Apple's iPhone 4 Out Soon - Analyst Blog

Shares of Apple Inc. (AAPL) are up since its release of its fourth generation iPhone 4 at the WWDC 2010 event.

Apple’s products have huge followings, and new products launched have a strong track record of success. In our opinion, the new iPhone will be another milestone achievement for the company, helping Apple continue on the growth path.

Apple is widely recognized as a leading innovator in the consumer electronics market, with a dominant position in the U.S. smartphone market.

The launch of a fourth generation iPhone is expected to further strengthen Apple’s position. Apple’s share of the global smartphone market reached 15.8%, and the company ranks No. 3 behind Nokia Corp (NOK) and Research In Motion Inc. (RIMM), according to research firm IDC.

Wall Street expects Apple to sell a total of about 36 million iPhones in fiscal 2010, which is a whopping 80% increase from over 20 million iPhone units sold in fiscal 2009. Apple has been reporting triple-digit growth in iPhone sales, driven by strong international demand for smartphones, as well as the addition of new carriers in key overseas markets. It is expected to sell its 100 millionth iPhone this month.

Total iPhone sales represented approximately 40% of the company’s total revenue last quarter, and we expect the new iPhone to boost the company’s long-term earnings power.

Estimate Revisions Going Up

The company’s second-quarter of 2010 results (both earnings and revenue) were a stellar and beat the bullish Zacks Consensus Estimates, fueled by strong iPhone sales (which more than doubled in the quarter), increased Mac sales, success of new product launches, increased consumer spending and a rebound in computer shipments.

Overall, Apple’s earnings performance has been way above the Zacks Consensus expectations and the company has reported positive earnings surprises.

For the third quarter of fiscal 2010, earnings are expected to be in the range of $2.28 to $2.39 per share. However, we should note that the company traditionally gives extremely conservative guidance. The Zacks Consensus Estimate for the third quarter is at $2.90, way above the company’s own guidance. This is 44% above the company’s year-ago earnings of $2.01 per share (a reflection of the change in subscription accounting principles as per FASB).

We see strong agreement among analysts with respect to estimate revisions. Ten of the 33 analysts covering the stock raised their third quarter estimates, while 1 has made a downward revision in the last 30 days. In the last seven days, 7 analysts have made upward revisions to their numbers, while one has moved in the opposite direction.

The launch of the iPad last quarter and the expectation of the iPhone launch led analysts to revise their estimates. Particularly notable is the magnitude of earnings estimate revisions. In the last 30 days, EPS estimates have gone up 7 cents from $2.83 to $2.90. In the last 60 days, analysts have raised their EPS estimate by 29 cents. Although the third quarter will not include the impact of iPhone 4, we believe the company’s long-term growth story becomes more visible with the release.

Attracting Customers with New Features

The new iPhone 4 features FaceTime, a video chat application that could be used for multitasking, such as listening to music and simultaneously reading email via updated iPhone software (OS 4) that will initially work over the Wi-Fi connection. It also has a more powerful battery that allows for 7 hours of talk time. The phone also features the iMovie App and includes gyroscope, which will help with video game apps.

The new iPhone is thinner than the previous generation, with a higher resolution display and two cameras, including a front-facing camera for videoconferencing. With a 5 megapixel camera including LED flash and HD video recording, the phone comes with iOS 4, the newest version of the mobile operating system. Apple is also adding Microsoft Corp.’s (MSFT) Bing search engine to the iPhone, although Google Inc. (GOOG) will remain the default search engine. With a host of new features, the iPhone is sure to attract a lot more users.

The new phone will be available in the U.S., U.K., France, Germany and Japan on June 24. iPhone 4 is priced in the U.S. at $199 for the 16GB model and $299 for the 32GB model — but only for select customers. iPhone 4 will roll out in 88 additional countries by the end of September.

Apple’s exclusive carrier AT&T (T) will price the iPhone 4 16GB model at $599 and iPhone 4 32GB model at $699. To attract customers and lock in subscribers for another 2 years, AT&T will enable customers to upgrade at the subsidized price. Eligible customers will be able to buy the iPhone 4 models for $199 and $299, respectively, with a two-year contract. This move will accelerate iPhone sales at AT&T.

Apple also cut the price of the current iPhone 3GS to $99. The lower price point may result in increased demand for the phone. AT&T is also cutting the price of current iPhone 3GS, 16GB and 32GB models to $149 and $199, respectively.

Taking on Competition

The new Apple iPhone 4 will face increased competition from 4G phones, such as HTC’s EVO 4G via Sprint Nextel Corp. (S) and Motorola’s (MOT) Droid Incredible via Verizon Wireless (VZ) that run on Google’s Android operating system. Moreover, Samsung and Dell Inc. (DELL) phones that run on Google’s Android operating system will add to the competition.

One major glitch in the iPhone success is the number of carriers it will be able to attract in the coming months. With no new carriers announced (we thought Verizon might be one), growth prospects could be a bit limited.

Maintain Outperform

However, we are impressed with the new iPhone 4 and believe that 4G will drive the next wave of success for the smartphone market. The new iPhone 4, with its new AT&T data plan, should drive much higher sales and profitability at Apple.

We believe that the iPhone remains Apple’s key growth driver and its continuous effort to expand into international markets (two-thirds of iPhone sales are now coming from overseas).

Apple’s iPhone 4 Out Soon – Analyst Blog

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