davswa's  Instablog

Everyone wants to know how well the iPhone is doing at Verizon.  Here is my estimate and the methodology I used to get it.  I will update this estimate twice a week.

According to AT&T quarterly reports the company has sold approximately 34 million iPhones until the end of 2010.  To be conservative let's assume that 10% of those older phones are no longer in service leaving 30.6 million in service.  AT&T is currently selling approximately 45 thousand/day (that number may be going down a bit now that Verizon has the iPhone - I will adjust once AT&T Q1 numbers are released).  The advertising tracking site labs.chitika.com/iZone/ displays the percentage of iPhones from both AT&T and Verizon networks that visit its advertising partners.  By combining this data an estimate of the number of iPhones on the Verizon network can be made.  For example, on February 11, 2011 3.0% of iPhones were on the Verizon network.  The total number of iPhones on AT&T on that date is estimated at 30.6 million + 48 * 45,000 = 32.4 million.  The number of Verizon iPhones is therefore approximately 1 million so that the percentage is 1/(32.4+1) = 3%.

In the table below I list the estimated active units in millions for both carriers as well as the estimated sales/day (averaged since Feb. 11) of iPhones at Verizon in millions.

Mar 31 Update:  the quarter is done and I estimate 4.73 million iPhone sales at Verizon.  We'll have to wait a few weeks to find out if I am correct.

iPhone count in millions
		Verizon
Date	AT&T	Units	Sales Per day (Avg since Feb 11)
11-Feb-11	32.42	1.00
17-Feb-11	32.69	1.83	.138
19-Feb-11	32.78	2.13	.141
25-Feb-11	33.05	2.41	.093
1-Mar-11	33.18	2.5	.088
4-Mar-11	33.36	2.78	.085
8-Mar-11	33.54	3.04	.082
12-Mar-11	33.78	3.60	.090
19-Mar-11	34.04	3.95	.082
24-Mar-11	34.26	4.15	.077
27-Mar-11	34.40	4.43	.078
31-Mar-11	34.58	4.73	.08

If the Q1 sales estimate is correct that would translate into approximately $3 billion in incremental revenue for Apple's Q2 and $1.3 billion in incremental earnings.

The tables below provide my estimates of what unit sales, revenues, and earnings will be announced when Apple releases 4th quarter results towards the end of October.

I am assuming a 35% Y/Y increase in Mac sales which is aggressive but in line with recent quarters.  The big drivers this time around are the back-to-university purchases (note that the market share of Macbooks on campuses continues to grow)  and the updated iMac product line released in September.

I am assuming flat iPod sales and 10 million iPhone sales which is in line with many analysts.  Unit sales of iPads will be about 4.5 million for the quarter, constrained by supplies.

If these estimates hold true then full year 2010 earnings would be just shy of $15/share.  Using a reasonable trailing P/E multiple of 15 and accounting for cash of almost $49/share the price target for Apple is $270/share.  But that does not provide any premium for further market share growth, introduction of iPad into new markets, removal of iPad supply constraints, or introduction of new products such as an iTv before the holiday season.  Taking these factors into account a more reasonable price target is $300-$325 before the end of 2010.

Purchasing January, 2011 options with a strike price of between $280 and $300 offer the best way to play APPL for the remainder of the year.  The earlier the purchases are made the better the likely returns will be.



Disclosure: Long APPL Options (Jan and April, 2011)

Back in January, 2003 Apple released a new software product – the Safari Web Browser.  I have been a fan of Apple hardware and software for many years but this announcement completely baffled me.  Why would Apple get into the zero-revenue, money-losing browser game?  The Mozilla foundation was already delivering a browser to compete with Internet Explorer – why not support it rather than build another browser from scratch?  It takes years to gain enough credibility and develop enough features for a browser to attract any significant following and I could not see the point of Apple even trying.

Safari muddled along, becoming the default browser delivered with Mac OS upgrades starting in October, 2003 and slowly it began to displace Internet Explorer and Mozilla/Firefox as the browser of choice on Macintosh systems.  Even so, four years after it was initially released it was still unclear what the value proposition was from Apple’s perspective.

And then in January 2007 came the announcement of the iPhone.  It was innovative in many ways, but the killer feature when compared to any existing mobile device was the ability to actually browse the internet with an application that made the experience practical and even pleasurable.  Suddenly it became clear why Apple had been investing in Safari for years.  The support for pinching and swiping, the pop-up virtual keyboard that appeared when an entry field was touched, the automatic rotation of a page when the device was turned on its side – all of these features had to be built into the guts of the browser.  Only by having complete control of the browsing experience could Apple make it work on such a small form factor.

Think about that timeline for a moment.  In a technology environment where obsolescence is often only months away Apple spent more than 4 years developing a piece of software for the specific purpose of supporting a device that did not yet exist.  The takeaway?  Steve Jobs and company have the patience to deal with long development cycles when the end goal is something truly transformative.

The next time I saw Apple announce something that didn’t make a lot of sense I took note.  The Macbook air, unveiled in January 2008, seemed like a complete gimmick to me.  Sure it was very thin and very light, but it was also lacking a lot of features and it was very expensive.  Rather than taking it at face value I started looking at what technologies were being given a “test drive” with the Macbook Air;  thin design, extended battery life, low power consumption through the use of a flash disk.  It dawned on me that all of those technologies would be needed in order to successfully commercialize one of the most elusive ‘holy grails’ of the technology world – the tablet computer.

There had been rumours about an Apple tablet for years but most analysts dismissed it as a device that couldn’t be built for a market that didn’t exist.  In July, 2009 I predicted (seekingalpha.com/article/151606-toshiba-...) that the ramp up in flash drive production was not for new iPods but instead was for an Apple tablet and that Apple developed silicon would be at the heart of that device.  It seems obvious today but at the time most analysts were still arguing about whether or not it made sense for Apple to even enter the tablet market.  Many analysts doubted that it could be very successful, even after it was announced in January, 2010.  We all know how wrong they were.

So, is it possible to decipher what the next monster hit for Apple will be?  I think it is.  There is a product they have been selling for years that has not gotten much attention and is considered by many to be a failure.  Apple TV.  

Talking about internet delivered programming at the AllThingsDigital conference in June 2010 Steve Jobs stated that “smarter people than us will figure this out”. If you believe that Steve Jobs thinks that such allegedly smarter people even exist I have more than one bridge in the Bay area that I would like to sell you.

Also in June the newest Mac Mini was announced complete with an HDMI port and NVidia GeForce 320M graphics chip – a perfect device to provide computer applications and streaming video in one box.

In September the new Apple TV was introduced sporting a smaller form factor and very low price together with $.99 TV show rentals.  With that device and the new Mac Mini Apple can serve everyone that already owns a large format TV.

In the meantime it has been public knowledge that Apple is building an enormous new data centre in North Carolina.  There has been a lot of speculation about what it will be used for but streaming of music and video seems like a fairly logical use.

So here is my guess at what all of this means.  Apple will start selling large format HD TV’s by the end of 2010 or early 2011.  These devices will incorporate the hardware components found in most set top boxes and will be able to detect what type of signal is being received (analog, digital, cable, satellite) and will support the appropriate functionality with little or no user configuration required.  A PVR will be included and it will be so easy to use that even grandma will be able to record her favourite shows.  They will also run iOS and provide desktop computing facilities.

What about content, you ask?  I believe that Steve Jobs is using his Disney/ABC connections to line up a package of TV channels that will be streamed from the North Carolina facility.  The package will be totally customizable.  You will only have to pay for the channels that you want and you will not have to scroll through hundreds of channels you don’t want in order to view content that you are interested in.  All you will need is an internet connection.  No more having to buy pre-bundled packages from cable or satellite providers.  The cost will be competitive – probably  $60-90/month.

For those that already have a large format TV a Mac Mini or Apple TV will provide them with the TV gateway that is included in the iTVs. 

So how does this information translate into an investment strategy?  Based upon organic growth in existing products I am modeling $4.13/share earnings in 2010Q4 and $22/share for 2011.  Add onto that a new product line (iTV) and associated subscription services and the estimate for 2011 earnings goes to $25/share at least.

By mid-2011 Apple will have about $50/share in cash.  Using a reasonable P/E multiple of 15 gives a forecast stock price of $25*15+50 = $425/share. 

If you find this to be a credible story then the safe investment strategy is to buy April 2011 APPL options with a strike price of either $250 (valued at $39 as of September 15, 2010) or a strike price of $300 (valued at $14 as of September 15, 2010).

The chart below displays the appreciation of both options given different stock prices for APPL in April, 2011.


The choice of which option to buy depends upon your confidence regarding how far APPL stock will move before April, 2011.  If you feel it will only move to the $300-$325 range then the option with a strike price of $250 will provide a better return with less risk.  If you believe that APPL could move to the $375-$400/share range before April, 2011 then the option with the strike price of $300 will provide much better returns - as much as 614%.  Of course, other strike prices are available.  I chose $250 and $300 in order to illustrate the difference in potential returns.

Disclosure: Long APPL options