Analysts starting to realize Apple has a brand new source of revenue

Bloomberg posted an article yesterday noting that iPhone service fees are prompting analysts to revalue Apple's earnings. Those who have been reading my Analyzing Apple reports will already be up on this trend, but apparently some financial analysts are just now realizing that yes, wireless carriers really are selling their souls to Steve Jobs to carry the iPhone, and that those tributes are going to bolster Apple earnings over the next few years.

Now I've got to apologize to readers for my lateness in posting the July Analyzing Apple report and getting the October/November one published (they're both coming -- really!), but even if you go back and read the June Analyzing Apple report, you'll see this little bit of info at the end:

Hidden revenue justifies a higher P/E ratio. Apple announced in April that it would recognize revenue from the iPhone and Apple TV hardware sales over 24 months. This means that iPhone and Apple TV sales will largely appear on Apple’s balance sheet for the next couple years instead of in its income statement. Blackfriars believes that this hidden and guaranteed future revenue justifies raising the P/E ratio that we use to calculate target stock prices to 35 from 30. We fully expect Apple stock to reach those new targets of $131 in FY07 and $161 in FY08.

And as you can see by those low price targets, that was before Apple's highly-successful US iPhone launch, blew out its Q4 FY07 quarter, and forecast a rosier-than-expected Q1 FY08.

So are those $250 price goals ridiculous? Well, here's a pretty good clue from a Dow Jones report today titled "Consumer electronics seen taking share in holiday spending":

"We believe this Christmas season could be dominated by three major categories within the consumer electronics space: flat-panel televisions, videogames/accessories, and Apple-branded products," said Credit Suisse analysts in a recent note to clients.

They see a similar pattern unfolding as in 1998, when the popularity and affordability of the personal computer likely stripped away demand for more traditional holiday items such as apparel and accessories.
This year, it is the desirability, variety, and pricing of such items as flat-screen TVs, Apple Inc.'s latest iPod models and its iPhone, and videogaming systems that could create a consumer electronics-skewed holiday season, according to Credit Suisse.

The fact that Apple-branded products show up -- the only consumer electronics products specified by name -- in the top three most in demand consumer products suggests that Apple's holiday sales will be above what many expect. And with November iPhone launches occurring in the UK, Germany, and France, and the Euro-to-dollar exchange rate rising, Apple is developing a recurring revenue stream that no one really has historical data for, yet we believe that this revenue stream will add billions of dollar to its balance sheet each quarter.

So here's a rule of thumb I've come up with to provide a handle on Apple earnings, based upon my own models.

In very rough numbers, each million iPhones sold adds about $0.02 per share to annual earnings, $2 to Apple's target stock price, and $350 million to its balance sheet.

Looked at this way, if Apple sells ten million iPhones next year, just those iPhones will have added $0.20 to its earnings, $20 to its stock price, and almost $3.5 billion to its cash horde to pay for future earnings. And of course, the iPhone is only one -- and currently the smallest -- of Apple's four lines of business. So unless Apple stumbles somewhere along the way, those $250 price goals that analysts are quoting aren't ridiculous; they're just based on revenue streams and deferred revenue that aren't immediately obvious.

Full disclosure: Despite the nearly 10% drop so far today, the author still owns Apple stock. And for those investors agonizing over that drop, here's some encouraging news: the queue to buy iPhones in the UK tomorrow has started forming at the Regent Street store in London, 24 hours in advance of sales.

UPDATE: For a point of view that makes me look like a sour Apple pessimist, check out this commentary on the same article citing Stephen Coleman (referred to incorrectly as Stephen Capital), an analyst who is predicting Apple stock will hit $600 in 18 months.

UPDATE 2: Under the topic of more good news from Europe, I missed this earlier, but Deutsche Telekom CEO Rene Obermann was quoted today as saying that he fears that iPhone demand in Germany may actually outstrip supply there.

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