I have yet to read about how it will push both sales of music and videos for years to come as people get their hands on these, since they will purchase more music and videos and from iTunes, providing about 50% margins and no additional costs to Apple. Taken the estimates of 10 million iPhones sold by the end of 2008, I assume that 20% of the people who buy iPhones did not previously have iPods, which means iTunes will have an extra 2 million customers. At an average spend of $50 per year per customer and 50% margins, that is $1 billion in extra revenue and $500 million in profits. Put that in to Apple’s earnings and multiply by AAPL’s PE of 40, and you have additional market cap of $20 Billion.
Nor have I heard about how the iPhone will enable Apple to increase its share of the PC market. Right now, Apple is around 8% of new sales. As the iPod did and still does, the iPhone will enable Apple to capture, at least in my opinion, another 1% of the PC market. Each additional market point at this level should have very high margins as there is no additional set costs to the sales of more product. Each marginal market share of the PC market is worth at least $20 billion in market cap on APPL’s stock price, probably significantly more.
The most important aspect that investors have so far failed to see is the referral income Apple will receive from AT&T (T). They have not released any official numbers on the amount of money AT&T is paying Apple to be the exclusive iPhone provider for two years, however, I assume it is significant. I believe that the average store that signs you to a new cellular contract receives around a $250 commission. I have to assume that Steve Jobs got a much much better deal than that. If not, why would he go with an exclusive provider? It would be in his best interest not to have exclusivity. Verizon (VZ) says they rejected the deal because it was so steep.
So, assuming Apple gets closer to $400 per subscriber (I really have no idea how much they are receiving), I suspect it is more complicated than just a flat payment. Probably a combination of an upfront payment and a share of revenues generated, if I were to take a guess. The margins on this money are about 100%
Their goal is to sell 10 million iPhones by the end of next year, which seems realistic and conservative. If you add up just the extra revenue and profit they receive from AT&T, it adds up to about $4 billion. Throw a multiple of 40, APPL’s current P/E on that money, or less, even 20, since there is no reassurance of it continuing (but I suspect most of it will, at least from the phones Apple sells through its website or in its own stores), and you get a value of $80 billion, or about 2/3rds of Apple’s current market cap.
Add all the numbers together and I see the iPhone adding approximately $120 billion to Apple’s market cap, which is about what the current market cap of Apple. My prediction is for Apple to double by the end of 2008.
All these numbers are in addition to Apple’s current revenue. I am only talking about additional value the iPhone is providing to Apple. 10 million phones seems conservative to me as well, considering that about 1 million have thus far been sold, before the European market has even opened, and it has only been out for about a week and a half. Double the number of phones sold, and do the math again. Steve Jobs hasn’t failed so far…
Disclosure: Author has a long position in AAPL
AAPL 1-yr chart
