Analyzing the Analyst: Brian Marshall

Brian Marshall of Broadpoint AmTech exactly gets it when it comes to the potential of the Apple iPad. Here's some more detail on his report and my thoughts about his thoughts.

Earlier, Jeff Gamet posted a news item on the analysis we received from Brian Marshall. Mr. Gamet hit the high points, but there was a lot more detail in that report worth discussing.

Mr. Marshall was one of those who actually got to handle an iPad after the introduction, and that experience can go a long way towards building insight and wisdom about the product. In sense, once you've handled the iPad, you've been "Ived." As in Jonathan.

Scott Forstall also explained the experience in the video Mr. Jobs showed at the end. The iPad makes exploring the Internet and books a more "intimate" experience. By that, I think, he meant that you are touching the content as opposed to conjuring it up, quasi remotely, with a keyboard and mouse.

Mr. Marshall observed that the iPad is not cannibalistic to existing product lines. That's the enigma of the device. By definition, Apple required it to be better at some things than a notebook: browsing, e-mail, photos, video, music, games, and e-books. If the iPad is better than the notebook in these areas, how can it not be cannibalistic? Because it has other limitations. As our Bryan Chaffin has said, it's all driven by the subset of the activities you want to engage in.

Understanding the nuances of the subset of activities other people have in mind is a "Say What?" moment for the iPad.

Accordingly, Mr. Marshall, who sets the Gross Margin at an astounding 50 percent based on his analysis of the Bill of Materials (BOM), predicts that Apple will sell 7 million iPads in CY10 (calendar year 2010). That's about an additional US$4.5 billion dollars in revenue. Personally, I believe Apple will sell many more than that, especially taking into account the holiday 2010 quarter.

Mr. Marshall gave several reasons for being bullish on Apple:

  • iPhone ramp is in early innings: With the iPhone now available in ~86 countries (compared to 80+ in June 2009 and 6 in June '08), the global ramp has just begun and we estimate AAPL now has 140+ international carrier partners (recall RIMM has well over 400 carriers now). Cumulative shipments of the iPhone since its June '07 inception now total 42.5mil units.
  • Best technology company: Apple continues to gain share across its major product lines (iPhones, Macs and iPods). Its business model is becoming stronger over time as well as the company benefits from an increasing richness of its revenue mix and when ASP cuts come, customers typically migrate up the "SKU stack" and buy higher priced items with higher associated gross margins.
  • The Bank of Apple: Apple continues to generate tremendous amounts of cash flow from operations and its current net cash hoard (i.e., total cash minus total debt) now stands at $39.8bil (or $43 per share) - the single largest in the technology industry. This comparables favorably to other large technology leaders with large net cash positions including: MSFT (~$27bil), Cisco (~$25bil) and GOOG (~$24bil). With AAPL shares currently trading at ~$208, the cash balance represents ~21% of the market capitalization ($43.29 net cash per share).

He also gives some reasons the Bears might point to, but they seem, to me, to be formulaic and thrown in just to cover his bets.

One thing that Mr. Marshall did not mention was the custom A4 chip in the iPad, designed by Apple and built by PA Semi. The iPad is the first computing device that combines a custom CPU, GPU and memory controller with Apple's software and industrial design. That gives Apple a significant advantage over the competition -- something that was the driving factor behind the acquisition of PA Semi. No longer will Apple be subject to the roadmap of Intel and be forced to play on the same CPU+GPU playing field as the coming tablet competition from the PC camp.

Once again, Apple has developed a product that has all the keys to success. As Mr. Jobs said in his summary: The iPad is: "our most advanced technology in a magical and revolutionary device at an unbelievable price." Independent of whether some may not find the iPad essential, many others will. Customers with imagination and creativity will press it into service in inventive, unforeseen ways. That tends to drive others to the product and guarantee success and growth.

Mr. Marshall is bullish on the iPad -- it has all the elements required for success. I agree.