Charlie Wolf invokes “Diffusion of Innovations” in raising his Apple price target to $540
In Everett Rogers’ classic text on how innovations percolate through societies, he describes how hybrid corn, despite 20% higher yield and resistance to drought, took two decades to become ubiquitous in the farms of Iowa. High-tech innovations spread more quickly these days, but they too follow Rogers’ S curve, from early adopters to mainstream use to late adopters.
Needham’s Charlie Wolf invokes Rogers’ treatise in his semiannual reevaluation of Apple (AAPL), issued Friday in a note to clients that announced he was raising his 12-month price target to $540 from $450. The ultimate size of the tablet computer market, and the iPad’s share of that market, are key to Wolf’s revised valuation because it is based of several new assumptions:
- That going forward the iPad, not the iPod, will be the the main source (along with the iPhone) of the halo effect that drives the Mac’s market share. The theory is that Microsoft (MSFT) Windows users who buy iPhones or iPads are even more likely to switch to Macs than iPod owners were.
- That iPad sales to new users will grow steadily for the next five years, peaking in 2016 at nearly 54 million units.
- That the iPad’s growth curve will end up being less like the Mac and the iPhone — which have small shares of very large markets — and more like the iPod, which continues to command a better than 70% share of the MP3 player market.
- That by 2020, the iPad will still be shipping nearly 140 million units a year and commanding a 60% share of the tablet computer market — considerably higher than conventional wisdom. Gartner, for example, has the iPad’s market share slipping to 47% by 2015 under the onslaught of copycats running Google (GOOG) Android and other tablet operating systems.
“We disagree with pundits who have predicted that the iPad will rapidly lose share to Android tablets,” Wolf writes. “There are over 100,000 applications written for the iPad compared with a few hundred written for Android. Unlike a smartphone, which is multidimensional, a tablet’s a blank slate without applications. Its value lies in the consumption and to a lesser extent the creation of content, but only marginally in communications. From a distribution perspective, then, the tablet is not naturally aligned with the carrier distribution network, which has been instrumental in the rapid growth of Android smartphone sales. Carriers are likely to play a limited role in the distribution of tablets compared to the consumer electronics retail channel. Our view and revised forecast, then, assumes that the trajectory of the iPad’s market share will more closely resemble the iPod’s rather than the iPhone’s.”
Below: Wolf’s revised Apple model and his forecast for iPad sales.
