The iPhone Opportunity and Risk that Investors Should Consider

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AAPL: Apple logo
AAPL
Apple

Apple (NASDAQ:AAPL) has become a pop-culture poster-child for innovation. The original iPhone, released in 2007, was an instant success, and this result quickly became a trend as new versions entered the market. Can this trend persist? Here we take a look at both sides of the coin, examining a major opportunity and a major risk that lies ahead of Apple in the smartphone business. Apple’s main competitors in this space include Research in Motion (NASDAQ:RIMM), Motorola Mobility (NYSE:MMI) and Nokia (NYSE:NOK).

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Our price estimate for Apple stands at $420, implying a roughly 20% premium to the stock’s market price.

Opportunity – Expansion of Addressable Market

When the iPhone first entered the scene, Apple reached an agreement with AT&T on an exclusive contract to offer the device. More recenlty, in February 2011, Apple announced that the iPhone 4 will be made available on Verizon’s mobile network. Verizon has more than 90 million subscribers in the U.S., and the announcement brought an immediate spike in Apple’s addressable market.

With AT&T’s announced acquisition of  T-Mobile, Apple becomes an indirect beneficiary through the opportunity to sell the iPhone to T-Mobile’s 34 million subscribers. This creates a real opportunity for Apple to expand its market share.

Risk – Managing the Supply Chain

While consumer demand for Apple’s product remains solid, Apple’s supply chain management is becoming a major risk. Management previously expressed concerns regarding component supply shortages during Apple’s fiscal Q1 2011 earnings conference call in January. [1]

The earthquake in Japan has now spurred new issues with regards to component supplies, as many Apple suppliers are Japanese companies. [2] According to a report from DigiTimes, Apple is considering accepting additional costs to secure supplies of touch panels for its iPhone and iPad, [3] meaning that Apple’s gross margins could come under pressure.

See our full analysis and $420 price estimate for Apple

Notes:
  1. See SeekingAlpha: Apple FY Q1 2011 earnings conference call transcript, January 2011 []
  2. iSuppli press release: Japanese Earthquake Poses Potential Supply Problems for iPad 2, March 17th 2011 []
  3. DigiTimes report, March 23rd 2011 []