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iPhone, but will uPhone?

26 June 2007 By Robert Cyran

If there’s one company that can capture the tech zeitgeist, it’s Apple. But will the group’s new handset, the iPhone, capture the market after its release Friday? Investors certainly think so. Since the device was unveiled in January, $34bn has been tacked onto the group’s market capitalisation. A bit of scepticism is called for.

Apple hopes to sell 10m of the devices by the end of next year. Yet the cheaper version of the iPhone will cost a hefty $499 – about eight times what a US customer pays for a typical handset and 2.5 times the cost of a high-end one. It will only be sold by one of the big mobile operators, AT&T. And users may also be turned off by the device’s touch-screen keyboard.

On the other hand, Apple is known for low-balling its estimates, and there certainly is high initial demand. So let’s assume the company’s estimates are correct. In contrast, cell phone giant Nokia should sell about 550m phones in the same period. The Finnish group’s market cap is $108bn. So even though it will sell 55-times as many phones, investors think the business is only worth three times as much as Apple’s.

Or look at it this way. Apple and Nokia both had operating margins of 13% last year. If Apple sells 7m phones next year, and earns similar margins, operating profit for the phone business would be around $350m. So the phone business is valued at close to 100 times estimated 2008 operating profits. Nokia trades at 10 times. This looks a bit excessive even if one assumes the iPhone snatches some of Nokia’s market share.

The conclusion: either Nokia is dirt cheap or Apple is extremely overvalued. Of course, betting against Steve Jobs has never been a profitable activity – an iPhone may yet appear in every pocket now housing an iPod or phone. But if it merely becomes an accessory of rich hipsters, Apple’s stock would have a long way to fall.


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