ATR: iPhone is an Open-ended Growth Story

by , 12:25 PM EDT, July 11th, 2008

Analyst Shaw Wu with American Technology Research said on Tuesday that the Apple iPhone is an open-ended growth story. He sees the iPhone becoming a significant contributor to Apple's revenue over the next two to five years even as worldwide Mac market share continues to rise.

The key points of his report, obtained by TMO are as follows:

• Our overall impressions after a few hours of use are positive. Our key take-away is that version 2.0 software turns an iPhone into an even more useful device with a high degree of customization (there are 500+ applications with what we believe will ultimately be thousands to choose from).
• One of the Apps we were excited to test was AOL instant messenger (AIM), a popular application that was previously unavailable. We find the slick user interface and overall experience positive. However, we noticed that it times out after about 2-3 minutes of inactivity. This is good in that it minimizes connection with the cellular network, but requires frequent reconnecting if the user is not interacting fairly constantly.
• We also tested other Apps including AOL Radio, Bloomberg, eBay, WeatherBug, Talking French Phrasebook, Remote, and Facebook.
• Of note, we found AOL Radio impressive as it allows one to connect to internet radio. We found it somewhat surreal and cool to be able to listen to Alice 97.3, a popular Bay Area alternative radio station, on our iPhone.
• We noticed that these Apps do not take up much storage space. In our already pretty filled 8 GB iPhone, we were able to load 17 applications with room for plenty more.

According to Mr. Wu, Apple will sell 11 million iPhones in CY08 for a total of 14.6 million since launch. He forecasted 17 million in CY09. Even more importantly, he predicted that iPhone adoption will accelerate and include a broadened product portfolio. In fact, he envisions a day when iPhone revenue will equal Mac revenue, each at US$15-20B.

The ATR analysts noted that Macs had a worldwide market share of 2.5 percent in 2006 and 3.0 percent in 2007 and that sales growth rates have been accelerating in recent quarters. His estimate for 2009 is 12.3 million Macs sold and a global 3.8 percent market share.

Finally, Mr. Wu assessed AAPL valuation: "AAPL currently trades at 33x our CY08 and 27x our CY09 earnings estimates. We see upside in shares to $220 in 2008, with potentially much higher levels attainable based on earnings potential in the 12-24 month timeframe. Our target represents 33x our CY09 earnings per share estimate of $6.70, which is 31x net of cash ($22 per share) and interest income. While this is a high multiple, we believe it is justified by earnings power and the likelihood of material upside. If $8.00 in earnings power is realized, then our $220 target represents 27.5x."

Total revenue for FY09 was estimated at US$38.7B.

Currently, AAPL is trading at US$174.25, down $2.38, likely influenced by the 200+ point drop today in the Dow Jones Index.

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