http://money.cnn.com/2007/06/22/mark...ex.htm?cnn=yes
iPhone set to ring up profits
Stock Spotlight: Investors think the iPhone will be Apple's newest consumer
gadget hit. But is it too late to buy the stock?
By Chris Zappone, CNNMoney.com staff writer
June 22 2007: 2:51 PM EDT
NEW YORK (CNNMoney.com) -- Few companies generate the kind of excitement
before a product launch as Apple has before the debut of its eagerly
awaited iPhone on June 29.
Consumers -- not to mention many tech writers and investors -- expect the
iPhone to be a superior, standard-setting device. In other words, the iPod
of cell phones.
"Apple thinks there's an opportunity to reinvent the way people use a
handheld device," said Harry Blount, an analyst at Lehman Brothers. "It can
be a handset, an MP3 player, potentially a GPS device. It could morph into
an e-commerce application."
Apple has a lot riding on the iPhone as the company continues to branch out
from its roots as a computer maker.
The company has sold 100 million iPods since the product's debut in
November 2001. Apple's (Charts, Fortune 500) transformation to a consumer
electronics giant under CEO Steve Jobs has yielded fat profits for the
company and rewards for shareholders. Shares of Apple have surged 212
percent in the past two years, trouncing both the broader market as well as
the Nasdaq.
But with so much promise in the air, the risk of "unprecedented" hype about
the iPhone is great, said Van Baker, an analyst with technology research
firm Gartner.
"If it does anything less than walk on water it will be considered a
failure," said Baker, adding that the trick for Apple will be to convince
people who are not hardcore Apple fans to buy the iPhone.
Hang up on the hype
Jobs has predicted the iPhone will sell 10 million units by the end of
2008.
No one doubts the slim white, GSM phone, equipped with Wi-Fi, a 3.5 inch
screen, and built-in iPod looks good. And Apple has dug in deep to make
technological improvements such as voicemail that can be sorted like email.
But the main question hanging over its release is how well all consumers -
and not just Apple loyalists - will respond. Analysts see the battery life,
the lack of a keyboard and price as possible sticking points. It's also
going to be available from just one carrier, AT&T (Charts, Fortune 500).
In mid-June the company announced that the iPhone's battery life will last
longer than originally expected: 8 hours of talk time, 6 hours of Internet
use, 24 hours of audio playback.
Analyst Shaw Wu of American Technology Research says the battery life is
"decent." But the iPhone doesn't have a removable battery either, which
could be a problem.
Wu explains that while an iPod is just used as an iPod; the iPhone "will be
used for multiple functions" including, presumably, business matters that
can't wait should a battery fail. The iPhone's user interface will use the
battery, too.
"It's constant interaction," said Wu. "Every time you use it, it sucks up
battery life."
As for the lack of a keyboard, virtual keys appear on the touch screen. Wu
said he's heard that the there is a "learning curve." If it's too obtuse,
potential buyers could be put off.
The cost of the iPhone is above the industry average, too. The iPhone will
come with 4 gigabytes or 8 gigabytes of memory, priced initially at $499 or
$599. That's on the high side for handheld devices and far above what most
consumers pay for cell phones.
Analyst Hugues De La Vergne, also of Gartner, estimates 70 to 80 percent of
cell phones in the U.S. are sold for less than $100 due to incentives
consumers get from wireless service providers.
And if consumers balk at the high price, that could hurt Apple since
Lehman's Blount says the consumerelectronics market is expected to grow two
to three times faster than the corporate hardware market over the next four
years.
Remember the Mac?
Given the focus on the iPhone and the fact that iPods and other music
products now account for a majority of Apple's sales, it's easy to forget
that until not so long ago, Apple was known mainly as a computer maker. And
Macs are still an important part of Apple's growth.
Thanks to the iPod's success, Apple has enjoyed a modest increase in
computer market share during the past few years, from 3.2 percent in 2003
to 4.7 percent last year, according to information from Bear Stearns.
Apple analysts and industry watchers have made much of the so-called "halo
effect," where satisfied iPod owners have decided to switch from PCs to
Macs.
Thomas Telford, a portfolio manager at investment management firm American
Century, who oversees a tech fund that holds shares in Apple, said he
thinks Apple's computer market share could grow to 10 to 15 percent in the
next five years.
And with all the hype on the iPhone, the Mac isn't the only Apple product
that's getting lost in the shuffle. Another new offering from Apple, the
Apple TV, also hasn't received a lot of attention.
Apple is hoping to win the battle for the living room with Apple TV. That
device, which was released in March and sells for $299, allows users to
play movies, TV shows, music and podcasts from their iTunes library on
their TV. It can hold up to 200 hours of video, 36,000 songs or 25,000
photos.
Apple TV could be an important part of the company's overall digital
entertainment strategy. But the sales haven't exactly gone through the roof
since its debut. Jobs called Apple TV a "hobby" rather than a business at a
recent industry event and said that at this point it expects to sell
hundreds of thousands, rather than millions, of units per year.
A "core" holding
Apple's stock has been trading above $100 since the beginning of May, and
has moved up steadily into the $120 range in anticipation of the iPhone's
roll out.
The stock trades at 35 times earnings estimates for fiscal 2007, which ends
in September. That may seem pricey until you factor in the fact that
earnings are expected to grow an eye-popping 56 percent this year and 21
percent, on average, a year for the next five years, according to estimates
from Thomson/First Call.
Apple trades at a premium to most of its major rivals but due to its unique
product mix, it's a little unfair to compare it directly with say, computer
makers HP (Charts, Fortune 500) or Dell (Charts, Fortune 500) or handheld
manufacturers Nokia (Charts), Motorola (Charts, Fortune 500) and Research
in Motion (Charts).
Plus, earnings estimates may wind up being too low. Analysts currently
expect profits to increase by only about 15 percent next year in fiscal
2008. Part of that is due to Apple's typically conservative guidance -- the
company has surpassed consensus earnings estimates by 31.6 percent, on
average, for the past four quarters.
But the growth slowdown from 2007 to 2008 is also a reflection of the fact
that no matter how successful the iPhone may be, Apple will recognize its
revenue on a subscription basis, which will smooth out its profits.
Given the stock's big run ahead of the iPhone launch, there's a good chance
there could be some profit taking once it finally hits stores. And with
expectations running so high, some kind of negative press seems almost
inevitable. That could also hit the stock.
To that end, Telford of American Century says the iPhone launch could be
followed by shortages or long waiting lists. That, he predicts, could cause
the stock to pull back. But based on Apple's history of positive earnings
surprises, it seems like any dip in the stock is probably a good
opportunity to buy.
None of the analysts quoted personally own Apple stock but Bear, Stearns &
Co. does non-investment banking with Apple and is a market maker in its
stock. Lehman Brothers Inc. has an investment banking relationship with
Apple Computer and makes a market in its stock. American Technology
Research does not have a banking relationship with Apple.
iPhone set to ring up profits 
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