2007 Jun 14 08:36 PM

[bradah:]

It is difficult to get a good sense of which way the iphone will go. There is a lot of positive analysis, yet, I've read from others that Apple will not have the kind of success they hope for. I guess it would depend on one's perspective.

Looking at the history of the ipod, it is easy to see how wrong people can be. Apple had something to the effect of "This device will be revolutionary" on their website for weeks. They even had a countdown timer. After SJ introduced the 1st gen ipod, I can remember reading many posts on forums like this that said it was just another mp3 player. Jobs could "see the future" whereas most of the general public could not. Even analysts were not impressed. How wrong they were. Will history repeat itself with the iPhone? I hope so.

2007 Jun 14 09:37 PM

[davesmall:]

sjofi76 wrote: "For Apple to sell 33m iPhones, the price must come down from $500-$600. That sort of volume needs a phone in $250 price range, as well as having multiple operators in each market to sell it. Also, the subscription fee can't be at $100/month."

I really think you're wrong. You're thinking that this device is only a phone.

I certainly would not pay $500-$600 for a cell phone.

But I would pay $200 to $300 for a cell phone that was easy to use. All the cell phones I've ever owned were impossible to use unless you kept a copy of the owner's manual in your hip pocket. That's especially true for internet features.

And I would pay another $200 or so if the phone was also an iPod. That would enable me to carry one less device.

And I would pay another $300 or $400 if the device could also surf the web and send/receive emails. Keeping up with stock quotes and staying on top of business would be worth at least that much.

So I don't the price of the device is a show stopper.

The other shoe has yet to drop and that will be AT&T's pricing monthly usage. That's what could kill the iPhone (or boost if they don't get greedy.

2007 Jun 15 06:18 PM