RBC sees huge iPhone "harvest"
“iPod/iPhone roadmap emerges, iPhone demand seen strong post-launch.
• Large 8M CY07 iPhone order. Checks suggest Apple may plan to produce 8M iPhones CY07, implying 12-14M unit sales end CY08, well ahead of Apple’s publicly stated 18-mo 10M goal. Apple’s CY07 plans may include offering higher memory (e.g. 16GB) iPhones, while refreshing existing models at lower cost to stimulate demand. Plans appear to include inventory for Canadian and European launches (est. Q4/CY07–Q2/CY08) and Asia (est. mid CY08). We see a 3G/HSDPA iPhone by Spring CY08, and believe Apple is also planning a higher-resolution display (480×720).
• iPod Refresh Q4CY07 iPhone-like Features. Checks suggest Apple may be planning an iPod line refresh Q4CY07, including new versions that we believe include: an updated iPod Nano, a new iPod and new video iPod. Some or all may include iPhone-like features (Touchscreen, Widescreen, new UI etc). We also expect new devices with more memory and integrated wireless (Wi-Fi).
• 850-950k iPhones sold to date, 1.1-1.5M Phones when Apple Reports Q3. We expect Apple to report 1.1-1.5M iPhones sold when they report Q3 July 25 (sell-in to AT&T, sell-through online and Apple stores). From checks we est. iPhone sell-through at 850-950k to date (we est 450-500k 1st weekend). Supply constraints caused stock-outs at most AT&T stores and some Apple stores, but most are replenishing this week, and checks indicate sustained demand. We expect iPhone to contribute $10M to Q3 revenue (nominal to EPS).
• Raising Outlook to 13.5M Phones by end CY08. Based on these checks, we are raising our iPhone sales outlook to 13.5M units (10.1M prior) end CY08. We continue to expect iPhone momentum to ease following early sales, reinvigorated subsequently on new launches. Our F08 estimates adjust to $32.2B revenue ($31.2B prior) and $4.52 EPS ($4.38 prior). Our F09 outlook
increases to $39.5B ($38.5B prior) and $5.67 EPS ($5.53 prior and vs. conc. for $35.1B and $5.03).
Valuation and Recommendation
• Reiterating Outperform and $160 target. Our $160 target is DCF-based (WACC of 10.5%, 4.5% terminal rate, FTM cash $20.70/share) and equates to 39x FTM P/E, below “Premium Technology” peers at 41.2x, and vs. historical 25x-38x valuation.”