Apple's (AAPL) big unveiling of the new versions of its iPhone has come and gone this week. The iPhone 5S has some interesting new features and a faster chip but nothing that is a game changer. The "cheaper" 5C was unfavorably received as investors viewed it as not "cheap" enough to make much headway in emerging markets where price is the main driver.
Ironically if the 5C was perceived as cheap, investors would have worried about its impact to Apple's margins. Very much a case of "damned if you do, damned if you don't." Not surprisingly, Apple's stock has taken a ~$30 a share hit since its iPhone event. The unveiling turned out to be a typical "buy the rumor, sell the news" event.
I believe the disappointment in Apple is likely to be temporary. Bigger drivers of the company's future earnings and revenue growth are still on the horizon and the stock is likely to move higher once these events occur. First and foremost is a long rumored deal with China Mobile (CHL) that will give Apple access to the company's ~740mm subscribers. Obviously this would have a huge positive impact on the company's ability to sell tens of millions of additional iPhones in the Middle Kingdom.
There are a couple of reasons to believe this deal is going to get done in the very near future.
- Lost in the disappointment on the iPhone unveiling this week was news that the company has received a license for its phones to operate on China Mobile's 3G and 4G networks from the country's Telecom Equipment Certification Center. This is significant pre requisite for selling phones to China Mobile's huge subscriber base.
- In addition, the Wall Street Journal recently ran a piece stating Apple has asked Foxconn, its contract manufacturing partner, to add China Mobile to the list of carriers slated to receive a new low-cost iPhone.
Given these items and other data an Apple/China Mobile partnership seems very near.
The other piece of news investors seemed to have glossed over this week is it appears that the new iPhones will be now be available via NTT Docomo (NTT) in Japan. This is a significant positive. NTT has less subscribers (60mm) than China Mobile. However, its subscriber base has a much higher per capita income and approximately a quarter of this subscriber base is already using 4G phones. Finally, Japan is Apple's biggest foreign market already with some ~$2.5B of quarterly sales.
With NTT Docomo in the fold and a deal with China Mobile imminent, the recent selloff is a buying opportunity. UBS estimates a deal with China Mobile alone could result in an additional 17mm iPhones being sold in China in 2014.
After the post iPhone event sell-off AAPL is selling for less than 7.5x forward earnings once its substantial cash hoard is taken out of the equation. The shares also yield 2.4% and the company has over $40B allocated to buy back stock in the next ~two years. Investors should use the recent decline this week to follow noted investor Carl Icahn and add to their positions.