Thursday, October 25, 2007, 08:00 am

Piper Jaffray ups Apple target to $250, sees sales of 45M iPhones in 09

By Katie Marsal

Investment bank Piper Jaffray on Thursday maintained its extremely bullish outlook Apple Inc., raising its price target on shares of the company once again to $250 from $222, saying it remains confident in predictions that iPhone sales will increase to 45 million a year by calendar year 2009.

"We have constructed a model that we believe reflects the impact of iPhone booked revenue and AT&T revenue share in the coming years," analyst Gene Munster wrote in a note to client investors. "Based on this model, we continue to believe that the iPhone and the revenue share agreement will be more impactful in '09 and beyond than currently factored into consensus thinking."

The analyst sees iPhone sales of 3.4 million, 12.9 million, and 45.0 million in calendar years 2007, 2008, and CY09, respectively. While his 2007 and 2008 estimates are in line with the general consensus on Wall Street, his aggressive forecast for 2009 is based on the belief that the average price of the touch-screen handsets will fall gradually over the next two years, from $400 currently to $370 by the end of 2008 and $300 by the end of 2009.

Based on data from Apple's recently-reported September quarter, Munster believes the current revenue sharing agreement between AT&T and Apple requires a revenue share payment of $18 per sub per month to Apple, which is "materially higher" than his original expectation of approximately $6.50 per sub per month.

"We are taking a conservative approach to the revenue share agreement and assuming that by the end of 2009 the monthly payment to Apple will be $9.00 per sub per month," he wrote.

Based on these assumptions, the analyst said recognized revenue in 2009 from the iPhone AT&T revenue share agreement would total approximately $4.8 billion. Even assuming a gross margin of 80 percent on the monthly payments from AT&T, operating income resulting from the AT&T revenue sharing agreement would be $3.9 billion in 2009, he said.

"In other words, revenue from AT&T payments in 2009 would add 60 percent to Apple operating income if we applied an 80 percent gross margin to AT&T revenue share revenue and assumed no additional opex from AT&T revenue share," Munster wrote. "Our model takes a more conservative approach and assumes AT&T revenue share revenue is run through the model at normal corporate gross and operating margins."

In his note to investors Thursday, the Piper Jaffray analyst also pointed out that iPhone is currently sold at just 2000 distribution points, which are comprised of approximately 200 Apple retail stores and 1,800 AT&T stores. Given that Apple maintains over 40,000 distribution points for its iPod digital media players, he believe the Cupertino-based company could easily expand distribution of iPhones in every country that has iPhone availability.

"This would be made possible by the fact that the iPhone is activated using iTunes on a user's personal computer -- not through in-store activation," he wrote. "As such, buying an iPhone is equally as simple as buying an iPod from a logistical standpoint. Therefore, it is possible for Apple to rapidly expand iPhone distribution throughout the world in countries with iPhone availability, which would likely serve as another catalyst to iPhone sales."

While the timing of Apple's roll-out of the iPhone beyond Apple and AT&T retail stores is difficult to pinpoint, Munster believes there will clearly be an appetite from other retailers whenever that time comes.

To help drive sales going forward, the analyst expects Apple will offer new and innovative iPhone features, like 3G internet connectivity and possibly GPS navigation, at the lower price points.

Shares of Apple were trading up $0.99 or just over half a percent to $185.93 in early morning trading on the Nasdaq stock market.