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AAPL Stock: 113.99 ( + 1.98 )

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Apple faces iPhone profit or market share dilemma

updated 12:15 am EDT, Wed October 10, 2007

AAPL target up by 30%

Following a slew of other upgrades, Sanford C. Bernstein analyst Toni Sacconaghi, the top-ranked computer analyst according to Institutional Investor magazine, boosted his stock-price estimate from $135 to $175 and increased his forecast for 2008 cash earnings per share by 3.3 percent to $5; however, the firm kept the "market-perform" rating saying that Apple must decide between sacrifice its currently high profits to meet its iPhone sales goals for 2008. While some upgrades by other analysts focused on software such as Mac OS X 10.5 Leopard and iWork as well as recent new Macs, Sanford C. Bernstein said that Apple's on-going revenue from iPhone sales may provide even bigger upside for the skyrocketing stock.

Sacconaghi, the top-ranked computer analyst according to Institutional Investor magazine, boosted his stock-price estimate from $135 to $175 and increased his forecast for 2008 cash earnings per share by 3.3 percent to $5; however, the firm kept the "market-perform" rating.

Last quarter, Apple said it plans to amortize revenue from sale of both the iPhone and Apple TV over 24-months, as it continued to fund software development and roll-out updates to customers during that time period. Analysts also predict that Apple has negotiated for a portion of its monthly subscriber revenues with its exclusive contract with AT&T and will likely have the same arrangement with other partners.

In September, Apple announced plans to bring the iPhone to several European countries through an exclusive distribution rights with different carries in the UK, Germany, and France. The company sold the right to distribute its four-in-one deice to Telefonica SA's O2 in the UK, Deutsche Telekom AG in Germany, and France Telecom SA's Orange.

"On the positive side, if Apple is able to secure what we believe are significant, near-100 percent margin payments from non U.S. wireless carriers that approach those we estimate from AT&T, and drive material unit volume of phones, there could be material upside to our earnings estimates and to the stock price," Sacconaghi wrote in his note obtained by Bloomberg.

The analyst, however, said that Apple would be unlikely to sustain the same level of profitably if it expects to sell 10 million phones in 2008, as its CEO Steve Jobs had hoped. Sacconaghi noted that carrier payments to the company could allow it "to pull some strategic strings" to drive up unit sales, but only at the expense of profitability.

Apple could earn about $14 from AT&T per month per subscriber, nearly double what rival Research in Motion -- creators of the Blackberry -- already receives from its carrier partners. In addition to its point-of-sale profit on the device, Apple could earn more than $330 per subscriber over two years in the US and could earn as much as $500 with its exclusive UK partner O2, the firm estimated.

"The iPhone's substantial revenue share potentially allows Apple to price the iPhone very aggressively - perhaps even selling the device at a loss - to stimulate sales," the analyst wrote in his note. "However, this comes at the expense of profitability, and unless the demand elasticity was high, our analysis indicates that it would be difficult for Apple to significantly move the needle on earnings."




by MacNN Staff

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Comments

  1. phillymjs

    Joined: Dec 1969

    0

    This guy wants another...

    ...iPhone price cut?

    Good lord, imagine the pissing and moaning (and frivolous lawsuits) if Apple actually cut the price again at all, much less cutting it down to selling-at-a-loss-to-get-marketshare levels!

  1. simdude

    Joined: Dec 1969

    0

    it will happen

    There will be another price cut. It won't happen until next year and may not be the current model. Perhaps a smaller, less features model. But if Apple's goal is 10 million phones, they need to reach new markets. Models for $199 and $299 would help achieve this.

    And I'm sure if Steve said he wants 10 million sales, internally, they are projecting much higher. You never want to come back an explain why you didn't meet your goals, But saying you blew through that estimate with say 15 million sales would look very nice.

  1. imagine engine

    Joined: Dec 1969

    0

    I want a better iPhone.

    Apple is going to have to release another iPhone soon with better features if they plan on keeping with their target and don't want the iPhone to be seen as a low end smartphone. Motorola already is selling their Q9 to GSM carriers that supports GPS, HSDPA, storage up to 32 GB MicroSDHC and able to edit documents as well copy/paste functionality, all of which the iPhone is not currently capable of.

  1. fishtech

    Joined: Dec 1969

    0

    Re. I want a better iPhon

    "...all of which the iPhone is not currently capable of."

    what part of OSX do you not understand?

  1. Fast iBook

    Joined: Dec 1969

    0

    Um..

    I dunno if it's where i live, or where i visit, but between my area of PA and NYC i see an iPhone in every 7th or 8th pocket/belt clip. I don't think market share is that big of an issue along the northeast corridor. Also, people who wouldn't touch an iPhone before the price cut are now 'waiting for the end of the billing cycle" to get the iPhone. I may get one. It's just so useful.

  1. jpruden

    Joined: Dec 1969

    0

    No problems here...

    fast ibook has a point. I work at a high school and have had at least 30 kids come in to see if we'd open the network so they can use their iPhones on campus. I don't think Apple is going to have a problem selling every iPhone they make, but they're gonna have to have it on Verizon before I buy it... ;)

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