Tech Investing Insights

Apple's iPhone price dropped: So what?

Last week, Apple announced a $200 price cut to their most expensive iPhone, the model that sold for $599.  They removed the cheaper $300 model from the market altogether. The price of Apple stock also fell as a result of the short-term thinking of ill-informed, reactionary suits on Wall Street and CNBC seeing this as a sign that Apple would not make its iPhone forecast of 10 million units sold by the end of 2008. They also saw it as a precursor to a decline in profits for Apple as a whole.

Today, Apple announced the sale of its one millionth iPhone unit, well ahead of schedule. So what's the deal?  Is Apple still the growth machine it was once touted to be?  More importantly, is Apple the investment it was said to be a mere two weeks ago?  My answer is a resounding yes to both questions! But not on the basis of the iPhone as a single product.

I say "So what?"” to the price cuts. The iPhone is currently a small mix in the total Apple product line up, and until its unit volume really grows to where it earns appreciable market share in the billion-unit-plus cell-phone market, its effect on Apple's revenues and profits will be minimal. Its impact on Apple’s stock price should reflect that of any newly introduced product in a large, crowded market where big players exist and large chunks of market share have already been staked out—in this case, the affect is minimal. (For more information on that point, refer to my post on 7/31/2007 about the hype related to the iPhone.)

Apple is an excellent technology company on several fronts. It has just introduced a new and improved iMac, a new browser called Safari, new and improved versions of the very popular iPod, new applications software called iLife with new versions of iPhoto and iMovie, and enhancements to iWeb. Apple has an outstanding operating system called Mac OS X as well as office applications software, similar to Microsoft. Apple now uses the industry standard Intel compatible processor, opening users to the broad range of Windows software.

Apple also has excellent financials:  Yearly revenues of about $80 billion and a market valuation of $115 billion. The company has no debt, a gross margin of nearly 30 percent, a profit margin of about 14 percent, and a management that is consistently and remarkably innovative—as witnessed by new products brought out in industries other than desktop and laptop computers.

So what is the big deal about a small stumble in a new product?  And what happened to those people that "had to have" the iPhone just because it was "cool."

Apple is a great growth company whose innovative management realizes that consumer products are driving electronics today.

Apple is still a sound investment for the long term.

Bill Durrenberger is an award-winning public speaker who is available for speeches or presentations on companies and technologies.  He will also be happy to research and provide a written custom evaluation report on a specific company or a technology by request.

Copyright Bill Durrenberger September 11, 2007 All rights reserved. Disclaimer: The statements and information presented in this article reflect the opinions of the author and do not constitute a recommendation to buy or sell specific securities.

Invest in companies providing components to Apple's iPhone?

Shortly before the Apple iPhone was available, several investment advisors suggested that investors purchase the stock of companies selling semiconductor components used in the iPhone.  Poor strategy. These component suppliers might be replaced by others in a heartbeat.  Even if Apple sells ten million iPhones by the end of 2008 as forecasted by some, this is not high volume.  The total of cell phones sold in 2006 approached almost one billion.  Now this is high volume!!  And all smart phones, including the popular Blackberry from Research in Motion and the iPhone, are nothing more than cell phones with enhanced features.  Getting your microprocessor or the power amplifier into the iPhone sounds like a coup, but in reality you need to break into the mainline volume market for the big bucks.  Getting into the original iPhone is good for bragging rights, but doesn't bring home the big bucks that sales and executive managers love to see.

Now consider the short longevity factor.  The cell phone market numbers attract component makers to develop commodity parts that can service the total market, which includes Nokia, Samsung, Motorola, LG, Palm, Research In Motion, plus the emerging China phone makers.  A power amplifier in the iPhone can and will be used in several other cell phones as well.  This represents immense competition for the iPhone management to play into.  Let me explain.  All suppliers have a negotiated, written contract to supply a specific number of parts into a product such as the iPhone.  All such contracts have a clause called "terms and conditions."  Within this clause is the "cancellation and reschedule statement," which believe me, does not favor the supplier.  This statement gives the buyer the right, prior to a specified date, to place a not-too-friendly call to the supplier that it is time to renegotiate the contract.  This happens when a competitor has developed either a better component or offered a more cost-effective price. The current supplier is gone in a heartbeat, provided the contract is outside the cancellation and reschedule date.

Component contracts are usually written on a yearly basis, so the competition has 365 days to make improvements in price, performance or both.  At new contract time, the existing supplier can be replaced by a new supplier.

Even Samsung, with its microprocessor currently in the iPhone, is not immune.  Usually, the software developed for a microprocessor has resulted in costly software engineering hours to be expended.  To change to an another microprocessor supplier means new software development.  But the amount of software in a cell phone processor is nowhere near that found in a large system such as a desktop computer, so the redevelopment expense to replace the Samsung processor is less of a factor.  While not in such a precarious position as the other components in the iPhone, the Samsung processor is not in an irreplaceable position.

My advice to anyone thinking of investing in a company solely on the basis of its supplier position in the IPhone is to say no.

Bill Durrenberger is an award-winning public speaker who is available for speeches or presentations on companies and technologies.  He will also be happy to research and provide a written custom evaluation report on a specific company or a technology by request.

Copyright Bill Durrenberger August 20, 2007 All rights reserved. Disclaimer: The statements and information presented in this article reflect the opinions of the author and do not constitute a recommendation to buy or sell specific securities.

 

APPLE’S iPhone: Over hyped, undersold, and with real issues

Well, the iPhone has arrived and the sales at product launch proved to fall short of expectations. Apple sold less than 300,000 iPhones but had expected to sell close to a million units. Apple expects to sell ten million before the end of 2008, this in a market of 30-40 million smart phones per year. The device really turned on the Apple crowd, as hundreds camped out to get their hands on one. Most, as they waited, had never seen one in operation. At least people knew what they were getting for their money when they waited in line to get the latest Harry Potter book.

Pre-launch, the device drove up the Apple stock to lofty heights, as the name iPhone elicited raves from the Wall Street bunch. Apple never really advertised the unit, just had “the man” dressed in a buttonless black shirt—jeans and all—show it at the Apple trade show, MacWorld, in January, and let Wall Street and the media provide all the advertising Steve Jobs could ever hope for. From my Motorola Semiconductor days, it’s called “drinking the Cupertino Kool Aid”…an elixir made from Apples.

What about this new product and its effect on the Apple financial position? After all, it IS still earnings people look at, or should, when they make a decision to purchase a company’s stock.

Apple gets about 85% of revenues from sales of iTunes, the iPod, Mac computers, the MAC operating system, and other software packages. While the iPhone apparently has a fat gross margin, with some estimates at 50%-60%, this new product will take some time to really affect the Apple earnings per share.

Let’s look at the facts.

The touch screen keypad is a good idea, as the display is larger when the keypad disappears. And a larger display is a good thing, comparing it to the minuscule displays on the cell phones of today.

The iPhone is a cell phone—with extra features—in a market where nearly a billion cell phones sold last year. This is a commodity-driven, low-margin market with some big, established players already in the field. There is Nokia, Samsung, LG, Sony-Erickson, Motorola—all with some form of smart phone and a lot of experience in the industry. And then there is the leading smart phone seller, Research in Motion (RIM), with its Blackberry brand. These are all tough competitors, with design teams willing to sell their mother for a few points of market share. Also, the iPhone, as all cell phones, is a piece of hardware; and cell phone hardware is not difficult to build these days. The innovation in cellular telephony, by Motorola, was the ability to switch a user from one geographic cell space to another as the user moved from area to area. In fact, the early cell phones used many of the same components that were in the Motorola cordless phones of the day. The differentiator in cell phones today is the features designed into the phones, lowering the phones receiver sensitivity so it can receive a weaker signal ( forget raising the phone’s transmitted power; this is already at the maximum allowed by the FCC), and the viability of the carrier’s network. And AT&T, the exclusive carrier for the iPhone, has less than a stellar network.

Yeah, I know. How about the innovation prowess of Apple, and didn’t the iPod capture the imagination of the world? It is also hardware isn’t it? The iPod originated in a market that was not serviced well by established players. Napster had been downloading music illegally, offering it for free on the Internet; and recording companies were beginning to drag the public into court with nasty law suits. It was into this environment that a very innovative program called iTunes and the iPod entered. It was an easy win. Winning in the very competitive cell phone market will be much more difficult.

Now for the viability of the carrier’s network. AT&T has the iPhone on their old and slow 2G (second generation cell phone network) EDGE network, rather than the new and faster 3G Broadband Mobile network. Downloading streaming video and web pages at slow speeds will not be the experience other wireless devices provide. And the AT&T network is spotty compared to the Verizon network. AT&T’s customer service is nothing to write home about either.

And what about Verizon? They will not sit very long for AT&T Wireless, the exclusive carrier for the iPhone, to take subscribers away from Verizon Wireless. And Verizon has scads of money to partner with a cell phone manufacturer to develop a competitive device such as the iPhone. As previously stated, the iPhone is just hardware. Anyone can add all of the hardware features contained in the iPhone. The unique features of the iPhone— such as the change from landscape to portrait mode and a touch screen display—can be duplicated and most of the other features are already on other cell phones.

Applications for the iPhone must be compatible with Apple’s Safari browser, which places a limit on the independent software developers that will be willing to develop new mobile applications for a one-flavor phone. Most will develop their applications software for the major portion of the cellular market.

Last, we have the high price point—a $400-$500 purchase price with a two-year contract from AT&T. The sweet spot for cellular phones, including smart phones, is from $150 to $250 and even lower with rebates. And how many people will be willing to pay money to buy out of an existing provider contract to go over to AT&T? Not enough in my view. AT&T’s monthly charges are in line with other wireless providers.

Apple is a great, innovative company with great management. The recent quarter’s outstanding results indicate that the company’s core businesses are hitting on all cylinders. At the moment, I would not buy the stock based on the iPhone product line. I would wait several quarters to see if the iPhone is truly a hit for a new product in a very competitive market. Consider a stock purchase only on the rest of Apple’s businesses.

Bill Durrenberger is an award-winning public speaker who is available for speeches or presentations on companies and technologies.  He will also be happy to research and provide a written custom evaluation report on a specific company or a technology by request.

Copyright Bill Durrenberger July 31, 2007 All rights reserved. Disclaimer: The statements and information presented in this article reflect the opinions of the author and do not constitute a recommendation to buy or sell specific securities.