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The Technology industry is the one of the most dynamic industries in which the product trends change at a breath taking pace. A company given up for dead might become the world leader, while a monopoly might become bankrupt in a very short time span. Investing in the technology stocks is extremely difficult but it might give huge rewards to the investors who can make the right bets. There are high chances of profit when investing in a stock which is about to embark on a new product cycle. New products generate buzz in the media and make investors think that the company will make huge profits from the new products. Apple (NASDAQ:AAPL) is about to start on a major product upgrade in the coming year. The stock has declined substantially as the other companies have been introducing new products and winning market share. Apple's main competitors such as Google (NASDAQ:GOOG), BlackBerry (NASDAQ:BBRY), Samsung (OTC:SSNLF) etc. have introduced a number of new products and services. Apple's iPhone 5 and mini iPad are old stories for the fast changing technology industry. Apple unveiled a terrific new design for the new MacPro and introduced the new OS iOS7. The company will also launch a cheap iPhone in August and iPhone 5S in the near future. There are also rumors that the company will introduce larger smartphones in early 2014. The stock remains undervalued with a P/E of less than 10x and can give a sharp gain for investors in the next 6 months or so.

Apple has launched/upgraded some major products in the last month …

Apple has launched three major products/services during its recently held Worldwide Developers Conference. While these products have received mixed reviews, the company will launch many more products before the year is gone. The iOS 7 has been criticized by a lot of designers, while the Mac Pro's sleek new cylindrical design has wowed everyone. Apple's rumors of a music service also came true with the introduction of the iTunes Radio Service. The MacBook Air was also upgraded with Intel's latest Haswell processors. The 22 nm Haswell Core chips are 50% more energy efficient than their predecessor IvyBridge chips. The MacBook Air will now have a 12 hour battery life, which is more than ~70% improvement from the previous version.

and Apple will launch many more in 2013

The recent product launches will not generate a lot of money for Apple as the MacPro is meant for a niche professional designer market, while others are mostly upgrades to existing hardware and software. The iTunes Radio Service will also not really move the needle in case of Apple's gargantuan revenues and profits. The late 2013 launches might prove to be a game changer for the company and move up the revenue and profit estimates.

a) Cheap iPhone

Apple's low cost iPhone which has been working the rumor mills for a long time will start to ship in August according to reliable sources. Apple has partnered with Taiwanese/Chinese EMS Pegatron for the smaller, cheaper iPhone. There are rumors that the device will ship for only $99. I don't think that is possible, given that Apple follows a premium pricing model for its products and a decent smartphone costs at least $180 (Lumia 520). Even if Apple launches an unlocked product for $200, I think that Apple sales could surge and it would be able to capture if not exceed its lost smartphone market share. This product will be the most important product launch for Apple in my view and could radically change the face of the smartphone industry. Apple could take the wind out of the sails of its competitors who have been gaining on Apple.

Pegatron has landed orders for an inexpensive iPhone with plastic chassis and next-generation iPad mini from Apple and will begin shipments in August, according to Taiwan-based supply chain makers…The upstream supply chain will start shipping components for the new iPad mini and iPhone in July and players such as chassis supplier Casetek are expected to strongly benefit from the orders. A next-generation iPhone and 9.7-inch iPad reportedly will appear in early 2014 and will be manufactured by Foxconn Electronics (Hon Hai Precision Industry).

Source - DigiTimes

b) iPhone 5S and new iPads

Apple will also refresh its flagship iPhone 5 and iPad 4 with a new version, as it follows an annual product cycle for the iPhone and iPad. I don't think the new iPhone or iPad will do too much for Apple, except for keeping its smartphone portfolio fresh and up to date with its smartphone rivals.

c) Phablets

A new rumor that is floating around the Internet is Apple seriously looking at introducing larger smartphones with a screen size of 4.7-5.7 inches. I think this makes sense given that consumers are moving towards larger screen sizes. The Samsung Note changed the industry by making large size smartphones popular with consumers. Now almost every big smartphone company has smartphones with > 4.5 inch screen sizes. Apple needs to get a product into the premium phablet space, otherwise it will lose market share because of the absence of a product for a large growing sub-segment.

Technology stocks get a boost during product launches

It is a fact that technology stocks can see a big price appreciation before the start of a major new product cycle. I can cite a few examples in the recent past where stocks jumped up as the companies were about to launch new products/services:

1. BlackBerry - This Canadian company was given up for dead by analysts who thought it could never recover against Apple or Samsung. However, BBRY stock surged before the launch of its new operating system BB 10. The company saw a price jump of almost 200% as the Z10 and Q10 generated a media frenzy. The stock price has now stabilized in the $13-16 range as the euphoria dies down.

BBRY Total Return Price Chart
(Click to enlarge)

BBRY Total Return Price data by YCharts

2. Intel (NASDAQ:INTC) - Intel's stock had been stuck in a $20 range for a long period of time due to investor concerns about the decline in the PC industry. The company's launch of its new generation Haswell chips has generated a lot of excitement. Also its recent tablet and smartphone design wins led to a sharp jump in the stock price. I expect that Baytrail and Merrifield launch could take Intel's stock to at least $30 in the next 6 months.

INTC Total Return Price Chart
(Click to enlarge)

INTC Total Return Price data by YCharts

3. Microsoft (NASDAQ:MSFT) - The Seattle giant has been underperforming like Intel for the last few years and I have been positive about the stock from the beginning of the year. The stock burst out of its stock range with the buzz generated around its new Xbox One launch and the upcoming launch of new products such as Windows 8.1 and smaller Surface tablets.

MSFT Total Return Price Chart
(Click to enlarge)

MSFT Total Return Price data by YCharts

Valuation and Stock Performance

Apple's stock has stabilized at the $450 level in recent months, after falling below $400 after it reported its C1Q13 results. The biggest share buyback in history and the increased dividend yield has set a floor for the stock. Apple's stock is cheap like other smartphone stocks with a forward P/E of just ~10x and a dividend yield of ~2.5%. The stock is set to rally as new product launches act as a catalyst for investors to lap up this cheap stock.

Summary

Investing before a major product cycle is a tried and tested strategy for the technology stocks, though it does not work every time. In case of Apple, the conditions are near perfect as the stock is undervalued and sentiment remains very bearish. The expectations about the company and its management are one of the worst I have seen in the last few years. Apple's MacPro upgrade shows that the company is still capable of launching tremendously innovative products that can wow users with their ease of use and premium looks. Investors should look at how Intel has given a ~25% return in the last 6 months under the same conditions. I would look to buy Apple now as the new products has the potential to surprise Apple bears and make the stock shoot up at least 20-25% in the next few months. Both Intel and Microsoft which are giant technology stocks have seen their valuations improve towards 12-12.5x forward P/E. Apple has similar size and also somewhat faces the same magnitude of risks.

Source: Apple: Consider It For 20-25% Upside Before It Embarks On A New Product Cycle