Apple iPhone/iPods

Doug Kass has an interesting discussion on the iPhone over at Street Insight today (Editor:  its now on the free site). In it, he looks at contribution of Apple’s new iPhone to the company’s market cap, as well as the potential of the hip new gadget to cannibalize existing iPod sales. Doug observes that "in theory, the iPhone has contributed to about a rise of $17.50/share, or $15 billion in Apple’s equity market capitalization" — a number he calls "breathtaking."

To put that Market Cap gain into some perspective, consider the incremental short-term rise in terms of some other companies in the mobile space: The $15 billion in Apple’s additional market capitalization represents:

60% of the entire equity capitalization ($25 billion) of Research In Motion (RIMM), which appears to have not only a software lock-in but, in addition, an annuity-like stream of income from subscriptions.

35% of the $43.5 billion equity capitalization of Motorola, which not only already has a 20% share of the global cell phone market but also includes much more valuable non-handset businesses.

80% of Apple’s 12-month trailing revenues. Handset makers Motorola and Nokia (NOK) trade at 1.03x and 1.49x sales, while personal computer makers Hewlett- Packard (HPQ) and Dell (DELL) trade at 1.27x and 1.04x sales.

Those are pretty astonishing numbers, and I agree with Doug that it reflects a certain speculative fervor that has gripped many market participants. If anyone tries to tell you that momentum trading is dead, exhibit "A" is the iPhone and the market’s dollar reaction to it. It was gory speculative excess at its finest.

~~~

However, unlike many Apple observers, I do not see the iPhone as cannabilizing Apple’s iPod sales. First, the iPhone creates an entry point into a huge market for mobile phones. Second, it creates an even higher end iPod model for Apple to sell, between the existing iPod models and the new iPhone.

Consider: As drool worthy as it is, I am not sure if I will be getting an iPhone. However, we can assume that the same touchscreen device will available — without a phone built in — as a high end touchscreen iPod. That  would be a must have for me and a lot of other Apple fans, and I would expect to pay a healthy premium for it.

So what Apple did with the intro of the iPhone was at least 2-fold: They raised the bar for MP3 players inordinately, cementing their lead for the foreseeable (3 – 5 years?) future.

But in addition to expanding into phones, they also created a new Ultra Luxe category of iPods: the touchscreen iPod. By the end of this year, we can expect Apple to have a non PC line of products will span nearly every price point from $50 to $600.

Consider these price points — based on actual and announced prices:

 

 

 

 

  Product Pricepoint
Apple iPhone
8/4 GB
$599/499
iPod touchscreen*
80/30 GB
  $449/399
iPod "Classic"
80/30 GB
$349/249
  iPod Nano
8/4/2 GB
$249/199/149
Shuffle 1GB $79

* estimated price, product not yet announced

Here’s what I estimate these price points will look like in 12-18 months or so:

 

 

 

  Product Pricepoint
Apple iPhone
10/5 GB
$499/439
iPod touchscreen*
100/60 GB
  $379/329
iPod "Classic"
80/30 GB
$279/229
  iPod Nano
10/6/3 GB
$199/139
Shuffle 1 GB $59

* estimated price, product not yet announced

Apple could have a unique and significant product offering at nearly every price point by year’s end. Given how high they have raised the bar, its hard to imagine anyone else getting a toe hold in their music franchise.

Source:
Is the iPhone Just a Phone?
Doug Kass
Street Insight, 1/16/2007 10:06 AM EST
http://www.thestreet.com/i/dps/te/theedge1.html#entryId10332622

Asking Questions on Apple’s iPhone
Doug Kass
The Street.com, 1/16/2007 1:38 PM EST
http://www.thestreet.com/newsanalysis/investing/10332670.html

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25 Possible Surprises in Store for 2007

Doug Kass puts together a terrific list each year. They are thought-provoking, and truth be told, kinda fun. These are just the headlines; The full details are here.

These are not intended to be predictions, but rather "events that have a
reasonable chance of occurring, despite the general perception that the odds are
very long."

The real purpose of this endeavor is to consider positioning a portion of my
portfolio in accordance with outlier events — with large payoffs. After all,
Wall Street research is still very much convention and groupthink,
despite the reforms over the past several years.


25 Possible Surprises in 2007

1. Private equity deals begin the year in a spectacular fashion with
two separate $50 billion dollar acquisitions announced in January.

2. Robert E. Rubin returns to his brokerage roots and becomes the CEO
and Chairman of Salomon Brothers/Smith Barney
after Citigroup (C)
decides to break up into three separate companies: a domestic money center bank
(Citibank), investment banking/retail brokerage (Salomon Brothers/Smith Barney)
and international consumer finance (Citiglobal).

3. Based on misleading government statistics, the housing market
appears to stabilize in the first quarter of 2007.

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