iPhone 5 Success Could Propel Apple Past $850

by Trefis Team
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The first couple of weeks in September promise some of the most exciting announcements in the mobile industry. While Amazon (NASDAQ:AMZN), Motorola (now acquired by Google (NASDAQ:GOOG)) and Nokia (NYSE:NOK) have already set the ball rolling this week with their respective flagship smartphone and tablet upgrade announcements, most eyes will be on Apple’s (NASDAQ:AAPL) media event scheduled for next week.

Apple on Tuesday sent out media invites to a press conference it is holding on September 12th. While more details about the purpose of the event were tantalizingly left out, the timing of the event is in line with the numerous rumors that have been floating over the past month concerning the iPhone 5’s launch date. If the rest of the rumors are to be believed, Apple could start selling the iPhone 5 from September 21st onward, with pre-order availability from September 14th itself.

With the iPhone 5 launch nearing, 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 17% 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.

See our complete analysis for Apple here

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 13% 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 quarters’ weaker demand. If the iPhone 5 manages to do that 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. Rapid expansion of operations in overseas markets, the addition of new carriers, and iPhone sales in emerging markets such as China present a huge opportunity to increase market share. (see Apple Is Headed To $700 With China Growth And iPhone 5) Apple already has two of China’s three carriers in its list of carriers that sell the iPhone and a deal with China Mobile is the cards after the recent Qualcomm announcement. China Mobile’s addition could alone mean an almost 18% upside to our current $700 price estimate. 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 15% to our estimate for Apple’s stock if iPhone pricing declines only to $500 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.

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