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Month June 2010

Why I think Apple wants everybody to have an iPhone

In recent entries I asked: Can the iPhone reach 10% of the world’s 3G subscribers? and  Can iPhone reach 20% of global smartphone market?

These were rhetorical questions designed to demonstrate that a growth rate of 50% (compounded) over three years was clearly possible through reduction to absurdity of alternative scenarios.

The question of iPhone as iPod vs. iPhone as Mac businesses is at the crux of any investment in Apple today and the key strategic question facing Apple and all its competitors.  Anyone holding or considering buying AAPL shares should answer this question for themselves.

To the top-down market share scenarios above I add the following, more direct, signals Apple has made regarding their iPhone-for-all strategy:

Analysts upgrading AAPL

Susquehanna Financial’s Jeff Fidacaro: To $335 from $325.

Kaufman Bros.’ Shaw Wu: To $340 from $320.

Piper Jaffray’s Gene Munster: To $348 from $340.

Caris and Co.’s Robert Cihra: To $325 from $310.

Morgan Stanley’s Katy Huberty: To $332 from $310.

International Strategy & Investment Group’s Abhey Lamba: initiate with $320.

Cowen’s Matthew Hoffman: initiate with $326.

At yesterday’s closing price Apple was trading at a 12-month trailing P/E multiple of 23 despite revenue growth that may exceed 50% and EPS growth that may exceed 70%.

Using the highest target of $348 price target as an example, it prices the shares at a P/E of less than 30 times the most recent 12-month earnings which does not take into account the contributions from the iPad.

Mobile phone companies consolidate while the smartphone market expands

In Japan’s second cell-phone merger this month, Fujitsu and Toshiba said Thursday they will merge their handset operations … NEC, Casio Computer and Hitachi merged their phone units earlier this month.

via Fujitsu and Toshiba to Merge Cellphone Units – DealBook Blog – NYTimes.com.

Mergers usually happen in a mature industry when there is excess capacity and decreasing growth.  In the mobile phone market we’ve seen several companies disappear or merge over the past decade:

  • Ericsson
  • Sony
  • Alcatel
  • Siemens
  • Casio
  • NEC
  • Hitachi
  • Fujitsu
  • Toshiba
  • Palm
  • Handspring
  • Motorola tried but failed to get itself acquired.

But we’ve just seen forecasts where the smartphone market is growing and is expected to continue growing at 40%. Why is there consolidation in a growing market?

Nokia: Throwing in the towel

“We have long maintained that the company’s ponderous corporate culture would eventually find its footing, but with competitors attacking fiercely at both the low and high end, deterioration in its core European market, and a lengthening timeline for Symbian^3, which may not live up to expectations anyhow, shares will plunge well below recession lows,” he warns.

via Nokia: Charter’s Snyder, Long-Time Bull, Throws In The Towel – Tech Trader Daily – Barrons.com.

But at least Nokia management can take comfort in having a higher P/E ratio than Apple.

iPhone 4 ASP is $600

As a footnote to the unlocked iPhone 4 story, it’s worth noting that the average Apple store pricing for UK and France is around $824 (assuming equal blending between the two countries and between the two models).  Excluding corresponding VAT leads to an approximate ASP of $695.

Operators probably get a slightly better price so my estimate for the iPhone 4 ASP of $600 seems reasonable with potential upside based on product and regional mix.

Unlocked iPhone 4 priced at €600

Factory unlocked iPhone 4 Sold by Apple in UK, Canada & France!! | All on the iPhone, iPod touch & iPad.

Unlocked iPhones are being made available at UK, Canadian and French Apple stores for the equivalent of $740, £500 and €600.

This will go some way toward making the iPhone available to a larger population, especially in developing countries.

iPhone on top down under

The most impressive number for us is the change in units shipped. For example, leader Nokia held 66.6% of the marketshare in Q1 of ’09, and 45.2% in Q2 for a 7% change in units shipped. Meanwhile, Apple held 10.2% in Q1 ’09 and 40.3% in Q1, ’10 for a 532.1% change in units shipped.

Can the iPhone reach 10% of the world's 3G subscribers?

In a previous article I asked what it would take for the iPhone to reach 20% of the world’s smartphone market? (answer: 50% growth).

Now I take a look at the whole market measuring three underlying quantities:

  1. the number of total wireless subscribers world-wide
  2. the number of 3G subscribers
  3. the number of smartphones sold every year 2007 to 2013

The forecast for 2013 is:

  1. total subs: 6.2 billion
  2. total 3G subs: 2.4 billion (38% of all WW users)
  3. 660 million smartphones sold in 2013

I also computed the installed base of iPhones based on units sold per year according to the following schedule: 100% of iPhones in use during first year, 75% in use after second year, 50% in use in the third year, 25% in the fourth and 0% in the fifth and after.

If the iPhone can sustain 50% growth then the following are possible in 2013:

  1. 4% of world’s users using an iPhone (248 million iphone users)
  2. 10% of 3G users are using the iPhone
  3. 21% of smartphones purchased are iPhones

Can iPhone reach 20% of global smartphone market?

On a yearly basis, iPhone has been growing at 270% in 2008,83% in 2009 and 130% so far this year.  The growth has been faster than the growth of the smartphone market during the same time.  As a result, the market share of the iPhone has increased from 2% in 2007 to 13% in 2009.

The question now is: What is the required growth rate for iPhone to maintain growth in share as the overall market grows?

Taking market estimates from Morgan Stanley, I tried to fit an iPhone growth rate which would result in a 20% share for Apple by 2013. This rate turns out to be a conservative 50%/yr.  Any growth beyond 50% would result in well over 20% share for the iPhone.

The iPhone at three

The end of June will mark the third anniversary of the market release of the iPhone. When it arrived in June 2007, anticipation for the product was significant with high consumer awareness and expectations–though the 10 million/yr. target for 2008 was met with skepticism by many.

The iPhone launched on June 29th 2007, with only a few days remaining in the quarter. 270k units were sold in that quarter and that was considered a solid start. When the company reported earnings a few weeks later (July 18th 2007) the company’s stock price jumped to $140 a share.

As a sign of optimism in the company’s prospects, the P/E ratio showed that the company was expected to reach 35% growth (35 P/E).

Was this optimism warranted?