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September 27, 2006

More Apple Cell Phone Rumors

ThinkSecret.com is reporting that Apple Computer (AAPL) will be launching a cell phone through Cingular early in 2007. The report says that Cingular will have a six month exclusive. This report is just a rumor and based on my own perusal of the ThinkSecret website I wouldn’t put a lot of stock in it.

However, if it is true it raises a couple of interesting points. First, most analysts had assumed that AAPL would launch be a mobile virtual network operator (MVNO), leasing spectrum from someone like Sprint and then reselling it. Current MVNO’s in the US have not been very successful. If AAPL avoids MVNO, is that a positive for wireless operators? Second, the phone is supposedly to be tightly tied to iTunes. If so, that means users will expect iTunes pricing, meaning 99 cent over the ari downloads. After all, the phone will surely have a USB connection so you can hook up to your computer just like an iPod. Presently, mobile operators charge $1.99 or more for downloaded songs and ringtones. It seems like an Apple iPhone could collapse this pricing structure. Ringtones are already a big business so this could have negative ramifications for mobile operators. Then again, if Apple can upgrade the music phone experience (so far music phones have not received good reviews in the US), the market could grow much more rapidly offsetting any pricing compression and igniting another round of phone replacements....

For Apple, the upside in a phone venture is based on the number of units it sells and how the phone protects the company’s domination of the digital music business. ThinkSecret says the company expects to sell 25 million units in the first year. That seems high given that Motorola (MOT) has sold a little more than 50 million RAZRs so far. For sake or argument, 25 million units at $150 per unit is $3.75 billion in revenue. This year is Apple is projected to have $19 billion in revenue so a phone could be a big deal. And 25 million phones is not that much in a market that sells over 900 million phones globally. Put a 15% operating margin on that revenue and you have $562 million in operating income. The tax rate has been running around 32% with a slowly rising share count of 875 million, producing incremental EPS of over 40 cents per share vs. current 2006 estimated EPS of $2.15. The 2007 consensus estimate is $2.64 but probably contains some cell phone EPS, though probably not too much.

As I have said many times, AAPL is one of the few large cap growth stocks that has real double digit growth. It is worth a premium multiple as long as momentum is sustained. With a cell phone, a set top box device, ongoing iPod upgrades, and significant market share gains in laptops, momentum seems likely to be sustained through at least 2007. I think the shares are headed for a new all-time high ($86.40) during the upcoming holiday season.

Posted by Steve Birenberg at September 27, 2006 09:26 AM in AAPL