Now that new HP CEO Meg Whitman has decided to keep the PC business rather than spin it out as her predecessor Léo Apotheker had proposed, HP appears to be heading back, however slowly, toward the kind of stability for which it had long been known.

But can it still perform? Bernstein Research analyst Toni Sacconaghi took the opportunity to examine the company’s business units and finds that, yes, the prospects for growth aren’t unreasonable. The current portfolio of HP’s business, he estimates, is likely to grow its sales organically by a combined 2.5 percent on an annual basis going forward. Add to that additional growth from the planned shifts toward higher-margin IT service, networking and software businesses, and the picture gets brighter, Sacconaghi writes in a note to clients issued yesterday. HP, he argues, should be able to grow its per-share earnings by 9 to 10 percent annually over the next three to five years.

Part of his assumption is that HP uses about $4 billion of its $8-$10 billion in annual free cash flow for share buybacks, which will help goose earnings on a per-share basis by reducing the number of outstanding shares; plus another $3 billion annually for acquisitions, buying companies at reasonable multiples of about five times revenue.

So how does each sector of HP’s business look?

PCs: Sacconaghi reckons that the global market for PCs will grow about 6 percent a year on a unit basis, down from historical averages of about 10 percent, and that it will grow on a revenue basis by about 2 percent a year through 2015. As the biggest supplier of PCs in the world, HP will, at the very least, hold its market share. While PCs are HP’s largest business, accounting for $40 billion in its last fiscal year and about one-third of its overall sales, the unit generates only 13 percent of operating profits. And, yes, while tablets are a threat, Sacconaghi sees no reason that PCs and tablets can’t grow together. The increasing need for an Internet connection everywhere and the increasing amount that consumers are willing to spend on technology, coupled with price declines over time, mean that consumers will be willing to spend more on notebooks and tablets.

Printers: As with PCs, HP is the market leader in printers, and as that market grows its revenue by about 3 percent a year, HP will probably hold on to its share of the market. Tablets may have a long-term impact on printing behavior, but Sacconaghi argues that consumer behavior tends to change slowly. A decade ago, he says, investors worried that email and the paperless office would kill printing. “Despite these ostensible headwinds, HP and Lexmark collectively grew their supplies revenues by 7 percent per year between 2000 and 2010, driving low to mid single digit growth for the printer industry.” HP’s printer division accounted for $25.8 billion in revenues in the last fiscal year, or about 20 percent overall, and because of its 17 percent operating margin, delivered 29 percent of the company’s profits. It’s a classic razor blade business, as HP loses between 20 and 25 percent on the printing hardware, only to make it up on supplies that command a 60 percent margin. The presence of tablets could actually boost printing, and thus increase the sale of those supplies down the road. Overall, the printer business should continue to grow at about 3 percent a year, Sacconaghi says.

Enterprise, servers, storage and networking: Sacconaghi expects HP to grow revenues in the ESSN unit by about 2 percent a year, slightly below the industry growth rate of 3 percent. He bases this on the expectation that HP can grow its networking business, hold its market share in the Intel-based servers, and lose share in its enterprise storage business to players like EMC and NetApp, and also lose share in the Unix storage business because of Oracle’s decision not to support the Itanium chip.

Services: This unit should grow by about 2 percent annually, slower than the market, which is growing at 4 percent. “We believe that outsourcing is a maturing business, and that EDS, which HP purchased in 2008, is and was an underperforming asset,” Sacconaghi writes. “As a result, we forecast HP’s outsourcing revenues to remain flat.” Expect it to grow in line with the enterprise hardware business, and along with the consulting business.

Software: The market research firm IDC expects the end markets for HP’s software to grow by 7 percent a year. If you assume that HP makes more software acquisitions, which Sacconaghi does, then you can reasonably predict its software revenue will grow by 10 percent a year.

So what’s the risk to all this? Leadership. “Ultimately, our projections for HP are predicated on the company choosing a disciplined financial approach to running the company that includes modest revenue growth, small and leverageable acquisitions, a strong operations focus, and high returns of capital to shareholders,” Sacconaghi writes. The last two CEOs who tried to “transform” HP — Carly Fiorina and Léo Apotheker — failed.

HP’s isn’t “broken,” but in fact offers a favorable risk for patient investors, Sacconaghi says. He rates HP shares as an “outperform,” with a price target of $37.

IBM, he says, should meet expectations for the quarter by delivering per-share earnings of $3.31, slightly better than the consensus estimate of $3.21. On top of that, he expects IBM to raise its guidance for earnings on the year to $13.35 per share or higher. Sacconaghi says IBM may earn as much as $13.60 a share this year, depending on how much it ultimately saves from workforce reductions and a lower tax rate. He says that IBM has beat its consensus in each of its last 15 quarters and raised annual earnings guidance in nine of its last 11 quarters.

All good, right? Sure, but how long can IBM keep this sort of thing going? Certainly not forever, especially in a tough global economy. Revenue growth this year will be difficult to compare to last year, Sacconaghi writes, especially in light of a stronger U.S. dollar, a slowing business cycle in hardware upgrades and a slowdown in services growth over the last 18 months. As such, his estimates for revenue growth are below those of the Street consensus: Where the Street expects IBM to report sales of nearly $112 billion in fiscal 2012, Sacconaghi expects $109.3 billion.

“IBM has benefited from a favorable currency environment, which has boosted the company’s headline revenue growth number, which is likely to reverse and pressure IBM’s reported revenues in the first half of 2012 at current spot rates,” he writes. “While we don’t expect this to lead to earnings misses versus the consensus given that IBM hedges, we believe that revenue estimates need to be revised downwards from current levels.”

In a note to clients today, Sacconaghi says that HP is the “most inexpensive tech stock in the S&P 500 and the 10th most inexpensive stock overall.” There are very few precedents, he says, for large-cap technology stocks trading at HP’s current valuation. Before this month, there had not been a large-cap tech stock that traded at less than 5.5 times earnings — not in the last 20 years.

At that level, he says, HP’s current valuation implies that its annual free cash flow will decline by 9 percent a year forever or, put another way, that HP will be half its size within seven years. Usually companies that trade so low have significant structural problems. HP, for all its faults, doesn’t meet that standard. It’s not “a broken company,” he says, it’s on track to grow earnings by 6 percent this year, and it leads in three of its four key lines of business — PCs, printers and servers.

So why the crazy-low valuation? “Investor exasperation.” (There’s that word again!) Investors have discounted it too much given all the drama, making it, believe it or not, a buying opportunity for “patient investors.” He rates HP an “outperform” with a price target of $37. Investors seemed to warm to the idea. HP shares finished the day up more than 3 percent.

It’s a mixed bag. While they all seem to agree that HP’s board is right to push out CEO Léo Apotheker, especially in light of the stock performance, a confused strategy and a jarring change in emphasis, none seem ready to endorse the ascendance of Meg Whitman, the former eBay CEO and current HP director, to that company’s top job. Yet like it or not, the HP board meeting that will make it all official is underway, and as AllThingsD has reported, Meg Whitman will be named HP’s CEO at the close of markets today.

Toni Sacconaghi of SanfordBernstein, the author of a widely circulated note last week describing how “exasperated” HP investors are, weighed in again. “We are not surprised by HP’s stock’s reaction yesterday, given that our conversations with shareholders and investors over the past month revealed a level of exasperation that we have not seen directed at HP or any other company in our universe in our 13 years following the sector,” he wrote in a note today.

He also slammed HP’s board. “Our conversations with major shareholders also indicate that they have been disgruntled with the board, given it has made and approved a series of decisions” — including the ouster of the prior CEO Mark Hurd, the Autonomy deal, the premature announcement of the PC-spinout — “that many shareholders believe were poor decisions and misaligned with their interests,” he wrote.

Nor is he a fan of the Whitman hiring. HP needs to search far and wide and also internally for another CEO, Sacconaghi says. “We would view any decision not to conduct a comprehensive search of internal and external candidates for a permanent CEO role as unsatisfactory and unnecessarily hasty,” he wrote. “We also believe that shareholder reaction to Whitman as a permanent CEO would be mixed.” He also thinks CFO Cathie Lesjak, notable for filling in as interim CEO during the Hurd-to-Apotheker transition, may be leaving.

Shaw Wu of Sterne Agee is pretty much in agreement with Sacconaghi. “Given the disappointing financial performance over the last few quarters and some questionable decision making including the high purchase price of Autonomy, handling of the spinoff of its PC operation, and abrupt shutdown of its webOS hardware business, we are frankly not surprised that a change is being considered,” he wrote in a note to clients today. “So far, investors and even some customers we have talked to don’t seem confident in where HPQ is heading so a change is likely needed.”

But he’s not sold on Whitman. “While we believe she has proven to be a very capable manager helping grow eBay from a start-up into one of the largest internet companies, we think an ideal candidate for HPQ should have extensive experience in the enterprise market. In addition, we believe expertise in supply chain management would be helpful as well.” He goes on to name a handful of insiders and outsiders he’d consider possible successors: Dave Donatelli, who runs HP’s enterprise business; Todd Bradley, who runs the personal systems group and would be a likely CEO of that unit if it’s spun out; Steve Mills, who runs software and hardware at IBM; and Gary Moore, the COO of Cisco Systems.

Wu also says it might be a good idea for HP to keep its PC unit after all is said and done. “We estimate the business generates $2 billion in operating income per year and is the second most profitable behind Apple,” he wrote. Also the PC business isn’t so bad when you think of it as being one and the same with the tablet market. He maintained a neutral rating on HP for now.

Lou Miscioscia of Collins Stewart isn’t encouraged by the shake-up, either. Many of HP’s problems aren’t necessarily Apotheker’s fault, he says in a note to clients issued today. And he’s not sold on Whitman, arguing that she’s never run so large a company as HP and has never run one focused on the enterprise before. He maintained a neutral rating.

And while a post-Apotheker HP may undo some of his decisions, like spinning off the PC business, one thing it probably can’t do is walk away from its $10 billion purchase of Autonomy Software, says Jeffries and Co. analyst Peter Misek. Corporate takeovers are governed by strict laws in the U.K., making it nearly impossible for HP to pull out of the deal now. He rates HP shares a buy.

In a scathing assessment from an analyst who’s rarely so negative on HP, Sacconaghi argues that investors are universally opposed to the Autonomy deal based primarily on the high price that HP is paying, which works out to 11 times sales, versus the option of using HP’s precious cash reserves elsewhere.

Unhappy HP investors have little recourse, Sacconaghi writes, and Autonomy shareholders seem especially eager to get the deal done. As the Financial Times reported yesterday, the fact that 42 percent of shareholders signed on to the deal so early in the tender process gives an indication of their opinion that the price HP is paying is a favorable one that’s not likely to be met by another bidder. It’s also an unusually high response rate this early in the process.

And there’s little if any chance that HP shareholders could stop the deal now even if a majority of them wanted to, he says. By paying cash for Autonomy, HP doesn’t need shareholder approval, and according to the terms of the deal, HP has to follow through absent a “material adverse change,” such as new negative information about Autonomy (like a major legal problem or something on that scale).

There’s certainly plenty to dislike about the deal. As Bloomberg News reported, HP sold $4.6 billion worth of bonds in order to help pay for the deal, though with yields on corporate bonds near record lows the timing to take on debt could be worse.

But even with corporate bond rates at relatively low levels, HP is paying more to finance its debt than its peers. Compare, for example the five-year fixed-rate bonds that HP issued yesterday with a coupon rate of 3 percent. In July, IBM issued five-year fixed-rate bonds at a coupon rate of 1.95 percent. I’m not exactly an expert on corporate bonds, but the way I understand it is like this: If you think of bonds like a credit card, HP is paying more than 1.5 times the interest on its debt than IBM is. That block of five-year bonds represents $1.3 billion worth of the $4.6 billion offering, making it the biggest portion of the debt offering disclosed in an HP regulatory filing yesterday.

Separately, two securities law firms said today they have launched investigations of HP and its board of directors. The Briscoe Law Firm, headed by former Securities and Exchange Commission attorney William Briscoe, and Powers Taylor LLP announced they’re investigating what they call “potentially misleading statements” by HP between Nov. 22 and and August 18. During that period, the firms allege that HP executives and directors made false statements or failed to disclose material information about the TouchPad tablet and the webOS operating system running on it. HP, they say, “lacked a reasonable basis for their positive statements,” and thus caused HP shares to trade at artificially high prices, peaking at $48.99 on Feb. 16. HP shares were nowhere near that high today, closing at $22.93, up 23 cents.

That’s the theory put forth by Bernstein Research analyst Toni Sacconaghi in a rebuttal to the conventional wisdom of the Street, which holds that we are in a post-PC world in which tablet sales are cannibalizing those of PCs.

Sacconaghi sees the evolution of Apple’s MacBook Air and its growing synergies with the iPad (instant on, slim profile and multitouch support) as the harbinger of a broader convergence between the notebook and tablet form factors. Which isn’t an unreasonable way of looking at things, given current industry trends. As solid-state storage prices decrease, more OEMs will begin using them in their devices. Same thing with the low-power/high-performance processors that make devices like the iPad possible. Add to this the proliferation of mobile app stores and the debut of desktop counterparts like the Mac App Store and, well, you see where this is all heading.

“The iPad is getting more powerful while the MacBook Air is getting lighter, and the distinction between the two is blurring,” Sacconaghi argues. “In fact, we expect the distinction to blur across notebooks as a whole … In the next two to three years, we believe OEMs will offer notebooks at the weight of the original iPad with touchscreen and integrated keypad capability for under $1,000.”

And the debut of that converged, ultraportable tablet/notebook could have an unexpected result.

Says Sacconaghi, “Ironically, availability of such notebook devices might undermine tablet sales, rather than vice versa.”

In other words, the cannibalized becomes the cannibal. And in the end, it turns out that the post-PC era doesn’t mean that the PC is dead, but rather that it’s been born anew as a converged device — an ultrathin, touch-sensitive notebook.

In a research note this week, Bernstein analyst Toni Sacconaghi reviewed a few of the more plausible ones, which run the gamut from the long-rumored iTunes streaming service to the back end for a natural language voice interface and navigation service for its iOS devices.

The first: an easy way of scaling the company’s iAd mobile advertising program. With its installed base of iOS devices likely to hit 200 million by the end of fiscal 2011, iAds could put quite a strain on Apple’s ad serving capabilities. Says Sacconaghi, “If iAd gets traction while serving interactive, multimedia ads then Apple’s underlying advertising platform will need to be significantly larger, and at a scale comparable to Google’s or Microsoft’s ad platforms.”

The second is a no-brainer and seems fairly likely to pan out given recent chatter about Apple’s MobileMe service going free come April: an overhauled verision of MobileMe that provides improved cloud-based synchronization of data and media, along with meaningful storage capacity.

The low-cost iTunes subscription service we’ve been hearing about for years now is the third. Again, this seems a completely plausible use for Apple’s new data center, and as Sacconaghi notes, the time may finally be right for the company to launch it. “In our meeting with Apple executives last month, VP of Internet Services Eddy Cue suggested that the reason that music subscription services had failed to receive traction with consumers was because they were too expensive, highlighting prevailing rates of up to $15/month,” he wrote. “We note that an annual subscription to Napster now costs $8/month, while the paid version – unlimited, higher-quality, ad-free – of music streaming from Pandora costs $3/month.” Add to that Apple’s 2010 acquisition of streaming music outfit Lala and the traction Spotify and Pandora have been gaining in the market recently and this seems a likely scenario as well.

Fourth on Sacconaghi’s list, an aggressively priced video streaming service. Given the popularity of Netflix’s iOS app among iPhone and iPad users, it might make sense for Apple to offer its own competing video subscription service. Or, it could simply acquire Netflix. It’s not like Apple doesn’t have the money to do it–even if Netflix’s market cap is north of $11 billion.

And finally there’s that voice interface and navigation service I mentioned earlier. This one might seem a stretch, but don’t dismiss it out of hand. Last April, Apple acquired Siri, developer of a virtual personal assistant supported by speech recognition, natural language processing and semantic Web search. And in 2009 it purchased PlaceBase, a mapping outfit that specialized in enhancing maps with private and public data sets. Put those two acquisitions together with a massive data center and Sacconaghi’s theory looks at least plausible.

“Apple could offer its own navigation service comparable to Google’s free and very popular voice-based navigation system on Android,” he writes. “The iOS device user-base could then potentially periodically upload anonymous information on routes travelled and speeds encountered, perhaps even in real-time, which would allow Apple to report back traffic conditions to its user-base.”

Sounds like a killer feature for the iPhone 5, doesn’t it?

PREVIOUSLY:

• Apple’s N.C. Data Center Intended for iTunes, MobileMe
• Apple Owns Another 70 Acres Near NC Data Center
• Was Apple Planning on Doubling Its North Carolina Data Center All Along?
• Apple Reaching for the Cloud With MacBook Air and N.C. Data Center
• That’s Apple’s New Data Center? Where’s the Giant Glass Cube?

For one thing, January’s restructuring of the board of directors has left a bad taste in the mouth of a pair of shareholder advisory firms, who have publicly called upon HP investors to vote against the re-election of as many as three sitting directors and against some say-on-pay proposals.

Sources familiar with the situation confirmed to me that after today’s event, HP’s investor relations team plans to mount what’s being described as a “road show” to counter the recommendations to vote against management made by Institutional Shareholders Services and Glass Lewis among retail investors. Exactly who is involved and whom they plan to visit couldn’t be determined. HP had no comment about it.

At least part of the road show’s mission will be to drive home the highlights of the strategy that Apotheker lays out in his keynote today. But there is some nagging concern that a sufficient number of shareholders, put off by repeated instances of board room drama over the last decade — Carly Fiorina’s ouster in 2002, the pre-texting scandal in 2006, and last year’s departure former CEO Mark Hurd — may vote against the three directors standing for another term: Lawrence Babbio, Sari Baldauf, and Ken Thompson.

That enough investors would vote against management to make a difference may seem unlikely at first until you consider the number of shareholder lawsuits stemming from the Hurd affair that are currently pending both in federal courts and in the Delaware Chancery Court. The fear of an embarrassing defeat for HP and its new board at the annual meeting on March 23 isn’t an unreasonable one.

Then there are the larger questions. As Bernstein analyst Toni Sacconaghi pointed out in a recent note to clients, HP’s stock has underperformed the S&P 500 since Hurd’s departure, and the lag has been driven mostly by uncertainty among investors about its strategy and about Apotheker himself. Its disappointing results in the first quarter didn’t help matters.

There are numerous questions around HP’s hardware strategy, particularly around the PC business. While it has promised to put the WebOS platform it acquired last year when it absorbed Palm into tablets and into every PC it ships, HP is still seen as far behind Apple on the tablet front. We all know why that is.

But the questions go deeper than that. Apotheker, a former CEO of the business software giant SAP, last week sent a strong signal in an interview with Bloomberg News that he plans to acquire some software companies.

What kind of acquisitions? He’s ruled out SAP, for one thing. And in a meeting with Bernstein’s Sacconaghi last month, he said any acquisitions would not be so large as to “keep investors awake at night,” meaning, Sacconaghi suggests, that they would probably not exceed $5 billion. Aside from buying software companies, he’s also signaled that the days of cuts–the hallmark of Mark Hurd’s tenure–are over. Cutting costs is out, investing is in.

But then there’s the larger issue about whether or not Apotheker can steer Hewlett-Packard, the storied Silicon Valley icon, on a course that restores its former glory. The question marks around him on this score are considerable because the task is just so huge. HP is a sprawling $126 billion juggernaut meaning change comes slowly, often in barely perceptible steps that leave impatient investors wondering what’s taking so long.

At the outset, the Apotheker’s strategy appears to be summed up pretty simply: Bring the market-leading position in hardware to bear and combine its offerings with a newly ascendant software business, which together will feed into an IT services business that aims to compete with IBM. It’s not going to be easy and the most important important thing that Apotheker has to do is inspire both analysts and shareholders alike that he’s the man to get the job done. As yet both are understandably skeptical mainly because Apotheker is an unknown quantity.

When Apotheker’s predecessor Mark Hurd took over at HP in 2005, there was very little doubt about what kind of CEO he would be: A relentless, unsentimental cost-cutter, and this much was clear before he was even officially on the job.

And while Apotheker has pointed tentatively in the direction he’d like to take HP, there are still more questions about him than there is certainty. His most important job will be to convince all concerned that he’s the man who can steer HP back on a course to greatness.

PREVIOUSLY:

• Another Advisory Firm Singles Out HP Director Babbio
• Shareholder Group Contends HP’s New Board Is Too Chummy
• “Peripatetic Polyglot” Léo Apotheker Wants to Save HP’s Soul by Buying Software Companies
• HP Earnings Today: Will Léo Apotheker Speak?
• Michael Dell Thinks HP Paid “Way Too Much” for 3Par
• Judge: HP Can Re-Investigate Hurd Departure
• Is This the HP Board That Will Allow Us to Stop Thinking About HP’s Board?
• Meg Whitman, Patricia Russo Among Five Joining HP Board
• HP Plans Another Probe Into Hurd Departure
• Léo Makes It Official: SAP’s Bill Wohl Joins Hewlett-Packard
• Want Enterprise Growth, HP? Think Services
• Mark Hurd Really Wants to Keep the Jodie Fisher Letter Private
• Mark Hurd Doesn’t Want You to Read the Letter That Cost Him His Job
• HP Networking Head: “People Are Tired of Paying for Cisco”
• HP Names Ex-SAP Chief Apotheker as CEO

The iPhone isn’t intended “just for the rich,” Cook said, remarking that Apple has some “clever things” planned to address the prepaid market and has no intention of ceding any smartphone market share to rivals. Add to this some related comments about the company’s focus on carrier expansion, particularly in poorer countries, and it’s pretty clear that Apple is developing a more affordable iPhone.

Just what sort of form it will take isn’t clear, though Sacconaghi suggests it may be a combination of less expensive hardware and better carrier rates, or even a move to disintermediate carriers with a soft-SIM.

That’s the theory put forth today by Bernstein analyst Toni Sacconaghi, who believes Apple’s market-share aspirations for the iPhone are a lot like those for its iPod business. Sacconaghi sees an iPhone Nano or Mini as an inevitability, one that would dramatically expand Apple’s addressable market.

“We are surprised that Apple hasn’t moved sooner to introduce a lower priced offering that could help secure a more dominant installed base,” Sacconaghi said in a note to clients today. “After all, the smartphone world is a platform war, where first mover advantage and scale matters. The dual facts that (1) iPhone has not been available at several very important global carriers and that (2) it carries a very high price point have contributed to creating an opportunity for Android that has been successfully exploited. Particularly with Android now outselling iOS, the imperative for Apple to expand its installed base has never been higher.”

A scaled-down version of the iPhone with a cheaper data plan–or one that required no data plan at all–is one very obvious way of doing that. Roll out a device like that with a street price that falls somewhere between $149 and $199, says Sacconaghi, bring it those carriers that don’t yet offer the iPhone, and mass-market adoption will follow. Serious mass-market adoption.

“It is difficult to estimate the size of a market for a product that we don’t yet know the form-factor or timing for. But as a rough guide, we estimate that at an end-user price of $150-$200 and no data plan contract, Apple could address potentially all of the remaining smartphone segment, the non-smartphone postpaid segment, and about 15 percent of the non-smartphone prepaid segment. This would amount to an incremental 700M+ units and $90 billion in revenue in terms of market opportunity; even if Apple succeeded in capturing just 5 percent of these incremental units, it would add $12+ billion in revenues and $4.50+ in EPS.”

And they’ve got the numbers to back it up. According to the two analysts, Android’s device shipment run rate has more than tripled in the past seven months, from 60,000 to 200,000 per day. That means there will be some 53 million Android devices shipped this year. “Even under the conservative assumption that Android’s run rate remains constant for the rest of the year, Android alone will contribute 25 percent points of y/y growth to the entire smartphone market,” Sacconaghi and Ferragu contend (click image to enlarge).

Meanwhile, Apple (AAPL) is shipping “iOS devices” (a grouping that includes the iPhone, iPod touch and iPad) at a run rate of 230,000.

That means the smartphone market is going to see a head-to-head battle for market share between Apple and Google (GOOG) sooner rather than later. Sacconaghi and Ferragu’s advice to Apple if it wants to win that battle: End carrier exclusivity in Germany and the U.S. and add new iPhone carriers in countries that currently have just one, like Japan and South Korea.

“[The iPhone’s] distribution vacuum, coupled with weak competitive offerings from other smartphone manufacturers, has made Android a strong alternative platform,” the analysts argue. “The key to arresting Android’s momentum then will be for Apple to broaden distribution. We believe that a CDMA iPhone is being developed by Apple and are modeling it to be distributed at Verizon (VZ) in mid 2011–various data points suggest it could actually be sooner, likely in early 2011. We believe Apple needs to strike distribution deals with these carriers, even if it has to sacrifice some pricing power since doing so would (1) still be accretive to company gross margins; and (2) take away the strong foothold it currently provides to a potentially formidable competitor.”

Assuming Apple does that and this all plays out as Sacconaghi and Ferragu foresee, what’s going to happen to RIM (RIMM) and Nokia (NOK)? Nothing good. “While Android and Apple are growing above market rates, other platforms are languishing in terms of developer support, and our recent proprietary research points to limited excitement among consumers,” the two write. “Given the continued momentum for Android and Apple, a scenario in which Nokia’s and RIM’s platforms get increasingly marginalized becomes a possibility.”

[Image credit: Bernstein Research]

About $1.5 billion, says Bernstein & Co. analyst Toni Sacconaghi. That’s about five weeks’ worth of Apple’s free cash flow or about 3.5 percent of its total cash balance. Ugly. But as I noted here Tuesday, the probability of a recall is pretty low, as Sacconaghi himself says.

“A full recall of the device and issuance of a new iPhone…is highly unlikely,” he said in a note to clients, adding that a more appropriate response would be for Apple to simply hand out nonconductive cases or bumpers to all iPhone 4 owners and with all new iPhone 4 sales. “[This] could be done immediately, would directly address the Consumer Reports concern, and would be financially immaterial,” Sacconaghi argues. “While it would force Apple to ‘acknowledge’ a design issue with the iPhone, we believe that consumers are increasingly aware of the antenna issue, and remedying it rather than dismissing or ignoring it appears most appropriate.”

Of course there is another option: Apple (AAPL) could ignore the current hurly-burly entirely, stand by its official statement on the issue, and release the promised software update that will correct it. Certainly, that seems to be the strategy so far.

That’s difficult to say, given the limited sales data available. But Bernstein Research analyst Toni Sacconaghi gave it a shot in a note to clients today, and the number he came up with is astonishing, though it’s quite a bit lower than the buy-side number that’s being bandied about these days.

“An analysis based on extrapolating sales trajectories of [the iPhone, iPod touch and all netbooks] suggests that Apple could sell a staggering 25 million iPads or more in FY 11,” Sacconaghi says. “We believe that current buyside expectations for FY 11 for the iPad are now at 20-25 million+ units, largely based on such an extrapolation.” [Ed. note: More like 28 million, Toni ...]

Not that he’s totally confident Apple (AAPL) will hit that number. He thinks sales will end up a bit lower, though he’s wary of offering a definitive forecast. “While iPad’s fast start points to the potential for 25M iPads in FY11, we note that the range of outcomes is wide and uncertain, particularly since the product use-cases and competitive offerings are very nascent. We currently estimate 18M iPads for FY 11, but underscore that we do not have high conviction in our estimate.”

Sacconaghi’s uneasiness here is due largely to fears that extrapolating the iPad’s growth trajectory from sales to early adopters might result in an unrealistic estimate. He also worries that expanded international distribution won’t juice iPad sales as much as the market hopes. Which is understandable. After all, the device is still quite new and its use-cases are still being established.

[Image credit: Gizmodo commenter modestmouse and RBC Capital Markets]

“People are loving iPad as it becomes a part of their daily lives,” CEO Steve Jobs said in a statement. “We’re working hard to get this magical product into the hands of even more people around the world, including those in nine more countries next month.”

The current pace of iPad sales means Apple (AAPL) appears on track to blow the doors off most analyst estimates. Earlier this year, Bernstein analyst Toni Sacconaghi predicted sales would hit five million units in the first year, while Morgan Stanley (MS) analyst Katy Huberty was looking for more than six million. More recently, RBC Capital Markets analyst Mike Abramsky bullishly predicted sales of eight million, which at this point seem entirely realistic.

The official release below.

Apple Sells Three Million iPads in 80 Days

CUPERTINO, California–June 22, 2010–Apple® today announced that it sold its three millionth iPad™ yesterday, just 80 days after its introduction in the US. iPad is a revolutionary and magical product that allows users to connect with their apps, content and the Internet in a more intimate, intuitive and fun way than ever before.

“People are loving iPad as it becomes a part of their daily lives,” said Steve Jobs, Apple’s CEO. “We’re working hard to get this magical product into the hands of even more people around the world, including those in nine more countries next month.”

Developers have created over 11,000 exciting new apps for iPad that take advantage of its Multi-Touch™ user interface, large screen and high-quality graphics. iPad will run almost all of the more than 225,000 apps on the App Store, including apps already purchased for your iPhone® or iPod touch®.

Users can browse the web, read and send email, enjoy and share photos, watch HD videos, listen to music, play games, read ebooks and much more, all using iPad’s revolutionary Multi-Touch user interface. iPad is 0.5 inches thin and weighs just 1.5 pounds–thinner and lighter than any laptop or netbook–and delivers up to 10 hours of battery life.

[Image credit: Gizmodo commenter modestmouse]

Apple (AAPL) stock is clearly on a tear and will be for some time. But that doesn’t mean it is risk-free, says Bernstein Research analyst Toni Sacconaghi. In a research note issued this morning, he outlined his bear case for the stock, pointing to five potential pitfalls that might undermine it.

“These five concerns are as follows,” writes Sacconaghi. “(1) Apple’s market cap is too large for it to outperform, and its image has migrated from underdog to Silicon Valley bully, which will increasingly pit competitors against it; (2) Increased regulatory scrutiny threatens to undermine Apple’s powerful iOS ecosystem; (3) Sustained growth in iPhones will inevitably lead to margin pressure; (4) Near-term expectations for iPhone and iPad units are getting heady, risking disappointment; and (5) Apple insistence on retaining cash points to a risk of the company squandering it on a flawed acquisition.”

Sacconaghi makes a case for each, but in most instances, it’s a bit of a stretch and seems to hinge on hypothetical scenarios (what if content providers collectively choose to support a non-Apple platform) or unfavorable outcomes to developing scenarios (what if the Federal Trade Commission finds Apple’s behavior in the mobile advertising market to be anticompetitive). So much so, that in the end, the analyst concludes that none of them presents an imminent threat.

“We have articulated the bear case for Apple investors principally as a checklist of issues to monitor,” he writes. “At this point, none of the aforementioned potential pitfalls concerns us sufficiently to change our earnings estimates or price targets….We continue to view AAPL as the most secularly attractive name in our coverage universe.”

Here’s a stunner of a data point: Apple is selling more than 200,000 iPads per week. Which means, according to RBC Capital Markets analyst Mike Abramsky, that sales of the company’s new device have outpaced those of the Mac in the United States and are closing in on those of the iPhone 3GS.

“Checks indicate that US iPad sales remain strong post-launch, driven by rising consumer visibility to iPad’s user experience, sustained PR/word-of-mouth marketing, 3G iPad launch, and broadening iPad apps/content,” Abramsky wrote in a note to clients this morning. “We believe Apple is now selling >200k iPads/week, greater than US Macs (est. 110k Macs/week) and just below US iPhone 3GS first quart (246k/week).”

Evidently, there’s quite a bit of pent-up demand for the device. Retail checks in mid-May showing widespread iPad stockouts at Apple (AAPL) stores and Best Buy (BBY). The 3G iPad is sold out at many Apple stores, and about 25 percent of them now have only Wi-Fi iPads available. Waiting lists are not uncommon.

With that in mind–not to mention the device’s forthcoming international launch–Abramsky raised his global iPad outlook for 2010 from five million to eight million.

Abramsky’s is one of the most bullish iPad sales estimates to date, though it certainly has company. Earlier this year, Bernstein analyst Toni Sacconaghi predicted sales will hit five million units in the first year, while Morgan Stanley (MS) analyst Katy Huberty said they’d likely exceed six million. (Click on table and chart below to enlarge.)

One last point: Before we go jumping to conclusions about cannibalization of Mac sales, recall Piper Jaffray analyst Gene Munster’s remarks after reviewing NPD’s April sales data for Apple:

The iPad launched in US Apple retail stores on 4/3, impacting nearly the entire month of Apple’s sales in April. As a result, April NPD data gives us the first sign of the degree to which the iPad cannibalizes iPod or Mac sales. From the early NPD data, it appears that the iPad has a minimal cannibalization impact on Mac sales, and could be slightly cannibalizing iPod sales.

[Image credit: Gizmodo commenter modestmouse and RBC Capital Markets]

This estimate comes from Bernstein Research’s Toni Sacconaghi, who also thinks Apple (AAPL) will do more than $58 billion in sales this year. So that number is nice, if not needle-moving.

But the analyst also points out the real benefit of iAds to Apple: It will generate more than $800 million a year for developers, giving them even more incentive to build programs for iPhones and iPads.

Sacconaghi thinks iAd could throw off $550 million this fiscal year (and double that in 2011); Apple will keep 40 percent of that. And he thinks Apple could keep another $250 million from more conventional advertising that runs on media ads/apps on the iPad.

All told, the analyst figures Apple’s new ad business will end up generating $18 in gross revenue for every iPad/iPhone/iPod touch in the market, which compares quite nicely with the estimated $21 in gross revenue per PC that Google gets. But Google (GOOG) keeps most of that money–$16 per PC–and Sacconaghi thinks Apple will only net about $7 per device.

From his report:

This makes intuitive sense to us–the gross iAd revenue number per device is close to what Google generates since both should be able to serve highly targeted advertisements; however, the net iAd revenue number is lower since Apple would effectively pay 60% “traffic acquisition costs” across all its revenue vs. Google for whom the cost is only incurred on about a third (AdSense) of its revenue.While Apple users’ demographics are undoubtedly more attractive than Google’s, we believe that is counterbalanced by the relatively infancy of the mobile advertising market currently.

But while it is moving into the ad business for the first time, Apple is not really trying to displace Google there. What the company is trying to do is make sure that developers have every incentive to build for Apple. That’s the real intent of iAds, and Scacconaghi thinks it will be effective.

He figures iAds could throw off $825 million to developers, who he had previously estimated would generate $1 billion to $1.8 billion year. That’s a boost of 46 percent to 83 percent.

That’s a pretty good carrot for Apple developers, no?

But there’s a stick, too, of course, in part from restrictions that make it hard to write apps for both Apple’s platforms and its rivals–otherwise known as the Adobe (ADBE) Flash ban–and in part from restrictions that cripple the ability of other mobile ad networks to compete on Apple’s platform. And that’s the stuff that is raising eyebrows in Washington.

Piper Jaffray analyst Gene Munster said this morning that his initial estimates of 900,000 iPads sold in the June quarter and 2.7 million in calendar year 2010 “may prove to be conservative.”

Munster figures Apple (AAPL) is poised to sell between 200,000 and 300,000 iPads this weekend–in line with the 270,000 first-gen iPhones it sold at launch. And he thinks the chances are good that the company will sell out of the device.

“When Apple began taking pre-orders customers could pre-order for home delivery on April 3 or in-store pickup on April 3,” Munster writes. “A week before the launch (on March 27) the company pushed back the shipping date to April 12 and ended the in-store reservation program for the launch. And in preparation for the launch, on March 31 Apple retail stores began calling those with iPad pickup reservations to confirm the reservation.”

What does it all mean? Says Munster: “We believe these signs indicate that initial demand for iPads was stronger than the company expected, and/or minor supply issues have slightly constrained availability for the launch. We believe the supply constraints are minor because the new ship date is not a significant delay. Ultimately, both strong demand and somewhat constrained supply appear to be resulting in the fact that Apple is selling every iPad it can build.”

Munster’s bullish estimate follows two others issued earlier this week–one from Bernstein analyst Toni Sacconaghi, who expects iPad sales to hit five million units in the first year, and another from Morgan Stanley (MS) analyst Katy Huberty, who expects the company to sell over six million units.

[Image credit: Panelfly]

Which is not to say that Sacconaghi disputes the iPad’s potential as a market-defining device. He just wonders if there aren’t a bit too many unknowns at present to make hard and fast predictions about its sales trajectory.

“What will international pricing be?” Sacconaghi asks in a research note issued this morning. “What sort of media content will be available, and how quickly? How rapidly will Apple increase distribution beyond the 10 countries announced so far, compared to the iPhone which is available in 89 countries? How prevalent will non-Apple distribution be?”

Reasonable questions. And without answers to them, Sacconaghi is playing it safe with his sales estimates. He expects Apple (AAPL) to sell between 300,000 and 400,000 iPads over launch weekend–including pre-sales. But he figures the device will sell five million in its first full year at market and 6.8 million in fiscal year 2011.

“We note that the initial iPad launch will be a US only launch and will not include 3G models; we suspect that total (including pre-sales) first weekend sales will be slightly higher than the original iPhone’s first weekend (270K), given the iPhone had a similar price, and was US exclusive (although it did not offer pre-orders),” Sacconaghi writes.

“Our analysis suggests that iPhone sales run rates have fallen significantly (i.e., by a factor of 4x – 9x) following launch weekends; we think a drop-off in sales at the high end of this range is likely appropriate for the iPad, given that pre-sales will have boosted first weekend sales. Such a drop-off in iPad sales from our launch weekend forecast would result in unit sales for year 1 of about 5 million units in-line with our estimates.”

That might not be an “over-zealous” estimate in Sacconaghi’s eyes, but it’s certainly a bullish one. Still, the analyst concludes that the iPad’s near term financial implications for Apple may not prove to be as magical as investors hope.

“We believe that while the iPad may evolve meaningfully over time, we expect its impact on Apple’s earnings to be minimal during FY 10,” he says. “In the immediate term, iPad expectations appear over-zealous, which could provide a relative short-term disappointment for investors.”

FURTHER READING:

Launch Day iPads Sold Out

iPad Available at “Most Best Buy Stores” This Saturday

Apple Grabs iPad Trademark From Fujitsu

Apple Now Accepting iPad App Submissions

Early Supplies of iPad Accessories Dwindling?

Initial iPad Demand Greater Than Initial iPhone Demand

iPad TV?

Apple’s Tablet: Read Different?

Rumored Apple Netbook Actually an E-book?

Coming Soon From Apple: Big Touch?

iTablet: Apple’s Killer App for Higher Ed

COMPLETE IPAD COVERAGE

That was an announcement few were expecting. In the weeks leading up to the event, it was widely believed that Apple’s (AAPL) tablet device, if it was going to support mobile broadband, would support it on Verizon’s network and that the announcement of that carrier deal would herald the arrival of the oft-pined-for Verizon (VZ) iPhone.

Didn’t happen. And now folks are pondering just what this might mean for Apple’s carrier relationships in the U.S. As I’ve noted before, it’s inevitable that the iPhone will cease to be an AT&T exclusive, and this will certainly be true of the tablet as well.

But perhaps not quite as soon as expected. AT&T’s iPad exclusive suggests that Apple’s relationship with the carrier is still quite strong.

You’ll recall that when Apple reported earnings earlier this week, COO Tim Cook leaped to AT&T’s defense when asked about the carrier’s network issues. AT&T’s iPad exclusive would seem to lend further credence to Cook’s remarks that Apple has been happy with the company as a carrier partner and is confident of its plans to vastly improve its network.

As Bernstein analyst Toni Sacconaghi observed in a note to clients Thursday, “We note that Apple’s tone towards AT&T has shifted since last June when Apple took some verbal swipes at [the carrier] during its WWDC presentation; COO Tim Cook was complimentary of AT&T on Apple’s recent earnings call, and appeared less committed about having multiple carriers in every country. We worry that this more amicable stance towards AT&T and the lack of a CDMA iPad could suggest that a deal with Verizon on the iPhone is still being negotiated and potentially is further away than some investors might hope.”

Perhaps. Though it may only be as far away as completion of Verizon’s long-term-evolution 4G network. Why bother building a CDMA iPad and iPhone for Verizon now? Wouldn’t it be easier to wait for the rollout of the far superior LTE network, which reportedly isn’t all that far off?

With usage levels like these and the network degradation and customer satisfaction issues that go along with them, is it reasonable to think that iPhone carriers like AT&T (T) will swap their all-you-can-eat data plans for usage-based pricing? Sacconaghi thinks so.

“iPhone users consume web, email and video data on the mobile network at levels that many believe are adversely affecting other subscribers on those mobile networks. Network congestion in turn is triggering higher capital spending requirements for carriers. Unchecked, the iPhone’s very high usage levels could severely undermine the economic returns of offering the iPhone,” Sacconaghi explains.

“We believe carriers will increasingly have to manage the usage side of the equation as well,” the Bernstein analyst asserts. “Carriers that have not already done so are increasingly likely to adopt usage-based pricing schemes that more fairly match price to usage but which will also inevitably discourage the most profligate kinds of applications.”

Sacconaghi adds: “Today’s combination of a subsidized iPhone with an all-you-can eat data plan can be likened to a carnival where there is a relatively high price of entry, but where all the rides are free. The adoption of usage-based pricing plans is akin to also charging for the Ferris wheel. When the rides are no longer ‘free,’ the value of the entry ticket could decline.”

That’s unfortunate. But in this case, the carnival’s wireless data traffic has increased 50-fold since the introduction of the Ferris wheel and there has not been a commensurate increase in revenue. In other words, AT&T is not getting paid for the level of data traffic it supports. Says Sacconaghi: “Over the…3-year period over which AT&T’s data bandwidth consumption has grown by 50-fold, its data revenues have grown by only 250 percent, resulting in a severe drop in revenue generation per megabyte of data.”

As more adopt unlimited data plans, they become unsustainable from a carrier profitability perspective. So what’s to be done?

Spend even more capital improving your network.

And raise the price of data by adopting usage-based pricing.

That might seem disadvantageous to Apple (AAPL), but as Sacconaghi notes, Apple could use the switch to usage-based pricing to its advantage. It could, for example, introduce a “non-data plan” iPhone that expands the device’s addressable market.

“A non-data plan iPhone might be something like an ‘iPhone Touch,’ a lower cost-of-ownership device (requires voice plan only; utilizes wifi for Internet connectivity) with which to attack the more traditional handset market…while exploiting Apple’s twin unique competitive differentiators: (1) A vibrant App Store with 100,000+ Apps and (2) a large and global iPod community that remains fiercely loyal to the iPod,” the analyst writes. “Such a product would have a price (to customers) that would be similar to a stand-alone iPod Touch today, and have a cost of ownership equal to standard voice-only phones.”

International Business Machines Corp. (IBM) is now almost alone in the market for mainframes: high-end computers that run everything from Amtrak’s reservation system to benefits payments for the Social Security Administration. Market-researcher IDC estimated that in 2008 mainframes accounted for 9.9 percent of the world-wide $53 billion server market.

Toni Sacconaghi, an analyst for Sanford C. Bernstein, estimates that IBM’s direct revenue from sales of its System Z mainframes was about $3.5 billion, or less than 4 percent, of its $103.6 billion in2008 revenue.

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In a research note issued this morning, Huberty–noting that the iPhone’s market share grew 136 percent in France when Apple switched to multicarrier agreements there–said iPhone sales could more than double if the company took a similar tack in other countries.

“We expect Apple to broaden iPhone carrier distribution over the next two years and believe this opportunity is under-appreciated by the investment community,” she wrote. “This total opportunity is substantial–it adds up to an incremental 20.3M iPhone units and $3.76 in adjusted EPS, 100 percent and 41 percent of iPhone units and adjusted EPS respectively.”

Adding further details to her projections, Huberty continues: “In the top six iPhone markets that are still exclusive, we believe that Apple’s market share could rise to 10 percent, on average, in a multiple carrier distribution model from 4 percent today. These six markets represented almost 70 percent percent of iPhone shipments in C2Q09.”

Huberty also claims that if Apple (AAPL) were to end its exclusivity deal with AT&T (T) and add Verizon (VZ) as a second carrier, its share of the U.S. market would more than double, rising to 12.2 percent from 4.9 percent today.

Huberty, it should be noted, isn’t the first analyst to make such a claim. In June, Bernstein Research analyst Toni Sacconaghi said that a deal with Verizon could more than double U.S. iPhone sales in the near term. Said Sacconaghi: “Verizon’s postpaid subscriber base is not only larger than AT&T’s, but more importantly, is untapped whereas we estimate more than 10 percent of AT&T’s postpaid users already have an iPhone.”

That’s what ngmoco co-founder and Electronic Arts (ERTS) alum Neil Young said of Apple’s iconic handset at the Game Developers Conference in San Francisco earlier this year, and it’s worth reflecting on a bit in light of a new report from Bernstein Research analyst Toni Sacconaghi that claims the iPhone OS will soon create pricing and customer migration pressure for traditional gaming platforms.

Noting that some 665-760 million games may have been downloaded from the Apple (AAPL) App Store during the last 12 months, Sacconaghi estimates that the installed base for the iPhone and iPod touch platform could amount to about one third of the total handheld gaming installed base by 2012.

“We believe that gaming embodies the power of Apple’s App store: it has dramatically lowered the entry barriers for both developers and gamers alike, resulting in an unparalleled number of available games at affordable prices, which is creating lock-in and enhanced interest in Apple’s high-margin iPhone (and iPod Touch) platforms,” Sacconaghi writes.

Continuing, the analyst adds: “By most measures, gaming has been the killer App Store category, accounting for an estimated 40% of all downloads. Most importantly, we believe that gaming is providing yet another incremental, differentiated reason for consumers to purchase iPhones and iPod Touches, and creates powerful lock-in to the App Store platform and Apple products on a go forward basis.”

The upshot of all this is bad news for traditional gaming console developers–particularly those who have dismissed it as a novelty. “Most gaming developers today view the iPhone and other smart phones as an incremental opportunity, which targets the casual gamer but not the dedicating gaming enthusiast,” Sacconaghi explains. “Over time, however, we believe that the combination of evolutionary improvements in iPhone/iPod gaming functionality, the convenience of the App Store download model, the App’s Store leading title selection and lower price points could cause some migration among gaming enthusiasts to the Apple platform and/or pressure traditional gaming incumbents’ hardware and software pricing.”

And this is clearly what Apple (AAPL) is aiming for. Consider these recent remarks from Phil Schiller, the company’s senior vice president of worldwide product marketing: “People are starting to see what a great gaming device this is. When you think about the companies that came before us…when you played those other systems, they seemed so cool, but now when you look at them, they don’t stack up against the iPod touch….No Multi-Touch user experience, Games are expensive, No App Store, No iPod, Expensive Games ($25-$40) and uncomfortable retail buying experience. [There are] 607 games for PSP and 3,680 games for Nintendo DS. [But there are ] 21,178 Game and Entertainment Titles at App Store.”

In a research report published Thursday, Bernstein analyst Toni Sacconaghi estimates the App Store currently brings in $60 million to $110 million in quarterly revenue for Apple, figures that sound big until they are measured against Apple’s revenue last quarter of $8.34 billion. That’s just over one percent of total Apple revenue, if we use the high end of Sacconaghi’s App Store revenue estimate.

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