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The Honolulu Advertiser
Posted on: Thursday, June 28, 2007

iPhone powers up Apple stock

By Matt Krantz
USA Today

Lines of geeks waiting to buy shiny new iPhones started forming at Apple stores this week. But the queue for Apple's stock started long ago as investors bet on a successful launch of the new product.

Since Apple's smart phone doesn't go on sale until tomorrow, investors can only wonder if the run-up in the stock is legitimate or the result of hype.

It's a reasonable thing to question given how much Apple's stock has risen. Shares of Apple shot up 44 percent this year, including 2 percent Tuesday alone, as investors bet the iPhone will be the next best thing since the iPod music player. That run-up makes the Standard & Poor's 500's 6 percent gain this year look paltry.

"If you look at the move in Apple's stock, it's all about the iPhone," says Piper Jaffray analyst Gene Munster. John Lynch at Needham agrees: "The iPhone has been a major driver in the run-up in the stock."

The debate about Apple's stock revolves around how the iPhone will affect the company, including:

  • Future growth. Earnings estimates raise questions about how much of the iPhone excitement will make it to the bottom line. Despite the pending launch of iPhone, analysts expect the company's earnings to grow 33 percent and 32 percent in the next two quarters before falling to 15 percent next fiscal year, says Thomson Financial. That's quite a deceleration from Apple's 140 percent average growth the past three years, says S&P's Capital IQ.

    The quarterly estimates reflect how revenue from the iPhone will be booked over time, not when the handsets are sold, says Andy Hargreaves of Pacific Crest.

    Investors also underestimate how many iPhones will be sold, Munster says. iPhone sales will hit $19 billion by 2009, he says, an impressive sum given it's equal to Apple's total revenue last year.

  • Valuation. Shares of Apple are trading for 38 times the value of the company's earnings over the past four quarters. That's 2 1/2 times its expected growth.

    That's reasonable too, Munster says, adding the stock can easily gain another 30 percent once investors realize how popular the iPhone is.

  • Trading patterns. It's not unheard of for a tech stock to run up prior to the launch of a new product and then fade. Microsoft shares outperformed the market by 14 percent in the six months prior to the Vista operating system launch, says Ned Davis Research. But 63 days after Vista launch, Microsoft stock was underperforming by 4 percent.

    That could happen with Apple, but it's unlikely, says Christopher McHugh at Turner Investment Partners, who owns the stock.

    Wall Street is betting a correction isn't in the making, says Stacey Gilbert, options strategist at Susquehanna Financial. Group are paying 25 percent more for options that let them bet Apple's stock will rise 10 percent by July than they're paying for options that protect them from a 10 percent correction, she says.

    Whether the hype is met will determine investors' reactions at first. "If there are lines in New York, Boston and Los Angeles, but nowhere else, the stock could go down," Hargreaves says.

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