Morgan Stanley’s ‘bull case’ for Apple: 80 million iPhones, $500 per share

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    Posted: 04 November 2010 07:40 PM #16

    Gregg Thurman - 04 November 2010 06:55 PM

    I lost over $500K betting on a post July earnings pop, that relied on an ISM higher than the realized 23.67.  I expect ISMs higher than that going forward, but am not counting on it with my trades.  I guess you could say I am using ~23.50 as a ‘safe’ investment threshold.

    Ouchy! Yikesy!

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    Posted: 04 November 2010 08:01 PM #17

    I think the discussion is missing the how of the sales numbers, while covering the how of the stock price thoroughly.

    Here’s my suggestion for how Apple sells 100M iPhones in calendar 2011.

    1. Release Verizon iPhone 4 - 5M/quarter
    2. Release iPhone 5 - 10M/quarter
    3. Adjust the price models - 10+M/quarter:
      Apple has always had a good-better-best approach, and now they can do it since the 3Gs runs iOS 4 decently.
      iPhone 3Gs - $49 (with contract discounts all the way to $0, to compete with the huge lowend/dumbphone market)
      iPhone 4 - $99
      iPhone 5 - $199/$299

    Total: 25M/quarter = 100M/year.

         
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    Posted: 04 November 2010 08:32 PM #18

    Apple sold about 40 million iPhones this fiscal year.  I think 75-80 million iPhones for FY 2011 is a more reasonable guesstimate.  Apple could sell more into the channel, but to me it sure seems like the growth of its super-popular product lines has been ruthlessly managed.  More sustainable, and higher quality control. 

    100% YOY iPhone growth in FY 2011 will be more than enough to impress Wall Street and most all investors.  Let Samsung convert more and more of its 70-something million handsets sold this fiscal year to Android.  That kind of retooling is not the same as Apple starting from zero and coming by its iOS growth in an entirely organic, additive manner.

    I think the 3GS will fade away next June.  A 16GB iPhone 4 for just $99 subsidized?  Talk about striking fear into the hearts of the competition.

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    Posted: 04 November 2010 08:38 PM #19

    NatasRevol - 04 November 2010 11:01 PM

    I think the discussion is missing the how of the sales numbers, while covering the how of the stock price thoroughly.

    Here’s my suggestion for how Apple sells 100M iPhones in calendar 2011.

    1. Release Verizon iPhone 4 - 5M/quarter
    2. Release iPhone 5 - 10M/quarter
    3. Adjust the price models - 10+M/quarter:
      Apple has always had a good-better-best approach, and now they can do it since the 3Gs runs iOS 4 decently.
      iPhone 3Gs - $49 (with contract discounts all the way to $0, to compete with the huge lowend/dumbphone market)
      iPhone 4 - $99
      iPhone 5 - $199/$299

    Total: 25M/quarter = 100M/year.

    Interesting proposition regarding leaving the 3gs for sale. Personally I think the iphone 4 at $99 will be a HUGE seller, and there is no need for the cheaper price point.

    I’m not sure if apple would want to keep the 3gs around now that every other iOS device has the higher res screens and are powered by the A4 processor (ipod touch, iphone 4, ipad) - for developers sake and for economies of scale. Plus I imagine they want facetime to be standard on all mobile devices they sell (just waiting on ipad 2 to complete the facetime lineup).

    thoughts?

    [ Edited: 04 November 2010 08:50 PM by Burgess ]

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    Posted: 04 November 2010 08:56 PM #20

    The Retina Display is the gold standard for iPhone/iPod touch screens for years to come. 

    I do wonder how they’ll decide to “scale up” the iPad’s resolution next year, if at all. Increasing resolution to 2048x1536 would be near-incomprehensible (not to mention, it’d be a gigantic strain on any model of ARM processor or mobile-based GPU currently available)  960x640 iPhone apps probably look great on iPad as is, with minimal waste of screen space.

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  • Posted: 05 November 2010 12:13 AM #21

    Gregg Thurman - 04 November 2010 06:32 PM
    DawnTreader - 04 November 2010 05:57 AM

    $500 per share by next August could be obtained with an expansion of the p/e multiple to 22.48 from the current 20.64 and a continuation of the September quarter’s 67.5% eps growth rate for three more quarters. In other words it’s not an unreasonable bullish case scenario.

    PE is nothing more (although very important) than an expression of Investor Sentiment.  With the elections over (and any uncertainty on outcome removed) investors feel much better about the costs of doing business going forward.  That will translate into higher ISMs (Investor Sentiment Multiplier - my term for PE).

    I’m using an ISM of ~23.50 for setting future AAPL targets, although I think it probable that ISM will go even higher.

    Gregg:

    I won’t go that high in my forecasts, at least not until the overall market moves higher and a p/e multiple above 22 is sustained by the market. My forecasts are based on a narrow p/e range of 20x - 22x trailing 12-month earnings. That conservative model moves the share price to $500 within eighteen months of today (provided eps growth can be sustained at the September quarter’s pace).

         
  • Posted: 05 November 2010 12:30 AM #22

    Gregg Thurman - 04 November 2010 06:40 PM
    adamthompson3232 - 04 November 2010 06:18 AM
    DawnTreader - 04 November 2010 05:57 AM

    $500 per share by next August could be obtained with an expansion of the p/e multiple to 22.48 from the current 20.64 and a continuation of the September quarter’s 67.5% eps growth rate for three more quarters. In other words it’s not an unreasonable bullish case scenario.

    If Apple shows another 3 Qs of 67% EPS growth the EPS multiple will undoubtedly (in my opinion, assuming the market is relatively flat or better between now and then) be higher than 20.6. Looking at analyst estimates for next year explains why the stock is not much higher today already. They simply can’t seem to grasp what is so obvious to many of us here - that apple is better positioned for rapid and significant revenue and EPS growth than perhaps every other mega cap in the history of the world (seriously).

    Exactly.  If you extend Apple’s revenue, using nothing more than the seasonal 3 year AVERAGE in unit sales growth, you get 60% YoY growth.  Given that that average does not include iPad revenue 60% growth is paltry.

    A few things to consider: Within three quarters will we have some iPad unit sales and revenue on the prior year comparisons, I expect Mac unit sales growth to moderate and iPod revenue to be flat to down. I do expect good news from both iPhone and iPad sales but sustaining eps growth beyond 67.5% eps will be a challenge.

         
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    Posted: 05 November 2010 03:16 PM #23

    iOSWeekly - 04 November 2010 11:38 PM
    NatasRevol - 04 November 2010 11:01 PM

    I think the discussion is missing the how of the sales numbers, while covering the how of the stock price thoroughly.

    Here’s my suggestion for how Apple sells 100M iPhones in calendar 2011.

    1. Release Verizon iPhone 4 - 5M/quarter
    2. Release iPhone 5 - 10M/quarter
    3. Adjust the price models - 10+M/quarter:
      Apple has always had a good-better-best approach, and now they can do it since the 3Gs runs iOS 4 decently.
      iPhone 3Gs - $49 (with contract discounts all the way to $0, to compete with the huge lowend/dumbphone market)
      iPhone 4 - $99
      iPhone 5 - $199/$299

    Total: 25M/quarter = 100M/year.

    Interesting proposition regarding leaving the 3gs for sale. Personally I think the iphone 4 at $99 will be a HUGE seller, and there is no need for the cheaper price point.

    I’m not sure if apple would want to keep the 3gs around now that every other iOS device has the higher res screens and are powered by the A4 processor (ipod touch, iphone 4, ipad) - for developers sake and for economies of scale. Plus I imagine they want facetime to be standard on all mobile devices they sell (just waiting on ipad 2 to complete the facetime lineup).

    thoughts?

    There is only one reason I include the 3Gs.  To gain total market share.  Right now, the iPhone still only sells at 4% of the total phone market

    from:
    http://www.asymco.com/2010/11/03/competing-with-non-consumption-can-apple-sell-100m-iphones-next-year/

    Imagine if the $49 3Gs can take a real chunk of that market.  Imagine it’s effect on iOS developers, ads, reach of the platform.

         
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    Posted: 06 November 2010 02:09 PM #24

    JDSoCal - 04 November 2010 10:40 PM
    Gregg Thurman - 04 November 2010 06:55 PM

    I lost over $500K betting on a post July earnings pop, that relied on an ISM higher than the realized 23.67.  I expect ISMs higher than that going forward, but am not counting on it with my trades.  I guess you could say I am using ~23.50 as a ‘safe’ investment threshold.

    Ouchy! Yikesy!

    $500K :bugeyed:.

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  • Posted: 06 November 2010 02:25 PM #25

    NatasRevol - 04 November 2010 11:01 PM

    Here’s my suggestion for how Apple sells 100M iPhones in calendar 2011.

    1. Release Verizon iPhone 4 - 5M/quarter
    2. Release iPhone 5 - 10M/quarter
    3. Adjust the price models - 10+M/quarter:
      Apple has always had a good-better-best approach, and now they can do it since the 3Gs runs iOS 4 decently.
      iPhone 3Gs - $49 (with contract discounts all the way to $0, to compete with the huge lowend/dumbphone market)
      iPhone 4 - $99
      iPhone 5 - $199/$299

    Total: 25M/quarter = 100M/year.

    The iPod provides us with a clear look into Apple’s price protection philosophy.  iPd share has remained static at about 75% for several years.  Unit volume has been declining, but ASP has been increasing due to iPod Touch.  IOW, Apple has ceded the low end (no value added margin) to the other 25% of the market.

    Until iPhone unit growth starts to slow, Apple will not provide a low end model that would erode high end sales.  We aren’t anywhere near that pint.

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  • Posted: 06 November 2010 03:00 PM #26

    Gregg Thurman - 06 November 2010 05:25 PM
    NatasRevol - 04 November 2010 11:01 PM

    Here’s my suggestion for how Apple sells 100M iPhones in calendar 2011.

    1. Release Verizon iPhone 4 - 5M/quarter
    2. Release iPhone 5 - 10M/quarter
    3. Adjust the price models - 10+M/quarter:
      Apple has always had a good-better-best approach, and now they can do it since the 3Gs runs iOS 4 decently.
      iPhone 3Gs - $49 (with contract discounts all the way to $0, to compete with the huge lowend/dumbphone market)
      iPhone 4 - $99
      iPhone 5 - $199/$299

    Total: 25M/quarter = 100M/year.

    The iPod provides us with a clear look into Apple’s price protection philosophy.  iPd share has remained static at about 75% for several years.  Unit volume has been declining, but ASP has been increasing due to iPod Touch.  IOW, Apple has ceded the low end (no value added margin) to the other 25% of the market.

    Until iPhone unit growth starts to slow, Apple will not provide a low end model that would erode high end sales.  We aren’t anywhere near that pint.

    The iPhone ASP grew sequentially from the June quarter ($595) to the September quarter ($610). There’s no reason to offer a lower-priced iPhone when Apple is challenged (or has been challenged) meeting demand on the existing models.

    I doubt a Verizon iPhone would increase sales 4 to 5 million units a quarter consistently. There might be a bump in demand when a Verizon iPhone debuts, but annualized there would nowhere near that level of increased sales in the US.

         
  • Posted: 06 November 2010 04:57 PM #27

    Gregg Thurman - 06 November 2010 05:25 PM
    NatasRevol - 04 November 2010 11:01 PM

    Here’s my suggestion for how Apple sells 100M iPhones in calendar 2011.

    1. Release Verizon iPhone 4 - 5M/quarter
    2. Release iPhone 5 - 10M/quarter
    3. Adjust the price models - 10+M/quarter:
      Apple has always had a good-better-best approach, and now they can do it since the 3Gs runs iOS 4 decently.
      iPhone 3Gs - $49 (with contract discounts all the way to $0, to compete with the huge lowend/dumbphone market)
      iPhone 4 - $99
      iPhone 5 - $199/$299

    Total: 25M/quarter = 100M/year.

    The iPod provides us with a clear look into Apple’s price protection philosophy.  iPd share has remained static at about 75% for several years.  Unit volume has been declining, but ASP has been increasing due to iPod Touch.  IOW, Apple has ceded the low end (no value added margin) to the other 25% of the market.

    Until iPhone unit growth starts to slow, Apple will not provide a low end model that would erode high end sales.  We aren’t anywhere near that pint.

    I completely agree. There is no shot that Apple will compete at the low end when they are constrained on production. If they weren’t production constrained it would still be unlikely. Apple’s strategy is to maintain a price point and continue to innovate to maintain and increase demand without price erosion. Apple as a hardware manufacturer has repeatedly proven how to generate the highest ROI/ ROE. Finally, Apple’s smartphone strategy has demonstrated it’s genius by generating 50% of the industries profits on 4% of the unit sales.

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  • Posted: 06 November 2010 05:39 PM #28

    Apple’s hardware lines are increasingly priced in an aggressive way relative to build costs. There’s no reason to lower price points on the iPhone while demand remains very high and supplies are constrained.

    Even if demand existed for products at lower price points the costs of acquiring manufacturing capacity and securing components might make the move economically undesirable.

    Apple will grow revenue by 60% or more this fiscal year and eps by around the same percentage gain (or more). There’s no reason to encumber management and add costs to enter product price tiers below that which management has deemed desirable.

         
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    Posted: 06 November 2010 06:25 PM #29

    adamthompson3232 - 06 November 2010 07:32 PM

    I am thinking 4 million units in launch quarter for the vz iPhone an then 1.5-2.0 million per quarter going forward.

    I think that 1.5-2.0 million number is very low, in light of AT&T reporting 5.2 million iPhone activations this past calendar quarter (which sounds about right big-picture-wise when you compare against 14.1 million iPhones sold worldwide, given Apple’s trending towards a 40-60 US-to-international sales mix) and the roughly equivalent subscriber bases of AT&T and Verizon.  I would think that Verizon will catch up to AT&T’s number in less than a year after the hypothetical launch.

    “Adding” to DT’s post, the beauty of Apple’s strategy (which contributes in part to the “margin misunderstanding” or maybe even FUD amongst some investors) is that it basically picks a nice, comfortable, but “smart” profit margin at the get-go and sticks with it.  The margin sustains Apple but just won’t work for anyone else.  Apple is unmatched at this skill basically because no other tech maker is as “whole widget” as they are (it also helps that Apple is the #1 purchaser of flash memory).  Hence its competitors constantly run around in the rain, searching hopelessly for the profit umbrella that doesn’t exist.

    [ Edited: 06 November 2010 11:30 PM by Mav ]

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  • Posted: 06 November 2010 06:45 PM #30

    Mav - 06 November 2010 09:25 PM
    adamthompson3232 - 06 November 2010 07:32 PM

    I am thinking 4 million units in launch quarter for the vz iPhone an then 1.5-2.0 million per quarter going forward.

    I think that 1.5-2.0 million number is very low, in light of AT&T reporting 5.2 million iPhone activations this past calendar quarter (which sounds about right big-picture-wise when you compare against 14.1 million iPhones sold worldwide, given Apple’s trending towards a 40-60 US-to-international sales mix) and the roughly equivalent subscriber bases of AT&T and Verizon.  I would think that Verizon will catch up to AT&T’s number in less than a year after the hypothetical launch.

    “Adding” to DT’s post, the beauty of Apple’s strategy (which contributes in part to the “margin misunderstanding” or maybe even FUD amongest some investors) is that it basically picks a nice, comfortable, but “smart” profit margin at the get-go and sticks with it.  The margin sustains Apple but just won’t work for anyone else.  Apple is unmatched at this skill basically because no other tech maker is as “whole widget” as they are (it also helps that Apple is the #1 purchaser of flash memory).  Hence its competitors constantly run around in the rain, searching hopelessly for the profit umbrella that doesn’t exist.

    Just to add to this point: Apple also keeps its SKUs to a practical minimum. Additional expense and reduced margins are the result of chasing volume. For commodity-grade product competitors (Windows OEMs, Android handset makers, etc.), they are in competition with one another thus no price tier can be left unmet with product. Apple avoids this game as much as possible, sticking with a select number of models and targeting acceptable margins.

    Apple