Apple Inc's $18 Billion Opportunity

Apple's larger iPhones could represent a share gain opportunity worth over $18 billion.

Feb 5, 2014 at 11:00AM

Back in December, Samsung (NASDAQOTH:SSNLF) announced that its Galaxy Note III "phablet" sold a whopping 10 million units in 60 days. Tim Worstall, contributor at Forbes, astutely pointed out that this represented roughly half of Apple's (NASDAQ:AAPL) quarterly smartphone sales. Now, of course, it's a bit unfair to look at sales of iPhones at the end of a product cycle with sales of a device that had just launched, but the more salient point is that between the Galaxy S and Note lines, Samsung sold about 100 million premium smartphones in 2013.

100 million -- that's a lot
Tallying up Apple's iPhone sales during 2013, it sold -- across all of its iPhones -- about 150 million units. Now, this is downright scary for Apple since Samsung sells roughly two-thirds of the high end units that Apple sells and an additional 200 million or so "cheaper" smartphones. Samsung is, by all counts, a behemoth and Apple investors would be wise to mind the threat from this South Korean giant.

Images

Source: Samsung.com.

A big part of its large sales volume is driven by Samsung's amazing breadth of products and variants of each of its lines. While Apple has stubbornly refused to do multiple screen sizes of the iPhone, Samsung has the following in its Galaxy S4 lineup: 

  • Galaxy S4 Zoom
  • Galaxy S4 Mini
  • Galaxy S4

In addition, Samsung also sells the Galaxy Note III phones for users who want an even larger screen. In short, Samsung offers product at every (reasonable) screen size depending on what that particular user's tastes are. This has allowed Samsung to sell almost as many "high end" devices as Apple. Crazy, right?

The good news for Apple
While this may seem like bad news for Apple, the good news is that Apple now has ample opportunity to take back share from Samsung's Galaxy S and Galaxy Note lineups. Especially if the rumor that Apple will launch a pair of iPhones is true. The "smaller" variant is expected to be between 4.7 to 4.8 inches, feature a 1920x1080 display, 2GB of RAM and an A8 processor. The larger variant weighs in 5.5 inches and 2272x1280 display.

Not only will this help Apple compete in the "spec wars", but this broadened product lineup (likely with the iPhone 5s offered at a discounted price) will allow Apple to more effectively compete and take share from Samsung -- locking in even more of the smartphone profit pie.

What if Apple takes 30% of Samsung's high end share?
Suppose, now, that Apple manages to take 30% of the Galaxy S and Note share with the iPhone 6 lineup. This could represent an incremental 30 million units. Assuming that Apple can maintain an average selling price of $600 per phone, this works out to be around $18 billion in revenue.

Assuming minimal incremental operating expenses and a gross margin of 37% (the low end of Apple's range), this works out to be about $6.66 billion in additional gross profit. At a 25% tax rate, this comes to $5 billion in additional net income or $5.60 per share. Multiplying this by a conservative earnings multiple of 12 and it would be good for a $67 per share increase in the company's stock price.

Foolish bottom line
The iPhone 6 might have a massive opportunity if it simply adds more screen sizes. While the next-generation iPhone is likely to sport far more in the way of enhancements (which would help in driving share gains), the form factor is huge. Also, Apple is likely to do something interesting with iOS 8 to come with the next-generation iPhones, which could further secure Apple's moat.

While not a "sure thing," Apple's shares do look cheap here, and frankly, if the new phones take share as many (including this Fool) expect, then Apple could very well top $600 again. That's a healthy premium to today's $510 share price.

Apple has more tricks up its sleeve
If you thought the iPod, the iPhone, and the iPad were amazing, just wait until you see this. One hundred of Apple's top engineers are busy building one in a secret lab. And an ABI Research report predicts 485 million of them could be sold over the next decade. But you can invest in it right now... for just a fraction of the price of AAPL stock. Click here to get the full story in this eye-opening new report.

 

Ashraf Eassa has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers