How to Profit from the Verizon iPhone

By , Associate Editor, Money Morning • @DavidGZeiler •

After three years of rumors, the Verizon iPhone has finally arrived.

Well, almost.

Existing Verizon Communications Inc. (NYSE: VZ) customers can pre-order the phone today (Thursday), with the long-awaited device going on sale to all on Feb. 10.

Of course, as soon as Verizon confirmed the existence of the iPhone Jan. 11 speculation turned from when the product would arrive to how many units would sell in the first year. Initial projections from analysts ranged from 9 million to 12 million handsets, although last week an analyst from R.W. Baird & Co. estimated the number of Verizon iPhones activated in the next three months alone could go as high as 25 million. Compare that to the 9 million iPhones AT&T Inc. (NYSE: T) sold in the second half of 2010.

Apple Inc.'s (Nasdaq: AAPL) own expectations for both the Verizon iPhone and the existing iPhone 4 remain ambitious. Apple in December upped its total 2011 shipment goal to 19-21 million units, according to DigiTimes.

While those numbers may sound large, there's still plenty of room for growth. In the U.S. market, the iPhone has snagged 25% of the 62 million-unit smartphone segment. Worldwide, Apple has about 4% of the total mobile phone market, and 17.25% of the smartphone segment.

Even for entities as large as Verizon and Apple, the almost unimaginable sales potential of the Verizon iPhone could provide a substantial boost to each company's bottom line.

Maximizing Market Share

With Apple expanding to two U.S. carriers, growth in the iPhone's market share is inevitable.

iPhones are Apple's most profitable segment and the main reason the company has grown as quickly as it has over the past three years. In fact, the product accounts for 53% of Apple's stock price, according to stock analysis site Trefis, which calculates the intrinsic value of the stock at $420 per share. (See accompanying chart)

Gross margins have fallen from more than 60% in 2007 to about 48% currently, but that still outdistances the gross margins of the Mac and the iPad, which Trefis estimates hover in the 30% range.

If you look at the trajectory of iPhone sales, even without the Verizon version, it's on a sharp upward curve. In the December quarter of 2008, for example, Apple sold 4.4 million iPhones. A year later it sold 8.7 million iPhones. In the most recent December quarter, Apple sold 16.2 million iPhones.

Indeed, Verizon stands to do very well with the iPhone. One of the biggest complaints from iPhone users over the past three years has been that AT&T's network is inadequate. That includes weak coverage, dropped calls, and difficulties downloading data.

Let's go back to that sales projection from R.W. Baird & Co. It was based on a survey of 1,000 mobile phone users in the United States. Of the existing Verizon customers, 37% said they definitely would purchase an iPhone in the next three months. Another 42% said they probably would.

Among AT&T customers, 6% said they'd get a Verizon iPhone, with 27% saying they probably would. About 5% of people using Sprint and T-Mobile said they definitely would buy a Verizon iPhone.

AT&T does have a few advantages over Verizon, however. For one thing, AT&T's network, while lacking Verizon's coverage, is faster. This Verizon iPhone isn't compatible with Verizon's next-generation LTE (Long Term Evolution) network, although the next model probably will be.

Another thing that could give mobile customers pause is that the Verizon iPhone won't be able to access the Internet while handling a phone call, as AT&T's network can. Nevertheless, Verizon's legendary network coverage is a big draw.

Baird based its projection only on the number of people who said they definitely would buy a Verizon iPhone, and then multiplied the percentages by each carrier's total number of customers. Verizon iPhone buyers do not include any of the respondents from the "probably" category.

Scouting Out Suppliers

Aside from Apple and Verizon, an assortment of smaller companies involved in supplying and assembling the parts for the iPhone should benefit from the product's phenomenal growth.
Although Apple does not make public its roster of suppliers and manufacturers, third parties have deduced many of them via product teardowns and periodic leaks.

And while the Verizon iPhone isn't yet available, analysts generally agree that it will contain almost all the same components as the previous iPhone 4 model, with the exception of the phone network circuitry.

That plum went to Qualcomm Inc. (Nasdaq: QCOM), with Apple snubbing Infineon Technologies AG (NYSE ADR: IFX), which makes the networking chips for the AT&T iPhone. That was the second recent victory for Qualcomm, which also will supply its Snapdragon chip to HTC for the Android-powered Nexus One phone.

According to iSuppli, which last year did a teardown analysis of the iPhone 4, the most expensive single component is the LCD display, which most likely comes from LG Display Co. Ltd. (NYSE ADR: LPL) or Toshiba Corp. (PINK: TOSYY). Both Toshiba and LG Display as well as Sharp Corp. (PINK: SHCAY) were mentioned this week in an iSuppli report that says Apple has invested $3.9 billion of its huge cash stockpile in long-term supply agreements with those three companies for LCD screens.

Also, the display is made of Corning Inc. (NYSE: GLW) Gorilla Glass - a thin, strong, scratch-resistant product that has proven popular among mobile device makers. Already it's used in 20% of the world's touch-screen handsets.

Perhaps the biggest beneficiary of the Verizon iPhone may be Samsung, which is manufacturing the Apple-designed A4 processing chip that powers the device in addition to supplying the phone's flash memory. Samsung is the global leader in memory chips.

The Korea Times last month reported that Samsung would quadruple the number of processors it ships to Apple. Amazingly, this means that half of Samsung's chip-making capacity will be devoted to Apple. In addition to the iPhone, Apple uses the A4 chip in the similar iPod Touch, the iPad, and Apple TV.

Broadcom Corp. (Nasdaq: BRCM) should be another winner. Broadcom makes the Wi-Fi and Bluetooth controllers, and is well-positioned to partake of Apple's successful family of mobile gadgets.

Finally, the two Taiwanese companies that will build the Verizon iPhone should reap rewards from the device's success. One is Foxconn Technology Co. Ltd., which builds many Apple products. The other is Pegatron Corp., a relatively new player that was spun off from ASUSTEK last year. Pegatron's version of the iPhone will go to Asian nations such as China, South Korea and Japan, all of which have significant CDMA networks, while Foxconn will build the Verizon iPhone for the United States.

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About the Author

Browse David's articles |

David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.

Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.

Dave has a BA in English and Mass Communications from Loyola University Maryland.

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