Chatting with a Canadian analyst, Cupertino execs offer hints about Apple's future plans

Rendering: Piper Jaffray

Apple executives (AAPL) have strict rules about not discussing products that the company has not announced. But they'll talk about market opportunities, as three of them did on Thursday at a special event for RBC Capital. And sometimes that's enough to discern what direction the company is heading.

In a report to clients issued Friday, RBC's Mike Abramsky ticks off the key takeaways from his meeting with Eddy Cue (vice president for iTunes and Internet services), David Moody (vice president for worldwide Mac marketing) and CFO Peter Oppenheimer.

What caught my eye was what they had to say about where they did — and didn't — see opportunities in digital content. They were talking about Apple TV, but it was as if they were thinking about future tablet computers.

Here's what Abramsky reports, in analyst shorthand, about that portion of the conversation: More

Images: Apple Inc., RIM

In a report to clients Tuesday, RBC Capital's Mike Abramsky takes a long (92 page) look at the "huge, nascent and underpenetrated" smartphone market and concludes that the emergence of devices like the BlackBerry and iPhone represents the next wave of computing — "as profound as the historic technology shift from mainframes to PCs."

Among his predictions:

• Smartphone penetration is likely to grow three fold over the next three years, to 504 million users in 2012 from an estimated 165 million in 2009. That's a 35% increase from his previous estimate of 395 million smartphones by 2012.
• Unlike the PC revolution, which was dominated by horizontally integrated platforms like Microsoft's (MSFT) DOS and Windows, the spoils of this one are likely to go to vertically integrated smartphone makers through the “special sauce” they employ to create unique, iconic user experiences.
• The most successful challengers — he singles out Research in Motion (RIMM), Apple (AAPL) and with less certainty, Palm (PALM) — could double or triple their revenues by 2012.

Almost as an afterthought, Abramsky raises his price targets: RIM to $150 from $100; Apple to $250 from $190; Palm to $25 from $18.

But the real value of the report may be in the rich collection of charts showing the scale of the potential market, the rate at which Abramsky expects it to grow and who he expects the winners and losers to be.

A sampling below the fold:

More

Those 1 million iPhone GSs sold last weekend represent a "remarkable achievement," writes RBC Capital's Mike Abramsky in a note to clients issued early Tuesday, especially considering the new iPhone's relatively narrow international distribution (8 countries vs. 21 last year).

But according to Abramsky, it's the old iPhone 3G — newly priced at $99 — not the new 3GS, that will drive global sales this fiscal year.

"While early buyers appeared to favor the iPhone S," he writes, "the $99 iPhone is expected to drive 30-40% momentum improvement, in countries like UK, Germany, France, and other parts of Europe and Asia where phones are more highly subsidized (on contract) and prepaid is popular (e.g. ~60% prepay in UK, ~90% in emerging markets like India)."

Abramsky expects Apple to sell 20 million iPhones in fiscal 2009, 64.5% of them the older 3G models. By his estimates the new 3GS won't dominate sales until fiscal 2010, when he expects Apple to sell 30 million iPhones, roughly 60% of them 3GSs. See chart and spreadsheet below.

On Monday, Apple announced that it sold 1 million iPhones 3GSs in three days of sales. The company has not released the number of iPhones 3Gs sold since that device's price was lowered to $99 from $199 on June 8.

We got a call Friday from Mike Abramsky who wanted to set the record straight — and crow just a little bit.

Last February we chided Abramsky, an analyst at RBC Capital Markets, for seemingly wrong-headed calls on Apple (AAPL) and Research in Motion (RIMM).

Three weeks earlier he had lowered his price target for Apple from $140 to $70 a share — below all the other analysts' — and raised his RIM target from $45 to $75.

But as luck would have it, Apple ended up climbing 27.5% to just under $100 a share, and RIM, after issuing an earnings warning, fell 14.5% in one day, to below $50 a share.

Those were short-term movements, however, and Abramsky — who has since raised his target on both stocks (Apple to $165, RIM to $90) — was calling to point out that while Apple's shares have risen an impressive 51% since Jan. 1, RIM's have done even better, climbing 81% for the year.

"We were wrong about our Apple valuation," he admits. "But we were right about which stock would outperform the other."

Abramsky these days is bullish on both companies, and had interesting things to say about what each has in store for this summer and fall.

RIM, he says, has at least a dozen smartphones in the pipeline — mostly extensions of its current lineup reconfigured for release with new carriers.

For example, there are new versions of the BlackBerry Bold and Flip coming to Verizon (VZN), and a version of the Curve 8900, which had a good run with T-Mobile (DT), coming to AT&T (T).

But there's also the product code-named Pluto that's half touchscreen and half keyboard, a phone with a slide-out keyboard, and a new version of the touchscreen Storm that has solved the first edition's awkward typing problems, according to carriers who have seen it.

Apple, by contrast, is sticking with its usual lean and stripped-down product line-up. Abramsky sees no more than three iPhones in Cupertino's near-term offerings:

• A "pro" iPhone with more memory, a better camera, perhaps a flash, and a host of other improvements users have called for
• A price cut on the current iPhone, to perhaps as low as $99 — which he says could significantly boost the device's global market share
• A smaller, entry level "nano" iPhone, but not before next year

"It's not really about Apple versus RIM," he says. "It's not a zero sum game." The two companies have "unique technology skills and focus," he says, and they appeal to different sets of users.

According to Abramsky, the BlackBerry will continue to draw "productivity centric" users who care about security, push e-mail and what he calls "purpose-driven browsing" (for example, looking up a phone number).

"Media centric" users will tend to prefer the iPhone, which Abramsky describes as "unmatched" in terms of Web browsing, iTunes integration, breadth of applications and general user experience.

Together, he says, Apple and RIM will drive the next wave of mobile handset sales — which he believes have shifted irrevocably from cellphones to smartphones — and continue to take market share from Nokia (NOK) and Motorola (MOT).

"This is almost Apple's second chance to dominate the industry," says Abramsky, who has been around long enough to remember how the Mac, once overtaken by Microsoft (MSFT) Windows, never caught up.

"Here in the mobile handset market Apple has such a strong sustainable advantage that one could argue that it will continue to dominate and gain market share."

So hats off to you, Mr. Abramsky, for owning up to your mistake, for reconsidering your valuations and for imagining markets broad enough to allow both RIM and Apple to prosper.

But for the record, in the four months since you made that Jan. 16 call on Apple, its shares, which closed at $129.19 on Friday, have actually outperformed RIM's ($73.77). See chart at right.

See also:

• Mike Abramsky's bad Apple advice
• Mike Abramsky's bad RIM advice
• Apple's Q2: Analyzing the analysts

I hate to pick on any particular analyst — especially one with as good a track record as RBC Capital's Mike Abramsky — but this is hard to resist.

When we last visited Mr. Abramsky, he had issued a price target for Apple (AAPL) of $70 — the lowest of all the analysts who track the stock — three weeks before the shares shot past $100. See Mike Abramsky's bad Apple advice.

Well, he's done it again, only on the other side of the trade, and this time with Research in Motion (RIMM), maker of the BlackBerry — the iPhone's chief competitor.

On Jan. 20, two business days after he downgraded Apple to "underperform," Abramsky upgraded RIM to "overperform" and raised his price target from $45 to $75. (link)

This morning, three weeks and a day later, RIM issued a warning that its fourth quarter earnings and margins will be coming in at the low end of its prior guidance — and well below the Street's expectations. (See here.) The stock opened at $50.20, off nearly 7 points, and closed at $48.76, down 14.5%.

As an aside, last week, Abramsky was the co-recipient of iPhone Asia's tongue-in-cheek Dean ("Animal House") Wormer award for bad advice. His firm's initials, of course, stand for Royal Bank of Canada, and the publication was suggesting that Abramsky was favoring a Canadian company (RIM) over an American (Apple). See here.  I find that hard to believe. Neither Abramsky nor RBC Capital's spokespeople has responded to our requests for comment.