A Look Inside Gene Munster's Crystal Ball

Posted by: Peter Burrows on June 07

Piper Jaffray analyst Gene Munster has made a lot of big calls about Apple in the past few years—in particular, the time in November, 2004 when he was the first to suggest AAPL shares could go to $100 based on burgeoning iPod sales. The stock was at $52 at the time.

Now he’s at it again, becoming the first analyst I’ve seen to really take a stab at the long-term impact of the much-hyped iPhone. Based on reporting in recent days for our story this week, my sense is that other analysts have been holding their fire, not wanting to say what they’re thinking about the iPhone’s potential and thereby add to the hype. That’s commendable, I suppose, given all the unanswered questions—about whether the phone will work as advertised, about Apple’s product strategy to get to more consumer-friendly prices in coming years, about whether other carriers will want to sign up with Apple, etc. As such, most analysts have been content to peg their numbers to Steve Jobs’ promise to sell 10 million iPhones by the end of 2008, at least until they see the initial reception to the iPhone when it goes on sale on June 29.

More after the break:

Now, I think Munster will open the floodgates for other analysts to publicly air what they might privately be thinking. True, most of the analysts I spoke with think Munster's belief that Apple can sell 43 million phones in 2009 is over the top. That would imply that Apple goes from zippo to 30% or more of the smart phone market in two years; Nokia, Moto, RIM and others might have something to say about that. But most seem to believe that 20 million is doable in 2009--and none were quite willing to totally dismiss the idea that the number could rise to 30 million.

“I can’t say we've spent an awful lot of time analyzing 2009; Apple is always hard to forecast out more than 12-18 months, because you never know what new products they'll come up with," says Goldman Sachs analyst David Bailey. "But there’s no reason to think that Apple can’t continue to take share in an increasing market for smart phones, based on its leadership in software and user interface. They’re filling a gap in the market that is quite large at this point."

If any of these iPhone dreams come true, we're talking about a growth tear that could make recent years look like a warm-up for Apple's real golden age. After all, it's one thing--a remarkable thing, to be sure--for Steve Jobs to take a dying $6 billion company, scale it back to its essential parts, and be ready to take advantage when a hit product like the iPod comes along. But if Munster is even close to right, this company will maintain growth rates of more than 20% early next decade, even as it blows past $30 billion and heads for $40 billion. That kind of growth is pretty much unheard of for companies of that size in corporate history. Other than Wal-Mart and a handful of companies that grew by acquisition, almost every company saw a big slowdown in top-line growth as they got this big. As Munster says, "I think Apple's revenue growth goes vertical in 2009. This is a company that is turning the physics of large company growth on its head."

Which brings me to one last interesting aspect of Munster's call. He's suggesting that investors will be so keyed in on iPhone unit sales that they will pretty much ignore Apple's decision to account for iPhone sales as if they were software (that is, booking a portion of the sale each quarter for two years, rather than when the cash register rings). That will give another psychological boost to AAPL shares, as if one were needed--because Apple's top-line growth would be truly stratospheric if one calculated sales by pure unit sales in 2009. By Munster's count, Apple would grow 43% that year! This in a world where most 31-year-old tech giants struggle to grow even 10% (Unless I'm missing someone, Cisco would come in second on the tech old-timers' sprint list if it hits its goal--of growing 15% a year.)

So is Munster nervous about walking so far out on a limb on this closely-watched stock? If so, I couldn't tell. "When you look at the numbers for 2009, it's pretty easy to be bullish--because I don't think the rest of [Wall] Street hasn't gotten its arms around what's likely to happen."

To be sure, Murphy's Law has laid to waste many well-laid plans, so I think investors have it about right: they've pushed Apple's stock from $60 to $126 in the past year, but much of that can be justified based on the Mac and iPod businesses. But here's the goofiest thing. If Apple does in fact sells 45 million iPhones in 09, then its "booked" earnings (as opposed to "ratable" earnings that Apple will use in its own quarterly announcements, using its new subscription accounting method) would be well north of $6 a share. If one applied its typical trading multiple of 40 in recent years to that, Apple shares would be worth a whole lot more than Munster's target price of $160. How much higher? Try $240.

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