Last week the FCC finally approved the iPhone and it should be on the market by June. I am putting a sell on Apple, the company that created the iPhone.
One of the oldest axioms on Wall Street is “Buy on rumor, sell on news.” Steve Jobs’ Svengali-like performances and the take-your-breath-away beauty of the iPhone has deflected the hard questions until now. I would rather sell before the questions are asked or, even worse, answered.
Steve Jobs at MacWorld this January dramatically announced, “From this day forward we’re going to be known as Apple Inc. We’ve dropped the `Computer’ from our name.” With those two sentences, Jobs has effectively pronounced the desktop computer dead.
Now that the future of Apple is the iPhone, Apple’s valuation might start to trade in line with other mobile handset makers like Nokia, Motorola and Sony-Ericsson. Compared to Motorola, Apple is very expensive at twice the market capitalization with less than half the sales volume. In other words, Apple is trading for a whopping 27 times earnings while Motorola is trading at 14 times earnings.
Right now, the iPhone has all the buzz. Those who have seen it wax lyrically about the revolutionary design of the four-in-one device (phone, iPod, camera and mobile internet device).
Michael Eisenberg of Benchmark VC was more practical and pondered: “The cell phone world is a cutthroat margin business where margins decline overnight. ... I wonder if Apple will succeed in maintaining margins as Motorola and Nokia cut prices on all new phones.”
How will Apple cope with the markdown in price that will eventually be required and the pressure to margins? I do not know if they will be able to do what they have done with the iPod. In that case, they added more features while keeping the price constant. In effect, later buyers get more iPod for the dollar.
And as for the price, at $499 and $599, I wonder how many teens and young adults, who are the most avid buyers of the iPod, can afford the iPhone. When the Mac was introduced in 1984 to critical acclaim, the price was a steep $2495. When buyers experienced sticker shock, huge sales did not materialize. .
Jobs’ defense of the price does not hold water with me. His argument is that consumers normally have to pay $199 for a comparable iPod nano, and $299 for a smart phone. iPhone delivers more bells and whistles for the same combined price.
Maybe some of my pessimism is coming from memories of Apple’s last attempt to enter the cell phone market. Apple, in collaboration with Motorola, produced a phone called the Rokr that could download songs from iTunes. The phone never caught on due to limited storage capacity.
What does the iPhone offer that other cell phones do not already offer, or will offer soon? The answer is not very much. The first-generation iPhone does not support 3G. The touch type keypad is beautiful to look at but hard to use for lengthy emails. Frequent users of other touch-screen phones have complained that it is hard to keep the screen clean.
Since third-party software programs cannot run on the iPhone, it is impossible for professionals to read documents in the ubiquitous Microsoft Word format.
Apple’s stated goal of selling 10 million iPhones by the end of 2008 seems ambitious. Ten million units represent 1 percent of the annual global sales of cellular phones. An analyst at Sanford C. Bernstein noted that cell phones that cost more than $300 account for only about 5 percent of the global market. With the current iPhone not compatible with the much-faster 3G wireless network, Jobs’ sales target even seems unlikely. The impetus to upgrade to 3G has been a recent revenue driver for mobile phone makers.
This is the first time that Apple has introduced a product that they do not control from start to finish. Not everyone is happy that Cingular (now AT&T) was chosen as the wireless carrier. The flashy new phone brings people in the door but the guarantee of good customer service is what makes them sign on the dotted line. Initially the phone will be available only to AT&T wireless customers. This a very smart move that will expand the fan base for Apple products beyond Mac and iPod users.
The Teflon coating around Steve Jobs has kept the stock options scandal at bay. But the coating may be peeling. Apple stockholders need to know that there is a remote possibility of an Apple without Jobs. Initially, the market would react very badly to that news.
While applauding Apple’s innovation with one hand, it is time to take profits with the other.
(Laura Goldman worked on Wall Street for more than 20 years for such firms as Merrill Lynch and UBS Warburg. She now runs her own investment advisory, LSG Capital, from Tel Aviv, Israel.)