How Big Will the iPhone Be?
Few stocks trade on emotion the way Apple Inc. does. Its rip-roaring initial public offering in 1980 created the template for modern tech mania, while making Steve Jobs a gazillionaire. When the company fell on hard times in the mid-1990s, no amount of good news could pierce the cloud of doom hanging over investors. Now, with the launch of the hugely hyped iPhone in a few weeks, momentum investors are driving Apple (AAPL) shares to unexplored territory. The stock has doubled in the past year, to 122. Apple's market cap recently topped $100 billion for the first time.
Hard as it is to believe, all the excitement surrounding Jobs and his new toy may actually understate the impact of this device on Apple's fortunes. Beyond the hysteria surrounding its June 29 launch, the iPhone has the potential for adding a totally new, $10 billion-a-year business within just a few years. If Apple can expand so-called smartphones from a luxury carried by corporate road warriors into an everyday tool for the masses—combining the functions of a BlackBerry and an iPod—Apple could soon see a new growth tear.
Up, Up, and Away
That's the kind of thinking that has some analysts pegging Apple's stock price at 160 and up. They contend that the blazing success of Apple's Mac and iPod lines on their own justify much of Apple's current value. JMP Securities' Ingrid Ebeling used conservative price-earnings ratio projections for 2008 to calculate that the Mac business, with revenues of $11.7 billion and net margins of 11%, would be worth $42.70 on its own. The iPod, with $10.8 billion in revenues, 12% margins, and a slightly lower multiple given slowing growth, would be worth $38.87. Add in $6.36 for other music products, $6.76 for peripherals such as Apple TV, $5.91 for software, and $14.18 per share in cash. You're already at $114.78—with no help from iPhone.
What the iPhone adds is a chance to grab prime position in a much bigger, faster-evolving business. Apple is trying to use its design and software expertise to win consumers who mostly buy Plain Jane phone models from entrenched players. The success of the iPod has been remarkable, with 100 million sold since 2001. But more than 1 billion cell phones are sold each year.
If Apple's goal of selling 10 million iPhones by the end of 2008 seemed ambitious to some back in January when Jobs first unwrapped his new baby, few doubt it now. Wall Street speculation has gone from how much market share it can steal, to how much it can expand the overall smartphone market, based on Apple's entry and the competitive response it will elicit from incumbents such as Nokia (NOK), Palm (PALM), and Research In Motion (RIMM).
The answer may not come until 2009. By then, Apple should have begun creating lower-cost iPhone variants to reach consumers scared off by the introductory $499 price. It also will probably have moved into overseas markets and cut deals with more carriers to utilize higher-speed wireless networks. So while most analysts look for Apple to sell around 3 million units this year and 10 to 12 million in 2008, many figure that 20 million will move in 2009. Piper Jaffray Cos. (PJC) analyst Gene Munster thinks Apple could sell more than 40 million iPhones in 2009—enough to lift revenues more than 30% that year, and earnings by 40%.
Still, Apple will need to execute flawlessly. In units built and shipped, the iPhone launch will dwarf anything Apple has attempted. It plans to have 3 million iPhones ready for sale on June 29, two sources say. (Apple won't comment.) And with its touch-screen keyboard, powerful battery-sapping processors, and a panoply of new applications, the iPhone is far more complex than the iPod. Glitches could lead to costly recalls and returns if buyers find the phone buggy or confusing.
It's easy to forget that the iPod wasn't an immediate hit when it rolled out. Apple had years to ramp up production. Jobs did so expertly, often creating a sense of scarcity by running slightly short of demand. With all the buildup over the iPhone, pumping up demand will be the least of his concerns.