iPhone Driving Apple's Earnings and Other Product Growth

Nov.25.07 | About: Apple Inc. (AAPL)

Apple (NASDAQ:AAPL) is bringing mobile computing and the internet to millions of people because it's combining key mass-market adopted technologies such as digital music, email, instant messaging and the cell phone in an impressive way. It's using these as a draw to raise the price point for wireless-enabled gadgets, which allows it to provide a mini personal computing device. This allows people to do things on the internet and on the iPhone operating system that they never had much desire to before (on a mobile device) because it was never sold to the public properly. Apple has done this with its awesome brand and marketing power, which comes from its reputation for creating great devices that transform the marketplace.

Now let's look at how the iPhone makes money for Apple.

The iPhone, like the iPod, primarily brings in money by causing people to use other Apple products and services and ultimately to buy Macs. This is because Macs still account for a large part of Apples revenue and profit. People are more likely to use Apple's ecosystem of software because it looks familiar, it syncs together well and it becomes a natural extension of the coolness of the iPhone or iPod. For Apple, the sum is more than the parts.

Apple's iTV will benefit as well because people will increasingly own iTunes movies and shows on their iPods, iPhones, and iMacs.

A more detailed explanation of this can be found here.

Of course the iPhone also makes money as a standalone product (and service). The iPhone turns a profit at the point of sale, then the iPhone makes money from the service contracts with the mobile provider. The iPhone makes even more money because its functionality ends up driving more usage. If iPhone users surf the internet more because it works well, they pay more for a data plan. Finally, Apple will make money through revenue sharing with third party developers of services on the iPhone (they already share revenue with makers of products to be used with the iPod). iTunes may also become a software application store. Third party developers will make Apple products even more useful.

Given all of the above, I strongly recommend buying Apple's stock.

There are some risks to investing in Apple at this point, such as a short-term consumer slowdown scare. It is possible that this could bring Apple’s stock down along with the rest of the market. If that happens, I think the downside is limited to 20% (short-term). If it really looks like the U.S. will go into recession, the downside could be slightly more than 30% and it could last longer. I don’t think the latter possibility is going to happen, however. There is too much strength in the global economy.

My upside target on Apple is $300 by the end of ’08.

Disclosure: Author has a long position in AAPL