Wed, 13 Sep 2017
Brian Colello says he'll be keeping an eye on early sales of the iPhones, and he sees the firm as overvalued today.
Brian Colello: Apple had its usual product announcements yesterday with three big product launches. The first being the iPhone X, the second the iPhone 8 and 8 Plus series, and then the third is the new watch series 3 with LTE connectivity.
The iPhone X is coming in starting at a price of $999 for 64GB for the higher storage model, which will probably be higher selling for these more affluent customers that'll start at $1,149. When you tack on AppleCare at $199 it becomes a device that's $50 to $56 per month or in the $1,350 range. So we're starting to get toward MacBook pricing for these iPhones.
We think big takeaway from the iPhone event, particularly with this iPhone X is that Apple's really raising the bar on pricing and leveraging its narrow economic moat, its customer switching cost on these devices. Quite simply we don't think there's an Android competitor that could sell phones at these prices because they don't have the customer loyalty, the customer stickiness that Apple has.
The second main set of products is the iPhone 8 and 8 Plus. This is more similar to, let's call it a 7S or 7S Plus. Incremental improvements to the iPhone 7 from a year ago. Again, they even raise pricing here a little bit starting at $699 for the iPhone 8 versus $649 for the iPhone 7. One thing we'd like investors to keep in mind is the trade-offs between the iPhone X and iPhone 8 series. The iPhone X will be delayed until Nov. 3, so it's possible we get higher sales of the iPhone 8 early on. But vice versa in a normal product cycle in years past, an iPhone 7, you'd get the higher storage sales earlier in the process. We might not see that this time with the iPhone 8 because customers might be waiting to get the latest and greatest with the iPhone X. It's something we'll be looking forward to over the next couple month to see, not just demand for iPhones in general, but also any signs of product mix between the devices.
The third notable item from the launch was the watch series 3 with LTE connectivity. Apple Watch sales in general have certainly been good in terms of watch standards, it's a number-one selling watch worldwide. But maybe a little bit disappointing compared to what investors would have thought a couple years ago. Unit sales are not on par with an iPad, for example. So we're waiting to see, we continue to wait and see if there's been any new features or enhancements that will really drive mass adoption of the watch above and beyond what it's already selling. It's very possible that having cellular connectivity could do that for the watch, that it could really create buzz and create more mass market appeal than it already has. So we're very interested in this device as well. It's only $70 more for the cellular connectivity versus the base watch, so there's potential for some real watch gains there. That might be a source of upside for Apple over the next few months.
In general, with Apple trading about $160, we maintained our $145 fair value estimate. We're going to continue looking for signs in demand in the coming weeks. This is obviously an uncertain time as we wait for those pre-orders and initial sales. So we see Apple as a little bit overvalued today but still a high quality company.