Apple (NASDAQ:AAPL) investors, I have a feeling you should be slightly concerned that the hype surrounding the launch of the next generation of the iPhone is focused on the color of the phone, flatter icons in a revamped operating system, and the introduction of a plastic molding budget iPhone. I think there is a legitimate question as to whether Apple will see the same type of excitement that is generally associated with new product launches as many iPhone users question whether it is worth purchasing the rumored 5S model or waiting another year to see if Apple can finally deliver an upgraded iPhone that offers something different. It will be interesting to see if all of the recent activity, such as Uncle Carl Icahn tweeting that he has a $1.5B stake in a $500B company, is just a sideshow meant to distract from a product launch that has limited upside but could very well surprise to the downside. Apple hardly strays from the playbook and thus it would be extremely surprising if all of the reports regarding the upcoming product launch are incorrect and Apple actually has an iPhone 6 or some sort of next generation larger screen model up its sleeve and ready to be unveiled.
Why Apple Investors May Be In For A Disappointment
It might have come across as a joke when I alluded to it earlier, but the Apple news this week was truly dominated by the rumor that Apple plans on introducing a gold colored option for this iPhone 5S release. Call me a simpleton if you will, but it is extremely hard to fathom how introducing a gold colored phone, as a complement to the standard white and black options, will be a game changer. I would argue more than 50% of those who own a smartphone use some sort of protective device to cover their phone, which already allows consumers to decorate their iPhone with essentially any color from the rainbow. Articles such as this one noted that gold was a sign of wealth, and this gold colored model would be especially popular in China or other emerging market countries. If a gold iPhone is Apple's solution to cracking the China market, then the company truly is at a loss for innovation. I have no problem with Apple introducing a gold or champagne color phone. I assume some subset of consumers will be drawn to this as another option, and it might even spur some people to purchase the iPhone 5S who might not have otherwise splurged on a new phone. What concerns me is that less than a month from Apple unveiling its new products, an entire week of news media was devoted to the COLOR of the iPhone 5S. Not a rumor about potential revolutionary hardware upgrades or things of the sort that make consumers clamor for the new device. Instead, we were treated to endless drivel about Apple getting so creative that it would introduce a third color pallet to its newest iPhone model. Yikes.
For those who say that the game changer is not the iPhone 5S, but the completely revamped operating system, I fear the let down in this arena has the potential to be even greater than that of the hardware. When it comes to the hardware of the iPhone 5S, expectations are generally low to begin with. Faster processor, better screen resolution, and the potential for fingerprint sensor technology top the list of what consumers can expect. Nothing major here so any surprises would be to the upside. However, the upgrade from iOS6 to iOS7 is being touted by CEO Tim Cook as the biggest change to the operating system since the introduction of the iPhone. With that in mind, consumers might be expecting revolutionary changes to the operating system. For the sake of Apple, hopefully that is not the case. Article after article that reviews iOS 7 spends an inordinate amount of time discussing the appearance of icons and background colors. While maybe revolutionary for Apple, in terms of having been the same for the previous 6 generations of the operating system, it is hardly something that screams "buy me now" to consumers. Then you get to the real meat and potatoes of iOS 7, specifically what Apple talks about on its website when it highlights the latest and greatest features. A new control center and notification center [catching up to Android and BlackBerry (NASDAQ:BBRY) 10], multitasking (inspired by BlackBerry?), camera upgrades with filters (Instagram anyone?), and oh so much more. I know Apple fanatics might argue that the coming Air Drop feature, allowing iOS 7 users to easily share items such as pictures wirelessly or through a Bluetooth connection is an amazing feature. I would argue this is already available for those using the Galaxy S4, through any number of other applications or third party sharing sites, and Apple users will be frustrated by the fact that only certain Apple devices will support this feature out of the gate. Needless to say, it is not that hard to make an argument that Apple is simply catching up to the latest features available in Android operating systems and even that left for dead BlackBerry and its latest and greatest operating system.
Finally, it is at this point a certainty that Apple will be debuting a cheaper or budget version of its iPhone. The iPhone 5c as it is rumored to be called, is intended to be Apple's best chance yet to make a foray into the gigantic emerging market where consumers are incredibly price conscious and have a tendency to purchase phones at un-subisdized prices. This has been a market dominated first by BlackBerry, and now by Android and its host of hardware partners schlepping hundreds of models of low cost phones across the globe. The was a necessary move for Apple to make and one where I believe the jury will be out until the retail price is known, as well as having a tear-down analysis completed in order to derive what Apple will make from each unit sold. I think Apple actually could surprise to the upside here due to its ability to generate substantial manufacturing savings from its budget phone and still command a premium price over comparable Android offerings in emerging markets. With that being said, there is no doubt that Apple will cannibalize the sales of its existing and more profitable high end phones with the launch of a cheaper version. This cannibalization will become an issue should Apple fail to hit a price point compels significant update for this product.
Since bottoming under $400 a share in late June, Apple has seen its share price bounce 25% to push shares back over $500 as of August 23rd. The last half of the 25% bounce can be almost directly attributed to Uncle Carl Icahn and his now famous tweet about speaking with Tim Cook and the potential for more shareholder friendly actions such as bigger share buyback in the future. It is rather disturbing in my mind that someone can take a position that is less than half of 1% of the entire market capitalization of Apple, and have the ability to fire off a tweet that spurs a more than $40B increase in the company's market capitalization.
Other articles have addressed this, some arguing that it is a positive and others that it is a negative, but all Apple investors should be clear that big money investors such as Carl Icahn are agitating for change that does not come without risk. One of the most significant stories with regards to the success of Apple has been the mountain of cash the company generated during its run of unparalleled success over the last few years. Yet now, gross margins are declining, the pace of innovation is stalling, and the competition, by and large, has caught up with Apple. One of the last remaining competitive advantages that Apple had over any other company was its massive cash pile. Now, big money investors want Apple to distribute that cash in addition to levering up the balance sheet with debt to fund dividends and buybacks. Is this a near term risk for the company? Not at all. You can be sure that after Icahn and the other big money investors get the dividends they are looking for and see the share price boosted higher as a result of buybacks, they will hit the exit long before retail investors know they are gone. They probably will not even have the courteous to tweet their exit strategy in advance. At least Apple investors will have their shiny gold iPhone 5S's to commiserate with.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.