Apple’s Sensitivity to iPhone Market Share

AAPL: Apple logo

Apple (NASDAQ:AAPL), which competes with Research in Motion (NASDAQ:RIMM), Motorola (NYSE:MOT), and Nokia (NYSE:NOK) in the mobile phone market, has rapidly increased its market share from around 0.3% in 2007 to around 2% in 2009, and we expect it to increase to around 3.7% by 2010. [1]

We estimate that iPhone constitutes around 53% of the $418 Trefis price estimate for Apple’s stock, which is about 22% above the current market price. Below we look at potential upside and downside scenario for Apple that focuses on its most important driver to its share price – iPhone market share.

+25% upside – Market share gain

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The iPhone’s unique touch screen interface; and the intuitive and user-friendly features are some of the factors behind its success in the past. The new iOS 4 has had a few improved features such as multitasking. Another reason for its success is the halo effect of Apple’s other products, which includes iPods and Mac computers.

Apple has also taken a few initiatives to expand its international operations. Apple recently introduced iPhone 4 availability in China, which comes just three months after the iPhone 4’s U.S. release last June. By contrast, Chinese consumers had to wait nearly two years for the iPhone 4’s predecessor, the iPhone 3G. This move to introduce iPhone 4 early will give Apple a chance to be able to get the phone into the hands of Chinese early adopters far sooner than in past iPhone sales cycles.

We expect iPhone to continue to gain market share to around 7% by 2013 and nearing 12% by the end of Trefis forecast period. In a rosy scenario where 1 out of 5 mobile phones sold is an iPhone in the coming years, or in other words, iPhone’s market share increases to 20% by the end of Trefis forecast period, this would translate to 25% upside to our estimate for Apple stock.

[trefis_forecast ticker=”AAPL” driver=”10289″]

You can see the impact of market share assumptions on Apple’s stock price by modifying this chart.

-15% downside – Market share loss

Although we expect a moderate increase in iPhone market share, in terms of units we expect that Apple will be able to sell more than 250 million iPhones by the end of Trefis forecast period, up from an expected 48 million iPhones sold in 2010. This expectation of a five fold increase in iPhone unit sales poses a risk to our estimates for iPhone market share in the long-term.

In a scenario where iPhone’s market share dropped to 10% rather than the current 12% anticipated by the end of the forecast period, there would be downside of around 15% to our estimate for Apple’s stock.

You can see the complete $418 Trefis Price estimate for Apple stock here.

  1. Estimated from the quarterly filings of the first three quarters of 2010 []