As fans of Apple
(AAPL) and close watchers of the company, my firm has written about the tech giant fairly often. We are not really big stock pickers, but have often discussed how to play Apple if you're bullish on it.
Earlier this year, we wrote about the rumored Apple product releases (see Apple: One Product Down, Two to Go in the Race to Another Blowout Quarter
). We thought that Apple’s rumored product road map had impressive revenue potential: (1) the new iPad in 4G (check that off!), (2) the new iPhone 5 with 4G (check that off tomorrow), and the (3) new Apple TV (still TBD).
When we wrote that article, we believed that the release of all three of these could lead to a December 2012 quarter that could exceed the sales and earnings of the December 2011 quarter. Remember that quarter? It was probably the single greatest revenue and earnings quarter for any company ever!
Six months later, we still believe that Apple has great potential in the December quarter, but we think the profit drivers will be a little different. First, we are skeptical that an Apple TV or TV set top box is going to be introduced before Christmas. The rumor mill would probably be full of more leaked pictures and internal parts. Instead, we have seen almost none. Additionally, the story we are hearing is that the content providers are moving slowly with Apple. This is easy to believe. None of the content providers want to squeeze the margins for video the way Apple has changed the music business.
So, how will Apple still achieve a blowout quarter? I think two things make this possible: (1) Apple will likely release an iPad Mini before Christmas, and (2) the iPhone 5 will be carried by China Mobile
Let’s start with the second point. China Mobile is the leading cell phone carrier in the largest cell phone market in the world. It is finally going to carry the iPhone. The sales in China alone may eclipse the sales across the rest of the world combined. This fact alone will help Apple set new sales records.
On the first point, the iPad Mini is rumored to be arriving soon. There have been enough rumored production pictures of internal parts to believe that a launch could occur this fall. So, likely this iPad Mini will help to fill the void left by the lack of an Apple TV. The 7-inch iPad Mini (rumored) will be a nice product for those that look for more portability in their browsing and reading. I know I will want one. I liked that my old Kindle
(AMZN) fit in my coat pocket in the winter.
So, expect Apple’s new product launches to keep this a high-flying stock into the new year. But one word of caution: I think Apple’s product strategy is going to show its first real signs of cannibalization this fall. The iPad Mini is an obvious candidate to steal sales over the long term from the iPad. However, the two combined will likely still result in more sales than just the 10-inch iPad delivered on its own.
In addition, I think the iPhone 5 is not a must-have product for consumers in the US that already upgraded to a new 4G iPad. The new iPhone 5 is really supposed to just have three main new features: 4G data, larger screen, and slimmer form factor. If you have a 4G iPad, you likely bring it almost everywhere. And if you already own the iPhone 4 or 4S, then that device is really just mostly an email client and phone for you – along with some favorite apps. In other words, if you already have a larger screen handy with a faster Internet data connection, why do you need the iPhone 5 with 4G? Especially when you factor in that the iPhone 5 will likely have worse battery life given the 4G data connection.
All in all, I am confident that the iPhone 5 will set new sales records because of the China Mobile launch. However, all past iPhones have always outsold the previous models combined. If this launch was in the US and Europe only, I am confident that that string would be broken. I am sure the iPhone 5 will set a sales record – but it will not sell more than all past models combined.
With that said, a new record is still a new record. Expect Apple’s earnings to really look spectacular at the end of the year on the back of a fantastic product release plan (excuse me: rumored
product release plan).
No positions in stocks mentioned.
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