This morning, thousands of enthusiastic fans crowded the stores of Apple Inc. (NASDAQ:AAPL) who went to purchase or see the new iPhone 5 as the company kicked off its worldwide sales today. Today the product shipped in the US, UK, Canada, France, Germany, Australia, Japan, Hong Kong and Singapore. Next Friday, Apple will launch in more than 20 additional countries and the product will be available in 100 countries by year-end.
What’s more exciting to see is that the advance booking for iPhone 5 started online on last Friday (9/14), and in 24 hours the company booked 2 million preorders, that’s double the amount of iPhone 4S.
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According to Barclays Equity Research, customer lines began to form on September 17th – four days before the iPhone 5 became available in the store. By looking at the current demand conditions of iPhone 5, Barclays equity research believe that iPhone sales this weekend should far surpass prior sales records, although they acknowledge the risk that supply constraints and stock-outs could cause the record figure to actually be lower than it really should be. If we just recall, last year the iPhone 4S sold 4 million units in the first weekend, when the phone was unveiled in seven countries (vs. nine at this launch, expanded to include Hong Kong and Singapore).
From a product perspective, Barclays believe that concerns around shortfalls in the new maps app and the need for new adapters are overblown. They think Apple Inc. (NASDAQ:AAPL) will improve the maps application and Google will likely offer an app in the near future. Furthermore, the Fly Over function has a “gee whiz” aspect that should please some users.
In terms of the need for adapters, Barclays acknowledge the frustration that could follow – but expect Apple Inc. (NASDAQ:AAPL) to benefit from sales of accessories as well. New features for the iPhone 5 include faster network speeds, a faster processor, thinner & lighter design, a new connector, improved camera features, a bigger 4” screen, Siri improvements and turn-by-turn navigation. The product is available in black and white colors. Partners include existing carriers in the US: AT&T Inc. (NYSE:T), Verizon Communications, Inc. (NYSE:Z) and Sprint Nextel Corporation (NYSE:S) and eventually 240 worldwide.
Overall, the product reviews have been very positive. Barclays believe the concerns over two features – maps and the connector – are overdone. On maps, the first concern is that usage will be limited by the lack of public transportation directions, the lack of a Google street view equivalent, and conflicting anecdotes regarding the quality of the actual directions. However, Apple’s app does have a few advantages such as voice activated turn-by-turn navigation (voice is only available on Google’s Android Maps app) and Fly Over, a really neat new feature. Moreover, users who are very bothered by the change could also access Google Maps through Safari, though this is likely a suboptimal solution. Over time, they look for Apple Inc. (NADAQ:AAPL) to continue to improve Maps.
On the connector, the pushback is that the entire ecosystem has been built around the 30-pin connector: changing this spec forces customers to buy an adapter. While clearly customers do not welcome the change. According to Barclays, the alteration sets up for Apple Inc. (NASDAQ:AAPL) to deliver ever-thinner devices for the next several years – extending advantages in the form factor. Note that the 30-pin connector had been in use since 2003, which adds credibility to the assertion that Apple does not needlessly force changes on its customer base. Also, the growth of AirPlay and BlueTooth will reduce the demand for physical connections going forward. The silver lining is that Apple and its partners will likely see a surge in sales of new accessories, which helps drive revenues and profits.
Barclays’ price target of $810 reflects their view that Apple Inc. (NADAQ:AAPL) can extract more profit from competitors in key growth categories. Their target is based on a market multiple of 13x our FY14 EPS estimate of $62.10. Their 13x multiple is slightly above AAPL’s 2-year average forward multiple of 12.1x, but is only in line with the market.