Crossroads

At the intersection of technology, finance and the Pacific Rim.

Thursday, March 25, 2010

Apple -- an Equity Analyst View

Barron's Eric Savitz writes about Apple's upside from the view of a well-known equity analyst on Wall Street (bold letters are my points for emphasis):

The market for the Apple (AAPL) iPhone has a long, long way to grow.

That’s the basic conclusion of a report today from Bernstein Research analyst Toni Sacconaghi on the ultimate addressable market for the phone.

Sacconaghi estimates that the iPhone has won about 40% market share among smart phones sold at carriers who distribute the device. At the moment, the iPhone is sold through 143 carriers, in 89 countries; together he estimates that they sold 360 million phones, of which 64 million were smart phones - which is to say that they required a data plan. Since Apple sold 25 million phones in calendar 2009, that gets you to 39% market share among the company’s carrier partners.

With that kind of market share, he says, it will be “increasingly difficult” for Apple to boost its share of the smart phone market among current carriers.

On the other hand, he estimates that Apple can more than double its addressable market by expanding to new carriers that don’t sell the iPhone yet. And he says they can triple the addressable market by offering a device that does not require a data plan. Together, Sacconaghi says, those two opportunities can boost the addressable market to 557 million units, or more than 7x the current level.

Sacconaghi notes that Apple’s current line up of carriers actually accounts for less than half of all global post paid customers - among the missing are China Mobile, NTT DoCoMo and - of course - Verizon Wireless. If the company signed up the 13 largest carriers not on the list, the addressable market would increase 65%, the analyst estimates. He points out, by the way, that Apple has added 15 new carriers in just the last four months.

The more controversial idea is his suggestion that Apple sell a non-data plan phone, something he has been nagging Apple to do for a long time now. “With prices at $99 now for the 3G iPhone, we believe incremental elasticity is likely to come from Apple offering phone devices that require less expensive monthly fees,” he writes. He says a non-data-plan iPod Touch with a $40 voice plan could address “the vast majority of the post-paid subscriber base,” and a portion of the pre-paid market as well.

He notes that the post-paid handset market is 4x the size of the post-paid smart phone market - and that average revenue per subscriber of around $40 a month is enough to supply carrier subsidies. He thinks a non-data-plan phone could sell for $350 wholesale, and have 50% gross margins, which would be accretive to overall Apple economics.

Sacconaghi calculates that the incremental iPhone distribution could generate $5 a share in EPS - with another $4 from a low-end non-data-plan phone. In short, he thinks the company has left on the table so far potential earnings of more than $9 a share, which compares to an estimated contribution from iPhone in FY 2010 of around $8 a share.

Finally, he issues a warning to investors. “While we are encouraged by the size of iPhone’s potential addressable opportunity, in the near term, Apple increasingly risks disappointing on iPhone sales if it fails to secure incremental distribution or introduce a lower priced offering,” he writes. “To date, Apple has done an excellent job expanding distribution, lowering the iPhone’s price, and enhancing the device’s feature/functionality – all of which have contributed to sustained, strong iPhone unit sales. Given its increasingly high market share, we believe that Apple increasingly risks disappointing on investor expectations for iPhone unit sales if it is not able to secure additional incremental distribution and/or introduce lower priced offerings over the next 12 – 18 months.”


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