Piper Jaffray details 10 Apple strengths for share price run up to $1000 - report
In the note obtained by AppleInsider, analyst Gene Munster offered a bird's-eye view of the company and its prospects.
He believes the most important highlights for Apple will be continued innovation in the company's 2012 product roadmap; a blowout next-generation iPhone launch; an Apple television arriving in 2013; little change to carrier subsidies for the next two to three years; sustained gross margins above 40 percent and the China opportunity.
2012 product roadmap
Munster said he expects Apple to release "meaningful updates" to its core product lines, especially the iPhone and Mac, that will demonstrate the company's continued "ability to innovate." Mac updates should arrive within the next six weeks with enhanced Retina Displays and Intel's Ivy Bridge chips, he added. Given that it would be the "first meaningful Mac update in over a year," Munster expects the refresh to "reaccelerate" Mac sales.
Looking ahead, Munster sees a smaller iPad with a screen of 7-8 inches and the Apple television arriving next year.
Apple's next iPhone
With regard to Apple's next-generation iPhone, Munster's position remains largely unchanged from an earlier note expressing confidence in the upcoming handset. He think Apple will manage to overcome a shortage of Qualcomm's 28nm baseband chips by procuring "a lion's share" of them ahead of production. He estimates there is an 80 percent chance that Apple will hit Piper Jaffray's 49 million iPhone forecast for the December quarter.
The next iPhone will have a "completely redesigned body style," possibly with a metallic rear panel similar to that of the current iPad. He puts the probability of a 4-inch screen at 60 percent. The next-gen handset will also likely include 4G LTE, an upgraded processor and memory and a higher-megapixel camera.
For several years now, Munster has been one of the most vocal proponents of the theory that Apple is working on a connected television. He speculated on Friday that Apple could announce the product as early as December 2012 in order to "freeze the market" of prospective TV buyers during the holiday season.
The analyst believes an Apple television would arrive in the range of $1,500 to $2,000 and would come in larger screen sizes (42-55 inches). By way of comparison, Munster pointed out that a typical 42-inch connected TV costs around $700, while a 55-inch goes for $1,400. He cited Bang & Olufsen's upcoming $3,700 40-inch V1 TV as an example of the market's high end.
The Apple television would reportedly include interface control via an iPhone and iPad app, as well as voice-control through Siri. Munster also suggested that the new TV would have access to an App Store that would "enable consumers to play games, listen to music, etc." on the TV set.
The firm believes Apple could achieve 10 percent of the market within 1-3 years of the device's launch. Analyst Michael Olson estimates the connected TV market will reach 110 million units next year. Munster estimates that every one million units of Apple TVs sold would bring in an additional 1 percent in revenue throughout calendar 2013.
Though some financial analysts have cautioned that carriers may be cutting back on phone subsidies, the investment bank expressed belief that iPhone subsidies would remain relatively unchanged for the next 2-3 years. It noted the fact that the iPhone reportedly has the lowest churn rates of any mobile device and pointed to in-house research showing that consumers interest in the iPhone should enable carriers to achieve lower customer acquisition costs.
Comparing Android subsidies to those of the iPhone, Munster said the market share on AT&T and Verizon was tilted heavily toward Apple. Additionally, even if market leaders among the wireless industry were to drop subsidies, second- or third-place carriers would remain willing to subsidize the iPhone, Munster said. Though such a situation could cause near-term "hiccups" in regional markets, the analyst believes consumers would vote with their wallets for the iPhone.
40%+ Gross margins
Munster suggested that Apple will be able to maintain gross margins above 40 percent over the next three years largely because the iPhone will make up a larger part of the company's total sales. He believes the iPhone has a 60 percent gross margin, significantly higher than the estimated 40 percent margin of the iPad and the presumed 25 percent margin for Macs.
Assuming just 10-15 percent of Apple's component costs are labor related, Munster does not expect increased wages at manufacturing partner Foxconn to have a "noticeably negative impact" on the iPhone maker's margins.
"Heart transplant" strategy
Munster described Apple's strategy of phasing out older products from its lineup as a "heart transplant" strategy.
"We believe this strategy is a key factor in the company benefiting from scale of producing a streamlined product line, which in part could enable the company to secure the best component prices possible which translate to higher margins," he said.
Looking ahead, Munster believes that Apple will continue to offer two older iPhone models and one older iPad alongside its current-generation products.
China adoption curve
Munster cautioned investors not to believe that China's adoption curve will follow the same arc as that of the U.S. According to his estimates, Apple sold 8-9 million iPhones in China during the March quarter, compared to 9.5 million Stateside activations and 1 million in the channel.
"While the US saw a 34 percent quarter-over-quarter slowdown in iPhone activations following the launch quarter, we do not believe China will follow the same path," he said.
The analyst said "most investors" believe the slowdown in the U.S., coupled with an expected dropoff ahead of the next iPhone, poses a risk to consensus estimates of 29 million iPhones during the June quarter. However, Munster remains comfortable with his 29 million unit estimate because he views iPhone sales in China as remaining robust over the period.
Piper Jaffray expects continued "healthy smartphone growth" from China because of its growing middle class and the current under-penetration of smartphones in the country, the analyst noted.
Tablets eclipsing PCs
Another key area of strength for Apple is the long-term tablet opportunity, Munster continued. Agreeing with Apple CEO Tim Cook on the matter, the analyst expects the tablet market to eventually outgrow the PC market.
For now, Munster expects Apple to sell 66 million iPads this year, roughly two-thirds of the projected total tablet market. Meanwhile, the PC market is expected to hit 371 million units this year, according to market research firm IDC. In 2015, Munster believes Apple will sell 176 million iPads out of a total of 301 million.
"Through 2015, we believe Apple will maintain its market share lead in tablets and have heard tablet competition likened to iPod competition in the early days of the iPod (XYZ is coming, which will kill the iPod)," Munster said.
IDC projects PC sales to reach 484 million in 2015. As such, Munster believes tablets could potentially surpass PCs by 2020.
Munster also said Apple's "long road" enterprise strategy will be another key point for its growth. He believes the company considers the consumer and enterprise markets as "significantly different verticals" and counts on consumer adoption to lead to enterprise adoption.
The analyst expects the high "consumer desire" for the iPhone and the iPad to transfer over to the corporate level. He did say, however, that he doesn't expect the Mac to enjoy the same amount of success in the enterprise as Apple's mobile products. The Mac maker's reluctance to support older OS versions is an obstacle to corporate adoption, since most companies prefer to use older versions of Windows "for reliability purposes."
Finally, Munster expressed belief that services such as iTunes, the App Store and iCloud will help "enhance" the Apple ecosystem without needing to produce substantial profits on their own. Apple could potentially take a similar approach to a "larger content initiative" for its rumored Apple television, he added.
"We note that with 225+ million registered iTunes accounts and 125+ million iCloud accounts, Apple has one of the largest registered user based in the tech world," Munster wrote.
Piper Jaffray reiterated on Friday its Overweight rating for Apple and its $910 12-month price target.