Barron’s Erroneous Take on Apple’s iPhone: Setting the Record Straight.

In Barron’s July 2, 2007 weekly print edition, Mark Veverka gave his analytical opinion regarding Apple’s prospect in the article titled “Fight Apple’s Temptations – Briefly.” Veverka seeks to make the point that the iPhone is not largely important to Apple’s overall business. As the subtitle points out- “It’s the software, Stupid” The author is referring to Mac OS and its software “Boot Camp” that allows users to run Windows and Mac OS simultaneously on a Macintosh machine. He believes that it’s the “Halo effect” of the iPhone that will drive Mac sales, which in his opinion, will have to be robust to support Apple’s current stock price.

While he makes some interesting and solid points, his analytical ability is called into question when he makes some indisputable, gross errors. It also makes one wonder if there are editors or fact checkers that review the work before it is published so that Barron’s reputation won’t become tarnished.
What I am referring to is the Veverka’s statement appearing in the second section of the article:

“As important as iPhone’s launch is, computer sales will be key to the stock’s maintaining it’s upward trajectory will into 2008.”

I do not necessarily disagree with that statement. Further Veverka adds:

“To put things into context, if Apple sells 10 million iPhones in 2008, that would add only 500 million in revenue.”

Hold up, let review our math from 1st grade, Ok if 10 million times 5 is 50 million, and 10 million times 50 is 500 million, then 10 million times the $500 selling price of the iPhone has to be 5 billion, not 500 million as the author stated. Ok, maybe it’s a typo. However, when he further says:

“Or 2% of its 21.6 billion estimated total (2008 Revenue). Thus, a big part of the story is the Mac.”

The aforementioned string of incorrect statements leads me to believe that it’s not just a typo, but very sloppy work. Anybody slightly familiar with Apple knows that iPhone is expected to add 5 billion in revenues and 2.5 billion in profit next year, and It would stand to reason any editor proofing the article would notice those misstatements. I mean after all, why has Apple’s stock been rising the past six months on the tear that it has? Is all the frenzy around the Mac? Uh no. It’s the iPhone, Stupid. Additionally, “21.6 billion of its estimated total”??? Estimated 2008 revenues? Which Veverka incorrectly states 500 million is 2% of? Actually, the consensus sales estimate for 2008 is 29.2 billion from both ThompsonFN and Reuters. For FY 2007, which ends this September, is expected to come in at 23.7 billion. Trailing revenues in the last 4qtrs has been 21.6 billion which is not an “estimated figure.” That’s an actual or historical figure. After seeing the erroneous statements the article, the author, and Barron’s (only to very slight degree) lost credibility in my mind. It’s tough to listen to the Veverka’s points when one has the impression that he has no idea what he is talking about.
I must point out that Barron’s corrected the 500 million to 5 billion and 2% to 23% in the article posted online. Yet, the article’s major point is how less significant the iPhone is to Apple’s success than what the majority of people perceive it to be. That’s true if the iPhone is only 2% of sales, but totally ignorant when it’s expected to be a quarter of sales. Thus, the purpose of the article is really lost.
Veverka points out that Mac sales will be the key to maintaining the stock’s upward trajectory. I previously mentioned I can agree with that statement, but in a different aspect. Veverka seems to think (since iPhone sales will only be 2% of revenue) Mac shipments will have to bear the heavy lifting. My thoughts are that Mac sales will only be crucial on the margin. To explain, iPhone sales will be a major portion of revenue and also demonstrate the major growth, yet it that forecast is already priced into the stock. For the stock to head higher, Apple must exceed expectations. Since the iPhone expectations are already lofty, the source for upward surprise will have to be from the Mac side which is forecasted to only grow 15% (1.5 billion) next year. To set the record straight, 5 billion (most think more like 6-7 billion) of sales growth next year will be driven by the iPhone; only 1.5 billion of sales’ increase will be attributable to Mac sales. Apple’s stated goal is the 5 billion figure, and they are notorious for low-balling thus Wall Street has revision that number upwards in making their estimates. That leaves less room for an upward surprise in expectations. Yet, the 15% growth rate is conservative, and Apple will easily exceed and mostly likely grow Mac revenue 25% or 2+ billion next year. That will be the source of surprise needed to keep moving the stock and not the majority of the absolute sales dollar growth. In essence, contrary to Veverka’s opinion, the iPhone is largely important since its expected to make up the major portion of sales growth and a significant portion of overall revenues. Even though Mac sales will be a small portion of growth, increasing success is tantamount in keeping and increasing investor’s interest and expectations.