BEIJING, CHINA - APRIL 28: A customer views a white iPhone 4 at a Apple store
Apple fans cannot wait to get their hands on iPhone 5 in September. This is remarkable in view of the fact that it is not known with any certainty what the name of the new device will be and when it will be available. It is widely believed that the phone will be launched on September 12, 2012 and be available the last week of September.
Some claim that iPhone 5 will be the biggest product launch ever. According to the Web research firm Hitwise, search variations around iPhone 5 have been steadily increasing and peaked the week of August 18 when searches grew 128% from the previous week.
From an investment perspective, the iPhone 5 related frenzy has turned into a mania in Apple stock. The mania in part is the result of some analysts projecting that more than 250 million iPhone 5 units will be sold. iPhones are the most profitable products for Apple. It is easy to take the 250 million iPhones and come up with projections of spectacular profits.
I've done some work to square those numbers, region by region, by demographics and disposable incomes. Taking the top-down approach, as opposed to the bottom-up approach that some analysts are taking, my conclusion is that 250 million phones is a ceiling.
Will iPhone 5 break the ceiling? Anything is possible, but counting on breaking the ceiling for aggressive targets does not fit our approach to generate high risk adjusted returns.
The less informed will scoff at the 250 million ceiling for iPhone 5 sales. The argument goes that there are over one billion Chinese, they are rich, they love Apple, and they can afford $199 for the phone. This argument is deeply flawed for two reasons.
First, unlike AT&T (T), Verizon (VZ), and Sprint (S), carriers in most emerging markets for the most part do not subsidize the iPhone. In the United States, a customer may pay only $199 for the phone but the carriers pay Apple $500 to $800 for the phone. The carriers recover the subsidy over the two year duration of the contract.
If you are an Indian or a Chinese consumer, you may have to shell out$500 to $700 upfront for an iPhone. This is the reason for the popularity of Google (GOOG) Android phones as they are less expensive. Some carriers in emerging markets such as China Telecom (CHA) are beginning to offer subsidized iPhones to battle bigger carriers.
Second, it is true that there are over one billion Chinese, but the number of those with disposable incomes to support Apple products is small.
Chinese currency is renminbi (RMB). One Chines RMB equals 0.157408 U.S. dollars as of this writing. A clerk in China makes 1500 – 3000 RMB per month, an accountant makes 10,000 – 15,000 RMB per month, a quality control manager makes 14,000 – 24,000 RMB per month, a human resource specialist makes 9,000 – 15,000 RMB per month, a legal secretary makes 6,000 – 15,000 RMB per month, a computer programmer makes 3,000 – 6,000 RMB per month, and a web designer makes 4,000 – 8,000 RMB per month.
You be the judge about aggressive projections for iPhone 5.
About Me: I am an engineer and nuclear physicist by background. I founded two Inc. 500 companies, and have been involved in over 50 entrepreneurial ventures. I am the chief investment officer at The Arora Report, which publishes four newsletters to help investors profit from change. Write me: Nigam@TheAroraReport.com. Follow me here and get email notification when I publish a new article.
Full disclosure: Subscribers to The Arora Report are long Apple from $131 and have taken partial profits at $360, $525, $629 and $568.
