Majestic Research

Wall Street Journal

The New iPhone Polishes Up Apple

By Martin Peers
Published: June 10, 2009

Pity Palm. Just days after its much-hyped new Pre phone hit the market, the iPhone is again dominating the headlines.

It says a lot about Apple’s marketing power that it was able to divert attention from the Pre with largely expected announcements about a new version of the iPhone and a price cut for the old model.

The aggressive pricing move was a sensible step to maintain the iPhone’s momentum. Its global smart-phone market share doubled to 10.2% in the first quarter from a year earlier. It expanded faster than its bigger rival Research In Motion, which makes the BlackBerry, according to Strategy Analytics.

But as the Pre shows, competition is heating up.

The iPhone is important for Apple’s bottom line. It generated 19% of Apple’s net sales in the March quarter, although its true significance is greater. Apple recognizes iPhone revenue over a 24-month period.

While Apple has long targeted the premium end of the market, it already has shown a willingness to cut prices, Majestic Research analyst Richard Klugman notes. Apple cut the price of its Shuffle iPod to $49 and introduced new cheaper iPods as SanDisk was offering cheap alternatives. It worked: Apple’s share of the MP3 player market rose a point to 71% in the first quarter from a year earlier, while SanDisk’s dropped, according to NPD Group.

Apple is trading at what appears to be a pricey 26 times 2009 earnings. But Barclays Capital estimates the multiple falls to 14 if iPhone revenue is recognized immediately and Apple’s $32 a share in cash is stripped out.

It may be worth taking another bite of the Apple.