The Case For VZ

Verizon, via of its Verizon Wireless joint venture with Vodafone Group, is the nation's number one provider of cellular services when measured by subscribers. 

Trading at a p/e (ttm) of 16.22 at Friday's closing price of $31.63, the company is paying an annualized dividend of $1.90 or 5.90% cash yield on the share price. Valued at a slight premium based on p/e and dividend yield than its rival AT&T, both companies are components of the Dow Jones Industrial Average. Both telecoms are experiencing rapid change in their markets as US consumers unplug traditional landlines in favor of wireless communications.

Verizon may have committed one of the big technology blunders of the decade when it passed on the Apple iPhone. Either Verizon didn't see the potential for the iPhone or didn't like Apple's original revenue formula for the device. AT&T has been growing its wireless customer base and the much-desired data plan customer base in part at Verizon's expense due to AT&T's exclusive arrangement on the iPhone.

The good news for Verizon is the iPhone blunder can be put in the company's past through a deal with Apple for the highly popular iPhone when AT&T's exclusive on the device expires sometime in 2010. It's in Verizon's best interest to pursue a deal with Apple for the iPhone, the much-rumored Apple tablet device or both products in 2010.

Verizon's need for the iPhone to more effectively compete with AT&T and stop the defections of current and potential data plan customers makes a deal with Apple not only preferable, but a near necessity for the next year. 

For AT&T there's no escaping the public's perception Verizon offers a superior quality service to customers. AT&T is racing to add and expand infrastructure as quickly as possible to meet the growing needs of iPhone users and address what are believed to be glaring service issues.

In my opinion Apple will not end 2010 without a deal with Verizon for the iPhone and perhaps the forthcoming Apple tablet device. I see a likelihood of a deal by summer. For AT&T the end of exclusivity may not be welcome news, but the company can leverage its existing relationships with iPhone customers through enhancements to the services provided and use what the company has learned about Apple's customers to continue to grow its wireless business.

For investors with low risk thresholds or investors looking for a balanced return (dividend yield and share price appreciation potential) both Verizon and AT&T may be attractive plays. Both offer an opportunity to profit from Apple's iPhone success without the risk of a high beta investment in Apple. In my opinion AT&T will continue to benefit from its relationship with Apple whether the iPhone is exclusive or non-exclusive and Verizon may represent a future iPhone play that can be acquired now. 

The iPhone Unit Sales Forecast Conundrum

Forecasting iPhone units sales for Apple's 1st fiscal quarter is quite a challenge. Coming off a sensational September quarter performance, there are no historical data points that can be relied on to develop an earnest estimate for the December quarter.

I expect an expansion of global channel inventory from about 2 million units to about 3 million units as many more global points of purchase become available and product is provided to meet the demand of consumers. I also expect the chronically constrained supply that had hampered sales to have been resolved in October. 

Still, the pace of consumer sales and activations from the September quarter should have carried into this quarter even before holiday seasons sales become a factor.

For these reasons I'm currently estimating 8 million iPhone units sold in the December quarter, subject to revision as anecdotal information and sporadic published reports provide evidence to the pace of sales between now and the end of the year. 

FQ1 Mac Unit Estimate Revisited

I'm holding firm on my estimate of three million Mac units shipped in the December quarter (Apple's 1st fiscal quarter 2010). This estimate suggests a sequentially flat quarter for Mac unit shipments and a year-over-year gain in unit sales of almost twenty percent. My estimate is based on continuing strong demand for the MacBook Pro line beyond the September quarter and high demand for the recently refreshed iMac line of desktop computers

It was an unusual step for Apple to refresh the iMac at the beginning of the December quarter, departing from a past practice of updating the iMac line in January, in concert with the annual IDG Macworld Expo. Refreshing the line in time for Christmas will capture seasonal sales as well as sales normally postponed into January in anticipation of a product refresh. The December quarter refresh also allows Apple to fill out channel inventory to between four and five weeks of supply provided the company can keep pace with product demand for the iMac.

While air freight costs of moving iMacs quickly from manufacture to distribution is anticipated to pinch margins just a bit in the quarter, ASPs should remain attractive on the three million units to be sold. 

The Demise of Dell

I've been heralding the demise of Dell Inc. for a number of years now.  The company that began the vicious PC price war in the mid-90's is succumbing to its own failed strategy. 

Dell's quarterly results released today confirmed the company is on the fast track to oblivion, unable to maintain price and margin control and having destroyed whatever remained of the company's brand value.

Over the past several years Dell Inc. has spent almost as much money buying back shares (almost $28 billion) as the company is now worth (about $30 billion) in a desperate effort to increase earnings per share that could not be achieved organically from operations. The company is a shell of its former self.

Dell's slide is so pronounced it has now been replaced as the world's #2 PC maker by Acer which has experienced explosive sales growth in part at Dell's expense. Once an industry titan through production efficiencies and a sell-direct model, Dell now languishes due to a lack of innovation and a consequential lack of unique, distinguishing products. 

Dell's management is counting on a rebound in enterprise spending to shore up the company's moribund revenue and profit performance. The company may plug along selling technology products and services but it's now outclassed by major rivals such as HP and Apple that have chosen to invest in developing innovative products as a means to improve performance, maintain higher margins and enhance the perception of brand value to customers. 

Dell's shares traded down over six percent after hours following the release of the company's most recent quarterly results that reflected a fifteen percent drop in revenue and a more than fifty percent drop in earnings. 

The Droid (Part II)

I see the Droid as a competent product suffering from a disastrous marketing and advertising effort on the part of Verizon. More important than competing with the iPhone, Verizon needs to move existing customers from conventional cell plans to revenue rich voice and data plans. That's been lost in Verizon's marketing attack. Comparing the Droid to the iPhone is a loser. Positioning the product for existing customers as a step up from their current experience would have been a much more effective marketing plan.

The Droid is not an iPhone competitor (at least not yet). Both AT&T and Verizon are suffering from an accelerated loss in revenue from traditional landline customers as consumers move to handheld wireless solutions. Positioning the Droid as an attractive option for Verizon's tens of millions of wired and wireless customers would be far more effective than for the company to be seen smarting over AT&T's iPhone success.

iPhone unit sales growth continues unbated. The Droid needs to be positioned not so much as an iPhone competitor, but as an attractive solution based on its own merits for consumers interested in migrating from a conventional cell phone handset to a smartphone solution. Verizon has a rich field to mine with its existing customers and far more to gain by selling the benefits of the Droid to existing customers independent of the iPhone's success.

The Droid

Accompanied by an expensive ad campaign, the Droid has hit the market. It's a step up in the continuing market migration to smartphones and products available for consumer purchase. But it's not an "iPhone killer" and any effort to position it that way will lead to disappointment and may actually be a disservice to the product and works against its consumer adoption.

In my view Verizon is miffed. The company's primary competitor, AT&T, is taking market share via of the iPhone. The problem Verizon has created for itself is positioning the Droid in its ads to compete directly with the iPhone. A better approach would be to release the Droid based on its merits as another smartphone option for consumers.

Verizon does not have a lock on the Android smartphone market and will be competing with other smartphone service providers offering similar fare. The loser in the market isn't Apple and the iPhone, it's first Microsoft and the Windows Mobile platform and to a lesser extent RIM and the BlackBerry line of products. Apple is gaining ground on RIM and Windows Mobile is losing share by the minute.

Android 2.0 offers a compelling list of features. For consumers choosing to remain tethered to Verizon as a primary determiner in choosing a new smartphone, the Droid with Android 2.0 may be an attractive choice. But I don't think it will materially slow defections from Verizon to AT&T this quarter by consumers interested in the iPhone.

I think Verizon has made a huge marketing mistake in choosing to position the Droid in direct competition to the iPhone. It would be more effective in my view to position the Droid for everything it is, not what it isn't. The direct comparison has done little more than alert consumers the iPhone isn't coming to Verizon anytime soon. The ad campaign is as apt to sell more iPhones for AT&T as it is to sell Droids to existing Verizon customers.

Android 2.0 will be available on a number of handsets offered by multiple service providers. Price competition is inevitable. Verizon at this point is doing nothing to position the Droid effectively in what will be a highly competitive environment between carriers offering similarly featured phones. There's less wrong with all of the coming Android-based phones than there is in the way Verizon is positioning the Droid.