Frankly, I never thought I would still have long positions in Apple (AAPL) with the stock at $124 per share. I have been trimming it as the stock has climbed, but somehow I still have not managed to close out the positions completely. Despite the fairly high valuation, there is still a lot of momentum at Apple and a high probability that numbers are still too low. Macintosh sales are growing faster than any PC brand, and it is entirely possible that the company can give video-on-demand (VOD) and Netflix (NFLX) a run for their money.
That said, the iPhone hype is a little worrisome. Not only is the stock running up heading into the late June release date, setting it up for a pullback in coming weeks as investors sell the news, but iPhone projections seem to be getting a little optimistic. I am not going to bet against Apple, because they have proved naysayers wrong over and over again, but let me give you an idea as to why I am beginning to wonder if they can live up to the hype this time.
Apple shares got a boost recently when Piper Jaffray analyst Gene Munster upped his price target to $160 and projected 2009 iPod shipments of 45 million units. He came up with the latter number by assuming a 7 percent North American market share for the iPhone, a 3 percent share on the other continents, along with the average retail price falling from $542 this year to $338 in two years. Munster has been overly bullish (and right) on Apple for a while now, but I wonder if that will cause him to stay on the train longer than he should.
My hesitation in accepting these projections as easily attainable is in large part due to the exclusive service contract Apple signed with AT&T (T) for U.S. distribution of the iPhone. In order for Munster's numbers to be right, it appears international sales will have to be breathtaking. In the United States, the big four (Verizon, Sprint/Nextel, AT&T/Cingular, and T-Mobile) have the vast majority of wireless customers (about 200 million as of the end of the first quarter). AT&T only represents 30 percent of that total, so if the other 70 percent of people want an iPhone, they will have to wait five years or switch service providers.
Switching might not be a big deal, but AT&T gets some of the worst customer satisfaction ratings in the industry. When AT&T bought Cingular they were the two worst in terms of satisfaction and network reliability, which caused many to poke fun at the merger. Just how many people will want to switch to AT&T just to get an iPhone? To me, that is one of the top obstacles Apple will have to overcome if the rosy forecasts coming from Wall Street are going to be met. And even if Apple does sell 45 million iPhones in 2009, does the stock price already reflect those expectations?
Deciding whether or not to sell the rest of my clients' Apple shares has been a tough decision. For now I have trimmed back larger positions to be average-sized at most. For now there is enough potential for me to hold onto some shares, but given I am getting a little skeptical, Apple is no longer is a large position in the accounts I manage.
What do you think? Will a five-year exclusive deal with AT&T hurt iPhone sales? If you are an AT&T customer, are you planning on buying an iPhone? If you are with another provider, will you switch to AT&T to get one?
Full Disclosure: Long shares of Apple at the time of writing