03/01/2007, 4:15pm, EST
Thursday, March 1st
Analyst: the street underestimates iPhone
Morgan Stanley advised investors to purchase Apple shares on incremental revenue and operating leverage.
"We believe the market is underestimating the likely success of iPhone. We're raising our Calendar 2007 unit and revenue forecasts to better reflect iPhone interest levels, as described in our proprietary survey."
The firm also raised its earnings-per-share estimates for 2007 and 2008 to reflect higher unit estimates and a more favorable NAND pricing outlook.
"We also believe the market is underestimating potential operating leverage. While we see positive leverage drivers across Apple's product segment, the iPhone alone increases scale (better pricing from suppliers), strengthens retail store leverage (increased velocity on fixed-cost base), and takes advantaqge of lower NAND pricing in the market."
Results from the survey appear to show that the hype over the forthcoming iPhone launch is not overblown, and in fact that iPhone demand appears higher than the market currently anticipates. Interest in Apple's cellular handset "far exceeds" levels for other high-end/converged phones in the market, including RIMM's BlackBerry device. The analyst says 19 percent of survey respondents either currently own or plan to purchase a high-end device in the next year. That number compares to 23 percent of respondents who said they are either extremely or somewhat interested in purchasing an iPhone in the 12 months following its release.
"This is a clear indication that dmeand for iPhone could expand the overall high-end device market in a significant way."
The firm points to roughly 140 million converged devices that were shipped over the last two years, with BlackBerry holding the highest market share at around 7 million users.
Morgan Stanley advises purchasing Apple for two "core" reasons: "We believe the market still underestimates potential traction of new products, including the iPhone; and incremental operating leverage exists with Apple's retail store distribution engine and component price negotiating power."
Despite the bright news for Apple and its upcoming cellular handset, the firm lowered its calendar 2007 iPod forecast from from 46.5 million to 45 million to account for slightly higher cannibalization as a result of higher iPhone sales.
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But I love this: which found that more people are interested in purchasing an iPhone than the combined number of people who already own or are planning to purchase a similar high-end device.
Which makes it sound like there's an incredible number of people who don't have or buying soon a smart phone are looking are interested in the iphone.
But this is followed by The analyst says 19 percent of survey respondents either currently own or plan to purchase a high-end device in the next year. That number compares to 23 percent of respondents who said they are either extremely or somewhat interested in purchasing an iPhone in the 12 months following its release.
So what does this mean? What percentage of the 19% are in the 23%? At the very least it indicates that there's at least 4% of the people out there who don't know the iPhone's a smartphone.
But, really, what does any of this mean? You've got 19% of the people saying "I have or am buying a smart phone in the next year" (which, really, you only care about the buyers, not the owners, since they have a phone), while 23% are INTERESTED in the iphone. Hell, I'm interested in the iphone. I won't be buying one, but I'm interested in it.
And the 23% may be interested because they just know that Apple's got the phone from commercials and some buzz, and have yet to find out that its tied to Cingular and costs $500+.
Let's look at the facts. In AT&T Cingular's report, they have 61M subscribers at the end of 2006 and added 2.4M net subscribers. Let's say AT&T does well and get up to 80M subscribers by end of 2007, then the Morgan Stanley estimate would mean 1 in 10 Cingular subscribers will switch to an iPhone - and that is within 6 months of its launching. I have not heard iPhone for other carrier yet so my assumption is one carrier for 2007.
Now, look at the pricing. $499 and $599 are not pocket change for average consumers. For corporate business users, nothing beats the Blackberry at this point. Blackberry does one thing (email) and does it very well. iPhone is like a mini computer. For business users, how likely is the corporate IT will buy iPhone just because it is cool and play music? The question is how Apple position iPhone, consumer or business users - the in-between is a tiny market.
Make no mistakes, I am a fan of Apple's products and champion their design philosophy and hope they do well with iPhone so we see better and more user-friendly smart phones on the market. I must say that 8M is a dream than a goal.
Granted, analysts are not always right, and I have no idea where these numbers come from. But I'm willing to read at least with some trust an INDUSTRY analyst who joins ALL THE OTHERS who are saying it's going to be a success than the flamebaiting from your typical pile-on rants, full of rumors and hyperactive anti-apple bias.
Second, the basis for "success" is that 23% of respondents say they're "interested" in the iphone. Interest is nothing. Here's questions: How many of those 23% know anything about the iPhone? How many know its tied specifically to Cingular? How many know it'll cost $500?
If you assume everyone who responded know everything there is to know about the iphone (which, at this point, is still less then most need to know to make a non-zealot purchasing decision), then the analysis can be correct. But the only people who know that are those who follow apple closely. Remember that everyone doesn't read MacNN daily and watch the Apple keynotes daily.
Also, the only ads (and, as such, the only real public exposure) there are for the iPhone just show it as an apple phone, not an apple phone/restricted internet device.
First of all, Morgan Stanley ISN'T a research firm, it's an INVESTMENT firm. It has staff that does investment research for clients. Research like ths will cause casual investors to jump on the bandwagon and but Apple stock for $87. When they do, Morgan Stanley charges a sales commission. If the stock doesn't reach the projected $110 following the introduction of the iPhone because 10 million units aren't sold, many of the casual investors will sell Apple and move on. Guess what? Morgan Stanley rakes in another transaction fee based on the stock sale.
So, Morgan Stanley double dips, investors may or may not make a few bucks, Allple sells a bunch of iPhones (likely less than 10 million by December, and everyone forgets about the market research. Life in the investment world.
I think Apple should have played ball with Verizon (or vise versa) as they would have access to an even greater network of people.
Apple's iPod sales are up to maybe 10 million a quarter, which includes devices that cost as little as 80 dollars.
The market for personal electronic devices tapers off pretty rapidly as the price increases. Add the fact that it's restricted to a single network, which further reduces the demand, and I wouldn't be surprised if they're off by a factor of 10, and they don't beat a million units shipped in the first 12 months.