Throughout 2007, AAPL was the darling of Wall Street. Shares more than doubled between January and December, from a respectable $84 in January to a record $202 on December 27, 2007. Since then, the story has been dramatically different, with Apple shares shedding $83, or 41%, since their post-Christmas high. After reporting their best quarter ever, Apple was punished as they guided lower for the Spring due to a weakening overall economy and weak consumer confidence. To be fair, the stock market places value on future potential, not past results. So, nice work, but what will you deliver next quarter?
The future of Apple may be in its core, no pun intended, with sales of desktops, notebooks and workstations expected to continue to outpace previous quarters and a resultant surge in consumer market share. Its predictable that iPod sales would slow as the device reaches saturation, and in fact the iPhone was developed as "the next big thing" after witnessing the convergence of portable phones and music players.
During Apples now-famous 2007 keynote, Steve Jobs predicted Apple would sell 10 million iPhones by the end of 2008. This is probably the most-frequently misquoted iPhone statistic. Yesterday, BMO Capital Markets analyst Keith Bachman lowered his price target on Apple shares citing concerns about sluggish iPod sales and his prediction that Apple could not sell 10 million phones in 2008. Recall that the 10 million unit figure includes the 4 million phones sold before January, plus all units sold in 2008. Yes, the unit is pricy, and probably, most of the technorati probably already own one, but there are still large, untapped markets around the globe that make me think this goal is still achievable.
As analysts and investors begin to sweat about predictions of units sales across the Apple line, the actual valuation of Apple’s wares isn’t fully appreciated. To account for iPhone sales (as well as AppleTV’s), Apple accountants uses a subscription method of accounting. Simply, this means that they don’t record the $399 of revenue the day the phone is sold, but rather they recognize it over a 2 year term analagous to the AT&T service agreement. This makes sense if you consider the now-widely-known fact that Apple pockets about 10% of iPhone users’ monthly AT&T service fees, unprecedented in this industry.
As long as total number of iPhones sold is growing each month, and no analyst as cited reason to doubt this, the passage of time produces a wild multiplier effect on the revenues recognized by iPhones sold in the past. There is a terrific NY Times article on what this could mean for shareholders, but the bottom line is this: don’t get too caught up in unit numbers and Jobs’ MacWorld 2007 wager. Watch the topline and value the stock accordingly.
I for one think Apple will continue to produce handsome returns for patient shareholders. Given Microsoft’s troubles with Vista and PC users in full retreat to XP, this is a great opportunity for Apple to step up and capture marketshare with devices that "simply work." Given that almost everyone has an iPod, and everyone at least knows 3-4 people who have an iPhone, the halo effect will continue to position the Mac, Apple’s bread and butter, as the ultimate iPod/iPhone accessory.
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