Almanac Investor Alert
Apple's iPhone Incredibly Ingenious but Dangerous Hype 6/28/2007
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Needless to say, Apple has a lot riding on the iPhone. Since Steve Jobs first announced at the Mac World conference on January 9th, the advent of what some hypesters have called the “God Machine” or “Jesus Device” Apple shares have soared. AAPL has moved up over 40% adding some $42 billion to their market cap while pushing their P/E into the stratosphere. Apple is now the 6th largest NASDAQ stock accounting for 2.2% of the composite.
To be clear, before we lay out our concerns pertaining to their current predicament, we think that the iPhone is nifty device with enormous potential. It represents the dawn of a new era of communication devices. Apple will force other device makers to ramp up their offerings as well as service providers to improve and expand their capabilities.
Reviews of the phone itself have been, for the most part, favorable. The biggest problem everyone seems to have stems from the exclusive agreement that Apple made with AT&T (nee Cingular). According to Consumer Reports, AT&T’s signal ranks last or second to last in 19 out of 20 major cities. Moreover, the web browsing component runs on AT&T’s EDGE platform which, in a nutshell, stinks. So no matter how good the iPhone is, until at least 2009 and possibly until 2012 it will be running on an inferior, although hopefully improving network.
As far as the iPhone is concerned, a major Issue expressed in numerous reviews is difficulty operating the keyboard. As this is the only way to interact with the phone, it is a big deal. As with the iPod, the battery is internal and cannot be changed by a user. Apple assures that the problem of battery life that most iPod users have experienced has been overcome, but seeing as none of the testers have had an iPhone long enough, we will have to take them at their word.
There is only 4GB of storage on the phone with no way to expand the memory. While this seems like a lot, when you start storing videos and pictures it is in reality, paltry. The top-end iPods that boast 80 GB of storage, 20 times that of a basic iPhone, retail for $349. Moreover, there is no way to send the beautiful pictures you take via your iPhone.
Another concern is the fragility of the iPhone. Having broken our fair share of $100 phones in seemingly ever increasing ingenious manners, we are quite sure that the all-glass screen was not designed with us or any other rough and tumbler in mind. While they slip easily into a purse or pocketbook; our man bags and fanny packs have been permanently retired. We are not sure where to stow the sexy slab. This begs an obvious question. In an industry that has been fixated on getting smaller and smaller since the first back-pack sized cell phone was released, how will the hefty iPhone be received?
Now about those lofty estimates Wall Street has saddled Apple with. At the low end of the spectrum of companies making sales guesstimates that we’ve heard is UBS which projects sales of 950,000 divine devices by the end of September and 8.1 million by the end of September 2008. The high end is Credit Suisse which estimates that 1.7 million miracle machines will be sold by the end of September and 12.3 million by the end of September 2008.
There will always be early adopters of a new technology; especially one as widely marketed as this one, but 10 million guinea pigs in the first year? To put those numbers in perspective it took Apple 3 years to sell 10 million iPods. Yes, Apple has sold 100 million iPods to date, but the explosive growth didn’t occur until introduction of the iPod Mini, Shuffle and Nano, three relatively cheap devices.
The most successful recent electronic mega-seller is Microsoft’s X-Box 360 which retails at $399. According to Microsoft, in its first quarter of availability, this must-have sold 1.5 million units in Q4 2005 worldwide. In the seven quarters that it has been sold, Microsoft has sold 5.4 million units in the US and about 12 million worldwide.
The iPhone will not be rolled out in Europe until Christmas and Asia and Latin America until sometime in 2008. The estimates, even the conservative ones, are for the United States only. We feel that Apple will be hard pressed to impress the Street.
Which brings us to the real issue at hand – cost.
• The most basic plan will be $59.99 for 450 minutes, $79.99 for 900 minutes up to $219.99 for 6000 minutes with a two year commitment. While this is similar to a “Blackberry” plan, 450 voice minutes run about $39.99, 900 about $59.99, etc. So you can tack on another $20/ month or $480 for the necessary 2-year contract
• Cancelling an existing cell phone contract can cost up to $200.
• The cheap 4 GB iPhone is $500, the “big” iPhone is $600. (Note: an iPod “nano” has 8GB of storage.)
• Chargers, car-kit, case, Bluetooth, et al all extra
So when all is said and done, to get yourself a 4GB iPhone with a similar 2-year plan to the one you currently have and change to AT&T with no “extras” you are going to spend over one thousand dollars. That is the rub.
We are sure that the iPhone is going to be great one day. By the 3rd generation all of the kinks should be out and AT&T’s exclusivity will probably be over. In the near term, if the iPhone misses the ridiculous expectations placed on it, AAPL may drop precipitously. The potential ripple effect in broader tech is a real possibility.
As we are already out of the NASDAQ, we are not concerned with any of our open positions, but there may be an opportunity to buy a short NASDAQ ETF such as the UltraShort QQQ (QID) on the horizon.
The Hirsch Organization will be closed next week in observation of Independence Day. The next email will be sent after the close on July 12th. Enjoy the 4th!
Please Trade Carefully.
Jeffrey A. Hirsch, Editor
J. Taylor Brown, Director of Research
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