Apple: Market Is Missing True iPhone Earnings Potential

One of the odd things about the Apple (AAPL) iPhone is how little the company has revealed about its relationship with AT&T (T), its exclusive U.S. carrier. Bernstein Research hardware analyst Toni Sacconaghi took a look at that issue in a report today, and concluded that investors are completely missing the true value of the iPhone as a result.

As Sacconaghi notes, Apple has not disclosed the size of the payments it is receiving from AT&T. And he thinks most sell-side analysts are being too conservative in their modeling on this point. He estimates that Apple’s carrier payments will average about $350 per unit, and says they will contribute 45% of reported iPhone revenue and nearly 70% of gross profits during the September 2008 fiscal year. In fact, Sacconaghi says that the iPhone business will contribute about 75% of Apple’s earnings growth over the next four years.

Sacconaghi is looking for 6.8 million iPhones to be sold in FY ‘08, generating an estimated $1.1 billion in gross profits. That calculation spurred the analyst to boost his ‘08 EPS estimate to $5, from $4.84; the consensus, he notes, is $4.49.

Sacconaghi today lifted his price target on the stock to $175 from $135. But he also says that Apple’s current valuation is “justifiable, but not especially compelling.”

He says that buying Apple at current levels require an investor to belief the company can sell 10 million iPhones in 2008 without sacrificing the high profitability of the business,” a scenario he calls “unlikely.”

Sacconaghi adds that the strong earnings power of carrier payments could allow Apple “to pull some strategic strings” to drive up unit sales, but only at the expense of profitability. “The iPhone’s substantial revenue share potentially allows Apple to price the iPhone very aggressively - perhaps even selling the device at a loss - to stimulate sales,” he writes. “However, this comes at the expense of profitability, and unless the demand elasticity was high, our analysis indicates that it would be difficult for Apple to significantly move the needle on earnings.”

Apple today is up 32 cents at $168.23.

Comments

[Tom B:]

"He says that buying Apple at current levels require an investor to belief the company can sell 10 million iPhones in 2008 without sacrificing the high profitability of the business,” a scenario he calls “unlikely.”"

Unlikely? I think the fact that 1) they moved a million at the original highish price in two month 2) They added the UK, Germany and soon France will make the 10 million goal not only "likely", but pretty nearly a sure thing. Amazing how many paid analysts suck. Makes me wonder how easy it is to braek into that biz.

2007 Oct 09 11:04 PM

[crowdofchee...:]

the whole "iSeries" is kind of a joke. look at all the chumps that bought the 1st iPhone...

the problem with the series is that many of the items like the iPod are not practical with the pricetag and what the consumer gets for it. a really good walkman, yay. i can plug my earphones into any computer with the internet and get all my music for free. is listening to your music in your car or walking or anything else that important? look at the traditional walkman of old and see where that went.

2007 Oct 10 08:02 AM

[Jon T:]

6.8m iPhone sales in 2008...he's kidding. The figure will be out by an order of magnitude. I think they'll be near double that number. And is he ignoring the march of the Mac? And Leopard? Or the iPod? They are looking just as interesting as the iPhone. It will be a monumental year in 2008.

2007 Oct 10 10:07 AM

[David Forjan:]

Just some general food for thought.
The iPhone will continue to surprise analysts. That's because it's a smartphone in two ways, not just the one way that we're all calling it. It's a smartphone as in the category of phones called smartphones.
But it's also a smartphone because the software/interface that controls it is "smart". Meaning the software interface is an intelligent one. The software is smart because it gives you only the options/buttons that are in the context of what you are currently doing with the phone. The user isn't confused and overwhelmed with options/buttons that are not necessary. Only the options/buttons that are pertinent to the function you are currently doing.
So the iPhone is a smartphone in two ways. And as the user base grows, and more people see how smart a phone can really be, the potential for new buyers of the iPhone increases exponentially, at least for the foreseeable future.
Thanks Eric for the forum you create for exchange of ideas, information and opinions about Apple, Inc.
David Forjan

2007 Oct 11 12:12 PM