Hype is by definition a short-term phenomenon. And Apple’s (NASDAQ:AAPL) iPhone, has epitomized it.
Of course hype, short-term results, and pumped up demand for product often blind market participants to long-term business ramifications and actual shareholder value creation. But on the other hand, world-changing innovations which started as hypes and were derided as fads have gone on to make fortunes for owners. So what’s the deal on the heels of the iPhone’s much-awaited debut, and is AAPL overbought, or underestimated?
Well, first a few qualitative thoughts. As much as I may not be able to tell you with certainty where AAPL will be in ten years, I can say this: it is the reigning king of what I’d call synergistic marketing, and demand creation. In other words, whether or not it is actually innovative (that’s up for debate — iPod was not the first MP3 player, for instance), it is better than anyone at convincing customers that its product is the coolest, hippest, and best must-have invention on the face of the planet. And its success has only bred more success, and greater cross-selling revenue (Paul Carton has a great discussion of Apple’s halo-effect here).
Think of it this way. Apple has been so successful and hip with the iPod that it has made computer buyers more interested in its other, largely unrelated product, the Mac. This should come as no big surprise, as simple psychology informs us that people love winners. This is at the heart of what I believe is Apple’s true competitive advantage. Apple has been, and should continue, at least for the foreseeable future, to be a winner.
From a quantitative perspective, the added revenue, if the company meets sales prediction for the next twelve months, should be around $5-7 billion (or about 20% of TTM revenue). That’s assuming sales of 10 million iPhones. My quick, and dirty estimate might put the incremental net income from iPhone sales at around $0.60/share. So it’s not an insubstantial short-term factor. But, in the long-term things become more interesting. Who’s to say the iPhone won’t flop in a couple of years, and that the shares that have been so heavily bid-up, won't topple?
Certainly not me, which is just part of the reason I won’t take a position in any shares (I generally don’t short, and almost universally avoid stocks with such rich multiples as AAPL unless exponential growth is a no-brainer). But, at least I can speculate about what I think the future of the iPhone, or iPhone-like products will be. For what it’s worth (and that’s probably not much coming from me), I’ll attempt to prophesy the future. I’ll keep it brief, but bold:
1-4 years: The iPhone sees significant demand, but competing products (likely from shops like Research in Motion) begin to cut into market share and drive down prices as quality and functionality also increases.
5-10 years: Hand-held, all-in-one personal devices will ultimately become nearly as good, affordable, and universal as personal computers. They’ll steal share from the desktop and laptop markets, but those devices will never entirely disappear, though they may change forms. We enter new tech era.
11-15 years: Owners of said devices begin to realize that it is too risky to carry their whole life in tablet form, so devices come equipped with a body-encapsulating bubble, and a life-insurance policy.
16-17 years: Given the slight inconvenience of personal bubbles, the iPhone as a physical device is replaced by implanted brain chip with telepathic email functionality, and trance-inducing sedatives that allow you to watch YouTube videos in your mind.
18-20 years: YouTube, Apple, and Google merge to form You-Google-Appletube, with combined market cap (adjusted for inflation) of $17 trillion, and a P/E of 245.
21-24 years: All human interaction is replaced by electronic communication.
25-26 years: World peace.
Disclosure: I do not have a position in any company mentioned in this article, and I also don’t think we’ll ever see world peace.