Tuesday, July 13, 2010

More On AAPL

AAPL shares are off 3% today after Consumer Reports issued a report confirming problems with the antenna on the latest iPhone 4 (no problems have been associated with older versions, like the 3G and 3GS). Notwithstanding the antenna problem -- which has led to its signal falling up to 20 decibels -- Consumer Reports placed the iPhone 4 at the top of its smartphone ratings due to its industry-leading display, front-facing camera, gyroscope and higher-quality video camera. But Consumer Reports is a well-respected product reviewer and will likely turn up the heat on Apple for an official response -- offering a bumper case for free or a discount, perhaps -- and a possible recall. Although the recall solution, in my opinion, is highly unlikely. Because 75% of consumers use a case anyway, a case solution to fix the problem seems the likely result.

Apple needs to fix this issue before the key back-to-school and holiday seasons. I believe it will do so, and even if the company recalls the phone, it is manageable from a financial point of view. Although a recall is highly unlikely, such an event would be manageable, costing roughly $100 million for the 2 million to 3 million iPhone 4s that have been sold since the launch on June 24 ($20 a phone mailing costs would be $40 million to $60 million plus the $1 fix for the antenna chip, plus labor). On a quarterly revenue run rate of $13 million to $15 million, a recall would be very manageable. So far there have been no change to build plans or demand patterns based on this issue; even if there is a slowdown to units sold, once the fix is in place, any demand lost should be made up. Estimates for the June quarter are for 7.5 million iPhones and 40 million for 2010.

I've added short-term calls today -- I believe this is a short-term issue and an opportunity to get into one of the best growth stories in technology. Shares remain attractively valued at 18.6 times 2010 and 15.6 times 2011 (very conservative) estimates.

long AAPL

No comments: