While most firms are going gaga over Apple (NASDAQ:AAPL) I'm on the lookout for notes that are more down to earth. Citigroup has one:
- Citi reiterates their Hold rating for AAPL shares with a new $98 target (up from $85) after Apple's introduction of the highly anticipated iPhone at Macworld on Tuesday. While the design and ease-of-use of the product are revolutionary, the $499-599 initial price point and a single US carrier are likely to limit the available market to a subset of the already-modest smartphone portion of the handset market.
While investors may be tempted to believe that iPhone will ship earlier than June, the firm notes that the process of obtaining FCC approval for a new wireless device can take more than six months in some cases. In addition, firm's checks have consistently suggested a 2CQ volume-production ramp, consistent with a June launch. A six-month delay to availability is problematic because some iPod nano buyers---and even some hard drive-based iPod buyers---are likely to defer iPod purchases during 1HCY07, limiting earnings upside for the next six months.
Also, iPhone will initially sell for $499-599 with a two year service contract from Cingular (including a likely $150-200 subsidy). This leaves the low-end iPhone $200-350 more expensive than any other smartphone in the U.S., with the exception of Palm's Treo 700 Series where the differential is a more modest $0-100.
With its high price, the iPhone only represents compelling value to customers who plan to use all of its features, especially its 4-8GB of embedded flash for music, photo, and video storage. However, they suspect that a significant portion of music listeners will continue to prefer a discrete iPod for music because the smaller form factor is more convenient for running or the gym. These users are not likely to pay for 4-8GB of embedded flash memory that they do not intend to use. The use of removable flash storage would have allowed Apple to hit lower price points while still providing higher storage capacities for those customers that want them.
Citi's most likely-case scenario calls for iPhone shipments of 3-4M in CY07 and 8-9M in CY08. This scenario assumes that 10-15% of Cingular customers whose contracts expire in 2H07 buy iPhones and that the phone's compelling feature set attracts another 1.5M subscriptions to Cingular from other carriers in 2H07. For 2008, this scenario assumes that Apple takes 8-9% share of the U.S., European and Asia Pacific ex-Japan smartphone markets, or that Apple achieves 60-70% of estimated BlackBerry shipments in 2008.
They are adjusting estimates based on a scenario analysis of the likely impact of iPhone on future earnings. However, analysis suggests that the current share price is discounting a significant portion of the likely contribution. They therefore remain on the sidelines and would await a pullback into the low $80s before reconsidering the Hold rating.
Notablecalls: I don't think these comments are actionable in any way but I do believe that following yesterday's huge move upside will be somewhat capped. Note that Morgan Stanley is out on AAPL saying iPhone is clearly a game changer in the phone market and could drive even more earnings power than we currently model. Assuming 5% market share (vs. firm's current 1% estimate) and 10% operating margins, the iPhone could add $0.90+ of incremental annual EPS versus their current forecast. An expanding product portfolio, growing distribution engine and market share opportunities all keep them Overweight AAPL with a price target of $110. As far as I know, MSCO's ests are Street high following their brilliant Dec 28 iPhone call.
- Citi reiterates their Hold rating for AAPL shares with a new $98 target (up from $85) after Apple's introduction of the highly anticipated iPhone at Macworld on Tuesday. While the design and ease-of-use of the product are revolutionary, the $499-599 initial price point and a single US carrier are likely to limit the available market to a subset of the already-modest smartphone portion of the handset market.
While investors may be tempted to believe that iPhone will ship earlier than June, the firm notes that the process of obtaining FCC approval for a new wireless device can take more than six months in some cases. In addition, firm's checks have consistently suggested a 2CQ volume-production ramp, consistent with a June launch. A six-month delay to availability is problematic because some iPod nano buyers---and even some hard drive-based iPod buyers---are likely to defer iPod purchases during 1HCY07, limiting earnings upside for the next six months.
Also, iPhone will initially sell for $499-599 with a two year service contract from Cingular (including a likely $150-200 subsidy). This leaves the low-end iPhone $200-350 more expensive than any other smartphone in the U.S., with the exception of Palm's Treo 700 Series where the differential is a more modest $0-100.
With its high price, the iPhone only represents compelling value to customers who plan to use all of its features, especially its 4-8GB of embedded flash for music, photo, and video storage. However, they suspect that a significant portion of music listeners will continue to prefer a discrete iPod for music because the smaller form factor is more convenient for running or the gym. These users are not likely to pay for 4-8GB of embedded flash memory that they do not intend to use. The use of removable flash storage would have allowed Apple to hit lower price points while still providing higher storage capacities for those customers that want them.
Citi's most likely-case scenario calls for iPhone shipments of 3-4M in CY07 and 8-9M in CY08. This scenario assumes that 10-15% of Cingular customers whose contracts expire in 2H07 buy iPhones and that the phone's compelling feature set attracts another 1.5M subscriptions to Cingular from other carriers in 2H07. For 2008, this scenario assumes that Apple takes 8-9% share of the U.S., European and Asia Pacific ex-Japan smartphone markets, or that Apple achieves 60-70% of estimated BlackBerry shipments in 2008.
They are adjusting estimates based on a scenario analysis of the likely impact of iPhone on future earnings. However, analysis suggests that the current share price is discounting a significant portion of the likely contribution. They therefore remain on the sidelines and would await a pullback into the low $80s before reconsidering the Hold rating.
Notablecalls: I don't think these comments are actionable in any way but I do believe that following yesterday's huge move upside will be somewhat capped. Note that Morgan Stanley is out on AAPL saying iPhone is clearly a game changer in the phone market and could drive even more earnings power than we currently model. Assuming 5% market share (vs. firm's current 1% estimate) and 10% operating margins, the iPhone could add $0.90+ of incremental annual EPS versus their current forecast. An expanding product portfolio, growing distribution engine and market share opportunities all keep them Overweight AAPL with a price target of $110. As far as I know, MSCO's ests are Street high following their brilliant Dec 28 iPhone call.
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