Apple has not yet sold a single iPhone, but investors are driving up the company’s shares to record highs as they bank that the combined telephone and media player will be a major hit.
A slew of brokerages from UBS to Piper Jaffray are raising their targets on Apple’s stock to as much as $160 — equivalent to about 40 times its expected fiscal 2008 profit.
That’s high for a stock that has traded at multiples in the low 30s the past couple of years.
The new target multiples, coming after the stock has already risen nearly 30% since the iPhone was unveiled in January, implies that analysts see the new gadget as a break-out product for Apple when it is launched on June 29.
Credit Suisse analyst Robert Semple forecast the iPhone could carry a gross margin of at least 40%, higher than overall margins at Apple, which topped 35% last quarter due in part to a drop in component prices.
Earlier this week, Semple said in a research note the device could sell five million units this year and 15-million in 2008 as people overlook the hefty price tag in favour of the promised new features.
Skeptics say the product’s success is far from guaranteed, noting concerns over the lofty $500 to $600 price tag, lack of a keyboard, and the fact that it is restricted to use on AT&T’s wireless network.
That could set investors up for disappointment if the phone has a less-than-smooth launch.
”Everyone’s buying the stock for the wrong reason, which is iPhone,” said Jonathan Hoopes, an analyst with ThinkEquity Partners. ”Don’t get me wrong, I think iPhone is a great product and most importantly it’s going to drive brand awareness.”
”But the revenue growth and earnings power is still a function of share gains in notebooks and desktops.”
The touch-screen phone is reworking Apple’s business model, which has expanded from computers to consumer electronics and, now, communications devices, they say.
Apple plans to record sales of the phones as subscription revenue so whenever it sells one of the devices, it will spread the sale over two years.
That helps smooth out Apple’s revenue and income, but also makes it more challenging to figure out what its shares are worth since the cash it collects on each phone won’t be mirrored in the top and bottom lines.
”Revenue-smoothing is never a good thing as seen by the hedge funds and buy-side community. Most companies that do it do it because they have to. Apple is doing it because they can,” ThinkEquity’s Hoopes said.
”Apple is very, very smart to make their comparables not impossible going forward. The company gets to grow revenue next year by not booking revenue this year.”
Whatever the uncertainties, most analysts agree the iPhone is Apple’s most significant new product since the iPod launched in late 2001.
On Thursday, investment bank UBS raised its price target on Apple stock by 20% to $160, saying it believed the iPhone, with its sleek design, large touch screen and ability to play music and videos, would be more popular than thought.
”After evaluating our model, we believe Apple’s iPhone and free cash flow potential is even greater than investors realise,” UBS analyst Ben Reitzes wrote in a research note.
Financial services firm Piper Jaffray also raised its price target on Apple shares to $160 on Thursday, saying the company could sell as many as 45-million iPhones in 2009, giving it about 7% market share in North America.
Analyst Mike Walkley said in a report that figure was ”a stretch, but feasible if the product is a home run and the price comes down to a $300 price point.”
Apple stock hit a new high of $127,61 during the trading day, up almost 7% since the device’s June 29 launch date was announced on Sunday. The shares closed at $124,07. – Reuters