Apple 2.0

Covering the business that Steve Jobs built

Piper Jaffray: Apple's earnings set to grow 25%-30% per year through 2015

February 23, 2011: 7:18 AM ET

The key, says Gene Munster, is the iPhone's addressable subscriber base

Source: Piper Jaffray

Apple's (AAPL) shares have dropped $24.52 (6.8%) in the past three trading days for reasons that have nothing to do with the company's underlying business. In a note to clients issued Wednesday, Piper Jaffray's Gene Munster tries to bring the subject back to Apple's fundamentals.

Most investors, he writes, believe Apple's earnings growth will slow to 15%-20% in 2012, and that's why shares are currently trading at 13 times his relatively conservative earnings-per-share estimate of $26.85 for calendar 2012.

But those investors, he says, are underestimating the company's opportunity to grow its mobile business over the next five years. Specifically:

  • He expects the iPhone, which represents 39% of Apple's revenues today, to at least keep pace with the smartphone's current growth rate of 35% per year and sell 200 million units in 2015. That implies that more than 40% of Apple's revenue stream will grow at the rate of 35% per year from 2013 to 2015.
  • He expects the iPad to grow faster than the iPhone, and the Mac and iPod to grow more slowly.
  • "The net," he writes, "is we believe a sustainable 25-30% growth rate in earnings could be achievable through 2015."

To support his model of iPhone growth, Munster looks at Apple's addressable market -- currently 1.7 billion potential customers -- in every country that sells mobile phones, from China to tiny Liechtenstein.

He makes the case that Apple is in a position to significantly expand its subscriber base. The nut graph:

In June of 2007 Apple launched the iPhone on a single exclusive carrier, AT&T, which had about 58m subscribers at the time. Later that year the company added several European carriers with about 100m subscribers collectively, also through exclusive contracts. Today, Apple sells the iPhone to carriers with over 1.7b subscribers collectively and does not carry any exclusive arrangements. But we believe Apple still has meaningful opportunity remaining to add to its addressable subscriber base. The recently added Verizon has over 90m subs, and with the launch of the CDMA iPhone, Apple could add China Telecom (also 90m subs) and Indian carrier Reliance (110m subs). We believe Apple could add China Telecom and/or Reliance to its list of carrier partners in CY11. In other words, Apple is just now tapping into meaningful subscriber bases in critical markets.

Also on Fortune.com:

[Follow Philip Elmer-DeWitt on Twitter @philiped]

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About This Author
Philip Elmer-Dewitt
Philip Elmer-DeWitt
Editor, Apple 2.0, Fortune

Philip Elmer-DeWitt has been following Apple since 1982, first for Time Magazine, and now on the Web for Fortune.com.

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