updated 10:10 am EST, Mon January 29, 2007
Needham bumps price target
Despite likely slow initial iPhone sales due to its high price point, Needham & Co. analyst Charles Wolf believes the new gadget's price will fall at a 20 percent rate annually due to declining component costs and rising carrier subsidies. "The decline in price should accelerate demand as the iPhone invades the sweet spot of the mobile phone market," Wolf wrote in a research note obtained by MacNN. "With carrier subsidies, the iPhone should sell for around $75 in the final year of our forecast." Wolf is predicting sales of 135 million iPhones in 2016, equating to a 7 percent market share for an increase of $20 net to Apple's target price. Wolf raised the research firm's target price on Apple shares from $115 to $135.
The value of the iPhone, according to the analyst, depends on three predictions which include the annual decline in the price at which Apple sells its iPhone to carriers, the magnitude and trajectory of carrier subsidies of the iPhone, and the price elasticity of demand for the cellular handset.
"Based on Apple's strategies in pricing the Mac and iPod, the price at which Apple sells the iPhone to carriers should decline at a 12 percent annual rate," Wolf said. "Carrier subsidies should increase over time because the iPhone should generate growing data access fees as features and services are added. The price to consumers should fall at a 20 percent annual rate."
Wolf adds that as the price of the iPhone falls toward zero, the price elasticity of demand will likely increase at an accelerating rate. Needham's free cash flow valuation model converts its iPhone forecast into $24 of value per Apple share, and factoring in cannibalization of iPod sales translates into a net addition of $20.
"The obvious risk is that iPhone sales could fall materially short of our forecast," Wolf cautioned.