If the pre-order demand for iPhone 5 is anything to go by, Apple (NASDAQ:AAPL) could well be on its way to recording one of the biggest upgrade cycles in the history of electronic devices. Going by the past iPhone launches, most would have expected Apple to run out of pre-order order stock on the opening day itself. However, the rate at which the same has happened this time gives us the first sign of what could be another record-setting holiday quarter for Apple.
Apple started taking pre-orders for the iPhone 5 at 3:01 a.m. ET on September 14, with shipping expectations set for a week. That didn’t last long, however, as Apple was forced to push its shipping dates by a week merely an hour after launch, with overwhelming demand causing Apple to run out of launch day pre-order stock. In comparison, Apple had taken at least 20 hours to run out of opening day stock for iPhone 4 and iPhone 4S during the previous two launches.  This incredibly fast sell-out gives us an indication of the huge pent-up demand that had built up in the previous months as people postponed buying an iPhone in anticipation of the new launch.
With iPhone 5 availability nearing and the demand signs looking incredibly strong, we thought it would be prudent to go back to Apple’s model and see how the success of the iPhone 5 could add to its upside from our current price estimate. We see that if the company is able to increase its share of the handset market to 19% by the end of our forecast period and at the same time, see slower declines in its average iPhone pricing, Apple’s stock value could surge by about 25% over our $700 price estimate.
1. Faster increase in iPhone market share (+15%):
The iPhone’s global mobile phone market share has steadily increased from zero at the start of 2007 to around 5.4% in 2011. We expect the iPhone’s global mobile phone market share to increase to around 15% by the end of our forecast period. However, the iPhone is Apple’s flagship product and contributes more than 55% of our price estimate. So, even a small outperformance with respect to its market share will have a huge impact on Apple’s valuation.
The company has been posting average annual growth of close to 90% in iPhone sales over the last three years. Last year’s holiday quarter saw the iPhone set a new quarterly record of 37 million unit sales, with the phenomenal success of iPhone 4S. With iPhone 5 rumors being a drag on iPhone sales ahead of the new phone’s launch, it will be important that the iPhone 5 continues on the 4S’ success and more than offsets the previous quarter’s weaker demand. If the iPhone 5 manages to do that (with initial signs pointing to the same) and Apple continues to set the same scorching pace in the coming years, the upside to our price estimate could be huge.
A number of factors could help Apple maintain its historical growth rate. The rapid expansion of operations in overseas markets, the addition of new carriers, and iPhone sales in the as-yet largely unexplored emerging markets present a huge opportunity to increase market share. (see Apple Is Headed To $700 With China Growth And iPhone 5)
China, for example, holds a lot of promise for Apple considering the huge 2G subscriber base that the carriers there are trying to transition to 3G (3G penetration is currently only about 18% in China and growing at a good rate). A deal with China Mobile, the largest carrier in the world by subscriber base, looks likely now that it seems Apple has used Qualcomm’s MDM9615 chipset for LTE, which incidentally also has TD-SCDMA support. Such a deal could instantly double iPhone’s addressable market in China and act as the next big boost to its stock, considering that the iPhone accounts for more than 55% of the company’s value by our estimates. (see China Mobile In Talks To Offer The iPhone; Can Alone Take Apple Past $800)
Meanwhile, the recent patent win that Apple scored over Samsung could lead to a ban on the latter’s devices in the U.S. and the developed markets may see little traction for competing smartphones such as the BlackBerry and the Lumia, both of which could further bolster Apple’s share.
These triggers could propel iPhone’s market share higher than we currently forecast. There could be an upside of 15% to our price estimate if the iPhone market share exceeds our current end-of-period estimate by about 4 percentage points.
2. Slower decline in iPhone pricing (+10%):
We currently forecast the average iPhone price to decline to around $400 by the end of Trefis forecast period as Apple enters emerging markets and increasing competition forces Apple to cut prices, beyond the customary slashing of prices of the older models in the future.
However, iPhone’s average pricing has increased over the last two years as continued demand for the newer as well as higher-end versions (32GB/64GB) of the iPhone has improved the mix while Apple has reduced the prices of the older ones. Traditionally, Apple has targeted only the high-paying customers and not aimed for a mass market presence, unlike its competitors.
Additionally, the recent patent win against Samsung could impact the latter’s ability to flood the market with competing markets, thereby limiting choice for customers. It could also see many Android partners trying to nurture rival struggling platforms such as Windows Phone and BlackBerry, buying Apple enough time to defend its lofty margins and high ASPs. (see Apple Patent Tide Could Lift Microsoft, Nokia and Maybe Even RIM)
These factors could mean that iPhone pricing could decline at a slower rate than what we forecast. There could be an upside of 10% to our estimate for Apple’s stock if iPhone pricing declines only to about $460 by the end of our forecast period.
Combine the 15% upside from the iPhone’s growth in market share to the 10% upside from slower declines in iPhone pricing, and we arrive at a price estimate of $875 for Apple.Notes:
- iPhone 5 Pre-Order Sells Out 20X Faster Than 4 And 4S, Further Highlighting Apple’s Dominance, TechCrunch, September 14th, 2012 [↩]