AAPL: Think Thoughts on Apple

Orlando, FL 11/23/11 (StreetBeat) --We are intrigued by industry chatter of a "plug-and-play" Apple iTV. Our checks suggest the project is real, but hard to tell when it will come. We view Apple's (Nasdaq: AAPL) potential entry into the TV market as similar to their entry into our estimated $150B+ cell phone market with the iPhone in 2007. We view the project as key to adding another material upside driver to our $34 FY12 EPS estimate. We expect a new iPhone form factor and the iTV tio be mid-to-late CY12 drivers, and expect the stock to be in a trading range near-term.

KEY POINTS:
A sizable opportunity. DisplaySerach estimates the flat panel TV market at ~ 210M annual units, with no clear leader as revenue share is split between Samsung (23% share), LG (14%), Sony (12%), Panasonic (9%) and Sharp (7$). If we assume an $800 ASP, we get to a $168B global market for TVs.

Why does Apple need to play there? Apple's current AppleTV product is quite compelling to us, but has not as of yet "crossed the chasm" from the "science fair" stage to mass markets. We believe that is due to the multi-step set-up procedure, that requires more than a casual comfort with IP/Audio Visual equipment. We think Apple's opportunity lies in its ability to create a "full-blown"/"plug 'n play iTV which, in Steve Jobs' words, "just works".

Similar to the iPhone, Apple can add value. The set-up reminds us of the iPhone --- the company tried with small steps (remember the Motorola ROKR?). If they want to get it done right, they have to do it themselves? Now, five years after the original iPhone launch, Apple owns an estimated 23% of the cell phone industry's revenue and 56% of its profits, according to ThinkEquity LLC estimates.

Can they scale? We think so. Our first take was that Apple's margins would take a hit. Indeed, market leader Samsung reports operating margins in the low-single digits. We think Apple's purchasing power, including a "special relationship" with GLW on the glass side, can lead to similar industry leading scale as the iPhone. We point to Apple's $8B capex plan for FY12 up from $4.6B in FY11 as a sign than Apple is up to something significant.

What will it look like? We guess an iTV would look similar to an iMAC --- but who knows? Our industry checks confirm Apple is up to something here -- several suggest speech recognition is a key part of Apple's strategy. We are concerned at the margin that without Steve Jobs, the product and more importantly putting together the "coralling" of content support may prove challenging.

Estimate $2 of EPS power for every $10B of sales or 5M units at $2K per. If we assume 40% gross and 30% operating margins (in-line with Apple's corporate margins for FY12E, we see up to $4 of EPS power in the 2014 time frame should Apple achieve 12% revenue share of our estimated $170B TV market.

Maintain Buy. We view Apple as the best large cap play on smart phones and tablets. Our $450 price target is based on 13x our FY12 EPS estimate of $34. We look for a new iPad early next year but more importantly an iPhone5 (mid-year) and iTV for potential upside to our new forecast. Near-term we maintain our view that AAPL's December guidance was uncharacteristically more aggressive the past periods.

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