Apple’s iSlate overflows with expectations
What’s the iSlate worth? It’s not an easy question to answer, as Apple isn’t even confirming it’s got a tablet computer gadget in the works. But the market gives a rough guide to what Wall Street expects from the new device. Investors seem to be slapping an “iSlate premium” of some $25 billion on Apple’s value. Though Apple boss Steve Jobs’ skill at launching new products is unparalleled, meeting these hopes will be a tall order.
Since July, Apple’s market cap has jumped by $64 billion to $193 billion. The bulls have been stampeding over that time, but the tech company’s performance has been more than double that of the broader market. On that basis, Apple has added some $35 billion more value than it would have if it had paced the market.
Some of that has to be attributed to the iPhone’s success. But Apple currently trades at almost 23 times next fiscal year’s earnings while Research in Motion, the maker of Blackberry handsets, trades at 13 times even though their respective earnings are expected to grow at the same rate.
True, Apple routinely – some would argue deliberately – low-balls its own forecasts. And RIM has missed its projections multiple times. But even if Apple deserves to trade at, say, a 50 percent price-to-earnings premium, that leaves some $25 billion of value unaccounted for. Call this the iSlate premium.
While there’s clear interest in the device, growth will probably follow the path of the iPod rather than the iPhone. Handsets are close to a necessity, while content players – such as Amazon’s Kindle – are more luxuries. Still, assume Apple’s consumer halo translates into a 25 percent faster adoption rate than the iPod achieved.
That would imply sales of about 62 million tablets after five years. At Apple’s typical profit margins, the present value of these sales would be perhaps $22 billion, according to a study from Southridge Research. On that basis, Apple’s current market cap is just about warranted. But beware – this is not just a rosy assumption. IT doesn’t take into account the potential cannibalization of other Apple products.
Betting against Mr. Jobs is rarely smart. Few technology executives have a better grasp of where computing is heading and what consumers want. But should this be a rare misstep, it could leave a $25 billion lump in Apple’s investors’ throats.