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

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    Posted: 06 November 2010 06:58 PM #31

    We have heard the rationale for not having an iPhone 3Gs when iPhone 5 is out.  Can we think of any business reasons for having it?  Assuming sufficient production capacity and demand of iPhone is still strong.  In military terminology, is an pre-emptive strike called for?  Who are the guys who won’t buy iPhone within the next 3-5 years?  Should Apple target them?  What is the consequence if Apple don’t?

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  • Posted: 06 November 2010 07:36 PM #32

    DawnTreader - 06 November 2010 06:00 PM

    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 do agree with you DT. But, I will play devil’s advocate for a moment. It is possible to imagine a different scenario at a different time where this might make sense:

    (a) when a particular low-end model makes just as much profit as “one up” models (perhaps the example above is a good one, a 3GS without the retina display, less memory, less processor, less camera, less battery, and cheaper manufacturing process might actually cost close to the difference (remember Peter said we can’t trust the iSuppli BOM). I don’t like the given example (3GS to 4) above due to the idea that I don’t want to introduce the masses to a version that is not FaceTime ready.
    (b) when expensive new features and a difficult manufacturing process means there is nowhere near enough supply of the new model
    (c) when the $49 model doesn’t leave a buyer too far behind in basic features (e.g. a 3G at $49 this year would have been crazy from an iOS feature perspective)
    (d) when the late adopter chunk of the masses (who really don’t care about smartphones) start getting one simply because it’s time to refresh their old feature phone. I’d like to see these folks to enter the Apple ecosystem, but think too many of these folks will just be getting the cheapest version or buying the name they already have in their pocket because they just aren’t that interested.
    (e) when there is more competition between carriers to drive promotions on price and shorter contracting periods

    So while I definitely agree with you today, it’s not impossible that a new scenario could evolve sometime in the future where this idea might hold some water. I guess “not impossible” isn’t the same as saying “it’s likely”, at least not while the ideal is still to “make the best smartphone, not the most smartphones”.

         
  • Posted: 06 November 2010 07:38 PM #33

    As each product line is discontinued it starts the clock on the length of time needed to provide support. legacy support costs are expensive.

    The 3GS is an excellent handset. But it might not have the processor power a year or two from now to support new iOS features and functionality.

    There’s no practical reason to continue the 3GS handset as a shipping beyond the release of the iPhone 5 (or even before that date if Apple determines the 3GS is no longer needed in the line).

         
  • Posted: 06 November 2010 08:55 PM #34

    DawnTreader - 06 November 2010 10:38 PM

    As each product line is discontinued it starts the clock on the length of time needed to provide support. legacy support costs are expensive.

    The 3GS is an excellent handset. But it might not have the processor power a year or two from now to support new iOS features and functionality.

    There’s no practical reason to continue the 3GS handset as a shipping beyond the release of the iPhone 5 (or even before that date if Apple determines the 3GS is no longer needed in the line).

    Yes, I agree, it’s quite clear today. I was merely saying it might be possible, say to keep iPhone 6 around after the introduction of the iPhone 7GS-Plus model. This would imply the pace of innovation slows somewhat to make the older version not feel a generation behind. Possible yes, but not very likely given Apple drive to continually improve their product.

    RE: ASP increase this quarter - is this typical for new model quarters? Or, was this bigger than usual and does this indicate that this great quarter had a higher percentage of the new model vs old model being purchased? (Personally, I think you’d be completely crazy to save $100 and lose the retina display, better camera, 2nd camera, better processor, facetime, battery, 8GB, better resale,  etc.)

         
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    Posted: 06 November 2010 09:20 PM #35

    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.

    I think the 1.5 to 2 million number makes sense looking at the last years sales, but neglects to include the massive overall growth in smartphone sales (smartphone sales will soon be the majority of new handset sales) - therefore I think you can reasonable conclude that after the first 12 months of verizon sales being high from people rolling into the new phone subsidy contract period, after which the potential iphone market will still be much higher than at present from overall smartphone market growth, meaning apple can settle in to 5 million per quarter iphone sales on both verizon & At&t, and throw in another few million a quarter from t-mobile & sprint iphone releases and you can easily make the case for 60 million US iphone shipments are year, plus another 60 million worldwide for a total of 120 million global yearly shipments per year rate within 18 months, with continued muted growth from there up to 200 million within a further 3-4 years.

    whats the estimated average profit on each iphone? at least $200 per phone? $200 x 200 million handsets….$40 billion profit from iphones alone. Add another $15 or $20 billion from all other apple products = apple is easily worth $1000 a share within a few short years.

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    Posted: 06 November 2010 10:55 PM #36

    How many iphones have been sold in the US to date? 25 mil or so in 3 1/2 years would be my guess. I think 5-6 mil a year for VZ is probably accurate.  :apple:

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  • Posted: 07 November 2010 01:33 AM #37

    mbeauch - 07 November 2010 01:55 AM

    How many iphones have been sold in the US to date? 25 mil or so in 3 1/2 years would be my guess. I think 5-6 mil a year for VZ is probably accurate.  :apple:

    IMO… That’s rear view logic. The smartphone sector is growing at almost 100% YOY. Using old sales numbers will lead you in the wrong direction.

    In other words… You’re way too low.

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  • Posted: 07 November 2010 01:44 AM #38

    jeffi - 07 November 2010 04:33 AM
    mbeauch - 07 November 2010 01:55 AM

    How many iphones have been sold in the US to date? 25 mil or so in 3 1/2 years would be my guess. I think 5-6 mil a year for VZ is probably accurate.  :apple:

    IMO… That’s rear view logic. The smartphone sector is growing at almost 100% YOY. Using old sales numbers will lead you in the wrong direction.

    In other words… You’re way too low.

    One must remove from the iPhone sales equation any AT&T iPhone customers that would switch to Verizon. The question is the number of net iPhone sales Verizon brings to the table not the total number of iPhones Verizon might sell.

         
  • Posted: 07 November 2010 09:28 AM #39

    Is it not a mistake to be looking at this as soley a Verizon iPhone?  Shouldn’t we be looking at it as the release of an iPhone for CDMA networks worldwide?  I honestly don’t know how many wireless networks in the world operate on CDMA but surely the number will include far more customers than what Verizon in the US currently carries.

         
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    Posted: 07 November 2010 10:27 AM #40

    jeffi - 07 November 2010 04:33 AM
    mbeauch - 07 November 2010 01:55 AM

    How many iphones have been sold in the US to date? 25 mil or so in 3 1/2 years would be my guess. I think 5-6 mil a year for VZ is probably accurate.  :apple:

    IMO… That’s rear view logic. The smartphone sector is growing at almost 100% YOY. Using old sales numbers will lead you in the wrong direction.

    In other words… You’re way too low.


    jeffi, The grouping of the iphone with other smartphones does a disservice to the iphone. I for one do not fret over market share (Apple has 100% of its market, :-D ). Apple is growing its audience and expanding its points of sales in the US and Internationally. If you do not use old sales numbers, you do not have any points for reference to project forward, in other words, just throwing darts. Personally I could care less about VZ/US and more about China.

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    Posted: 07 November 2010 01:57 PM #41

    Trefis has a model to get to $500. Interestingly, their $400 price isn’t a target - it’s what they think AAPL is worth now.

    What Could Justify a $500 Apple Stock Price?

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    Posted: 07 November 2010 02:12 PM #42

    Any similarities between 2007 hope for $300 in 2008 and current hope for $500 in 2011?

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    Posted: 07 November 2010 02:22 PM #43

    mbeauch - 07 November 2010 02:27 PM

    jeffi, The grouping of the iphone with other smartphones does a disservice to the iphone. I for one do not fret over market share (Apple has 100% of its market, :-D ). Apple is growing its audience and expanding its points of sales in the US and Internationally. If you do not use old sales numbers, you do not have any points for reference to project forward, in other words, just throwing darts. Personally I could care less about VZ/US and more about China.

    Of course market share matters, so I’ll assume you are jesting. But smartphone growth is the real story. Here’s some worldwide numbers to consider:

    * Smartphone sales grew 89.5 percent in the third quarter.
    * Smartphones to account for more than 20 percent of all devices by the end of the year

    In other words, on Jan 1, 80% of mobile phones will still be old school cells. That leaves 80% of the market untapped. Seems like an awful lot of room to run.

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    Posted: 07 November 2010 02:34 PM #44

    Mace - 07 November 2010 06:12 PM

    Any similarities between 2007 hope for $300 in 2008 and current hope for $500 in 2011?

    Hopefully not, considering the intervening macro events in 2008.

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    We filed for over 200 patents for all the inventions in iPhone and we intend to protect them. — Steve Jobs, 2007

         
  • Posted: 07 November 2010 03:36 PM #45

    There seems to be a lot of agreement on this subject.  What it comes down to is the law of diminishing returns.  Look at what happened to Dell when they followed that strategy.

    DawnTreader - 06 November 2010 08:39 PM

    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.

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