From Jan 2007: Motorola Short???

CIBC_Dec 21 2006.pdf
———- Forwarded message ———-
From: Chauncey Gardener
Date: Wed, Jan 10, 2007 at 7:44 PM
Subject: Motorola Short???
To:
Obviously, the whole world is talking about Apple’s iPhone. I was on the subway this morning and I all I could overhear people talking was about the iPhone.

RIM and Palm shares fell pretty heavily. I think Palm deserves to fall but I agree with David Pogue that the iPhone is still not a replacement for the Blackberry. Besides the QWERTY buttons being more comfortable, Blackberry’s enterprise support is the biggest advantage of RIM.

 

The stock fell about 10% because of the lower earnings projection before the unveiling of iPhone and the back story was covered on the front page of WSJ. However, after the unveiling of the iPhone, the situation is going to get worse for Motorola. The handset revenue/earning was expected to be grow a little before the earnings warnings. I think most of the analyst after that have assumed a flat revenue/earnings after the warning.

 

Couple of market stats:

  1. The global handset market is about a billion handsets
  2. In the US, total shipments are about 119M
  3. Motorola has about a 25% market share of the world handset market

Couple of Motorola related stats from the attached analyst report:

  1. In 2006, the Handset division generated 2/3rd of revenue ( i.e. about $28BN of $44BN)
  2. 70% of operating earnings ($3.2BN of $4.5BN)
  3. Motorola sold about 210M handsets in 2006
  4. Average selling price of a handset of about $135
  5. The cash margin contribution of an average handset is about 10% which translates to about $15/handset. A high end smart phone (RAZR, SLVR, KRZR) could have higher margins but lets conservatively assume it to be about $20/handset.

Couple of Apple iPhone related projections:

  1. Smartphone sales forecasts are about 200M by 2008
  2. Steve Jobs hopes to sell 10 Million phones by the end of 2007 . Also- see WSJ Report- Apple’s Phone- Is it worth it? Remember these are only half year projections since they plan to launch in June 2007.
  3. I think that just by the buzz on the street, internet, friends etc??? the launch/reaction has gone far better than anyone has expected. I think that they will meet their projections for 2007 and beyond.
  4. I think they will grow at least 50% in 2008 and sell full year handsets to about 30 million handsets.

My thoughts on the impact of iPhone on Motorola :

  1. If in 2008, Apple sells about 30 million handsets, Motorola would at a minimum be impacted on the current market share if not more. So, in 2008, Motorola will probably sell 10 million (Approx 30% of 30m) fewer handsets because of iPhone
  2. However, for 2008 and beyond, Apple will continue to be a constant fixture in the cellphone market and will take share of all the players and grab at least 10% of market share by 2009 and 2010.
  3. The 10% share translates to about 100-150M handsets for Apple which represents a loss of about 30-50M handsets per year for Motorola based on 30% share of the market.
  4. At a cash contribution margin of $20/handset, the loss in 30-50M handsets could lead to an overall cash contribution decrease of about $600-$1BN
  5. This cash contribution decrease will lead to a decrease in overall cash flow decrease of 15-30% on about $3.5BN of projected cash flow and a corresponding decrease in market cap and share price.
  6. The approximate present value of a perpetual loss of $600m-$1BN cash loss is about $6-$10BN assuming 10% discount rates. The current market cap of Motorola is $43BN

I know some of the impact is way off in the future so that is why I bought a put option expiring in Jan 2009 at a strike price of $20 for a cost of about $3.3/option

I have not looked at Nokia but I think the same thoughts may apply.

 

Love to hear anybody’s thoughts on this.

 

Thanks,

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