Bernstein: Street Underestimating iPhone–So Sell AAPL

Confused by that headline?  So were we.  But that seems to be the message of a new report by Sanford Bernstein’s Apple (AAPL) analyst Toni Sacconaghi.  According to Barron’s Eric Savitz, Sacconaghi concludes:

  1. The iPhone is far more profitable than Wall Street thinks.
  2. There isn’t much upside to 2008 Apple earnings.
  3. Apple’s stock is fully valued (or, rather, “not especially compelling.”)

The first theory is provocative.  Can Apple really be generating $350 of operating profit per iPhone?  Our back-of-the envelope analysis after the price cut suggested that Apple only generates about $250 of gross profit per iPhone unit, which might put the operating profit around $150.  Sacconaghi thinks that AT&T’s payments back to Apple are so high that the profit per unit might be more than twice that–or way more than Wall Street is expecting. 

Sacconaghi thinks, in fact, that Apple will generate $1.1 billion of iPhone profit and sell 6.8 million units in 2008.  He uses this as justification for raising his 2008 earnings estimate to $5.00, more than 10% above the Street’s $4.50, and his price target to $175.

Sacconaghi isn’t bullish about the stock, though–because Apple’s already trading at $168.  Which means that the $7 of upside will deliver a return of 4%–or less than a Treasury bill.  Any investor who thinks that Apple can only hit $175 over the next year should sell it (why take single-equity risk when you can get the same return from a riskless security). 

So this, in turn, suggests something else: Wall Street doesn’t really think Apple will only earn $4.50 next year, or the stock probably wouldn’t be trading anywhere near $168.   In fact, Wall Street probably thinks Apple will earn at least $5.00, with, perhaps, a lot of the upside coming from the iPhone.  If Sacconaghi is right that there isn’t much upside to his new iPhone numbers, this means Wall Street is vastly overestimating the potential for Apple’s Macs and iPods. Right?  (Toni?)