Apple: How the Street Weighs In on the iPhone

It’s time for a roundup of the Street’s views on Apple’s (AAPL) launch yesterday of the new “zippy” iPhone 3G. The most surprising news was the price tag: at $199, the phone will be half the price of the comparable model of the version edition of the phone. The good news is that this should drive more units, maybe a LOT more units. The stumbling blocks are the fact that basically no phones will be sold between now and the launch of 3G on July 11, and the fact that the company will no longer get an ongoing slice of carrier service revenues. Still, in general it seems like the right move if Apple wants to make the iPhone a mainstream device. Here’s a rundown on some of this morning’s Street commentary on the news:

• Toni Sacconaghi, Bernstein Research: “The most important aspect of the new 3G iPhone is not its feature set, but Apple’s decision to change the iPhone’s business model,” abandoning carrier payments in exchange for more traditional upfront carrier subsidies. He thinks the switch likely reflects “widespread carrier unwillingness to move to Apple’s revenue share model.” He estimates Apple will sell the phone to carriers for between $350 to $700 depending on factors like carrier competition, exclusivity and ARPU. He notes that, in a move to prevent unlocking, the new phones will require in-store activation. Sacconaghi thinks the company can sell 10 million post-paid 3G iPhones in fiscal ‘09, but with profitability lower than the first generation device due to the business model switch. Sacconaghi also worries that in markets where they sell a pre-paid iPhone for $199, there could significant cannibalization of iPods.
• Gene Munster, Piper Jaffray: “In reducing the entry-level price of the iPhone to $199 and eliminating revenue sharing agreements with its carrier partners (using one-time subsidies instead), Apple is clearly making a trade-off. Ultimately, we believe the net impact will be positive, but the new arrangements are not without some negative consequences.” He continues to see iPhone unit sales of 12.9 million in calendar 2008 and 45 million in 2009. Munster cut his FY 20098 EPS estimate to $6.38 from $6.60.
• Richard Gardner, Citigroup: “We remain aggressive buyers of AAPL shares at current levels. Apple’s decision to move from a revenue share model to a traditional subsidy model for the 3G iPhone is a significant positive because Apple receives iPhone-related cash flow sooner. As a result, our free cash flow estimate increases by $2B for FY09 and our price target increases from $248 to $287.” His iPhone unit estimate for the second half of calendar 2008 goes to 12 million from 8 million. For calendar ‘09, he goes to 23 million from 16 million; for 2010 he goes to 28 million, from 20 million.
• Andy Hargreaves, Pacific Crest: “Software looks to be the star of iPhone 3G,” he writes. “The combination of console-quality games and value-creating enterprise applications will drive strong demand for iPhone while creating a sustainable competitive advantage.” But he notes that the shipment date of July 11 is nearly a month later than expected. He increased his fiscal 2009 unit forecast to 15.5 million from 14 million, but lowered his free cash flow per share estimate slightly, to $7.50 from $7.55. He keeps his rating at Outperform, with a $225 price target.
• Charlie Wolf, Needham: “Apple is going for volume with the iPhone,” he writes. “iPhone sales should increase dramatically in the second half of the year and beyond.” He keeps his Strong Buy rating and $235 price target.
• Richard Windsor, Nomura: “A lesson learned and a business model spurned as Apple launches the 3G iPhone at a price point that could mean significantly higher volumes of the device,” he writes. But he also notes that “by allowing the subsidy to pass to the user, Apple must increase its volumes very substantially to make up the difference.” He notes that a dollar from revenue share has EBIT margins of 100%, while hardware revenues have an EBIT margin of closer to 30%. Writes Wiindsor: “This implies to us that Apple could be looking to double or triple its targets meaning as much as 30 million annually in the longer term.”
• Shebly Seyrafi, Caris & Co.: “The 3G iPhone announcement sparked a profit-taking yesterday and may continue to do so for the next couple of days. However, we think that this would be an opportunity for investors to add to positions.”
• T. Smith, Standard & Poor’s: Rating increased to Buy from Hold. He upped his FY September ‘08 EPS estimate to $5.33 from $5.30; for ‘09 he goes to $6.60 form $6.50. His price target rises to $210 from $200.
• Chris Whitmore, Deutsche Bank: “We believe any weakness in AAPL associated with the timing delay is an opportunity and would accumulate shares on a pull back,” he writes. Whitmore cut his June quarter iPhone shipment estimate to 700,000, from 2 million, but sees 2008 units at 13 million, above the company’s target of 10 million.
• Mike Abramsky, RBC: “At $199 or lower, iPhone 3G hits the ’sweet spot’ for Smartphone pricing, which, plus 3G, plus global distribution is expected to boost iPhone momentum 100%+…We reaffirm our CY08/CY09 iPhone estimates for 14M/24M ships.”

Comments

[TanToday:]

OK, some random thoughts not expressed elsewhere.

One - with Apple pro-rating the income over 24 months, on let's say 4 mill of the 6 mill sold to date { the others are bootlegged and wont produce anymore income than the sales ticket, which TOO was prorated } I expect ALL that deferred revenue { or the VAST bulk of it, to be recast and brought forward NOW as sold and bookable } THAT will add an impressive quarterly POP that will more than offset the NO SALES of any units for two months for all extents and purposes.

Two - if you historically look at what happed with the iPod, when it was mainlined with a drastically lowered price, the sales skyrocketed, and continued exponentially UP for a few years, and there certainly was no dearth of competition, I know, I resisted and bought the other models, I wasn't gonna get "caught" in that buy trap they had with iPod. { I now own three of them, and boy was I stupid for trying to make the others all work right. } Should that same scenario happen, if they could sell SIX mill in a year, at prices 2 or 3 TIMES higher, a new unit now going to be available in 70 { and more, they are not done signing co's up } at 1/2 the price and 2.5X the speed....I see the only real constraints out there, making enough of them and Hon Hai { Foxconn } will have all 200,000 girls in the Shenzhen plant working as much overtime as they can crank out of them. I call it for 10 million from July 11 to Christmas.

Income: each phone will be bulked out to the carriers for a 200-250 per unit profit to apple, NOW, not deferred. That brings the income to the sales date, not staggered out over two years.

and what is now GROSSLY overlooked....

THE KEY to all this, the APPLICATION STORE.

With each Apple, you get a hook into THE STORE, where every time you go there there will be SCADS of neato, cool, fun, useful, coy, pleasing, gotta have THIRD PARTY applications being showcased for your pleasure....a single CLICK, and it is ON your machine, working, tested, and compatible....NO ONE has that. And joy of joy, our company rakes off 30% of each and every sale for hosting this little hidden gem.

Now, if each user puts say 20 apps on his new toy a year, at an average of 19 bucks an app, that is $400 a year, and apple gets 120 of that.

Add 'em all up, $250 on the hardware as it goes out to the carriers as profit. The SERVICE CONTRACT covering damage, etc at $70 for the three years, and approximately 75-120 cut of application sales.

So, each iPhone has a potential to generate a bottom line to the company of $375-450 over the life of the phone.

AND ... the halo effect, every one of these people WILL be buying into the former .MAC now renamed with all the convergence aspects...

ADD in ANOTHER 99 a year, and the sales of iMacs, and iThis and iThat that will follow these units as the world is now interacting WITH the Apple experience.

... oh yeah, add in the ENTERPRISE side as companies see the STATUS of having their outside people looking like STAR TREK future citizens, instead of chickenpecking at little eetsy beetsy chicklet minikeys.

This is huge guys, SEE THE BIG PICTURE here, Job et al BLEW it when they didn't see the WORLD in the last explosion, they are NOT going to make that mistake twice.

2008 Jun 10 05:46 PM

[aapl:]

Re: TanToday
Abolute realistic prediction. Many people don't see the big picture now. Mhoe-ing about a missing video camera etc. That is not the question.

Jobs did his reseach and the iPhone is his big longer term plan. And it's solid as a rock. 199$ is the trojan horse to take over the market. It's gonna happen, step by step.

As we speak, I think the Enterprise intergration will push companies far more to use the Iphone professionaly. Many employers (here in Europe I know for sure) prefer the Iphone over a Blackberry of other PDA and now will ask thier boss for it.

Costs are equal so: the iPhone 3G could take a big deal of the businessmarket aswell longer term. TomTom software available and GPS integrated so you can see where your employer is hangin' out ;-)

Another plus for AAPL.

2008 Jun 11 05:44 AM

[digivision:]

the companies that are in danger of being seriously hammered by the iphone are Tom Tom, Garmin and Palm
as of July 11 the iphone will be the best GPS on the market with the most advanced tracking technology..

$0 trades
friends.zecco.com/r/5d...

2008 Jun 11 08:54 AM

[brewer:]

Uh, add RIMM to the list of companies about to be clobbered by APPL. Also, how many decades does MSFT have to hover with no growth whatsoever, before the clueless realize it's a dog?

2008 Jun 16 01:17 AM