'Let's Talk' iPhone 5 Is A Game Changer

| About: Apple Inc. (AAPL)

The official announcement for the October 4th iPhone event has been sent out to the media in the form of a 'Let's Talk iPhone' invitation. Wall Street has not yet caught on to the fact that this iPhone upgrade is an absolute game-changer. Consensus opinion remains severely off track with the expectation that this new phone will have a better camera, be a little faster, and look the same as the iPhone 4. The truth is that this iPhone 5 upgrade is the most significant upgrade to the Apple ecosystem since the initial launch of the product back in 2007. Wall Street will soon catch on to the reports being leaked to tech publications.

Consider the ramifications of the following iPhone 5 elements:

  1. Why did Apple use the phrase 'Let's Talk iPhone'? Because this is the first phone that will integrate the Siri voice assistant technology that Apple purchased in April 2010. The implementation of this voice technology is the biggest thing that has happened to smart phones since they first implemented touch screens. When asked to describe the sale of Siri to the media, Norman Winarsky, vice president of licensing and strategic programs at SRI International, was quoted as saying, "this is a great event for us in terms of our impact on the world."

    The Siri voice control system allows users to instruct the iPhone to 'sent a text message to Jason Schwarz asking him meet me for lunch'. Think about this capability in terms of safety. We all know that too many drivers send and receive text messages, now they will be able to safely operate an iPhone in the car. The voice assistant adds a layer of intelligence as well. If I ask my iPhone to 'call Dad' it might ask me whether it should dial his home phone or his mobile. It is also able to perform Web based search functions such as 'book a table for two at 9:00 tonight' or 'send a taxi to my house'. Siri worked with Citysearch, Opentable and Taxi Magic before the Apple acquisition. Voice search, rather than browser based search, could prove to be a real threat to Google's dominance.

    At the original iPhone event in January 2007, Steve Jobs stated, 'We are all born with the ultimate pointing device-our fingers-and iPhone uses them to create the most revolutionary user interface since the mouse." Well, I would add that we're also born with the ultimate communication tool-our voice-and iPhone is about to create the most revolutionary user interface in the history of technology. I expect that this voice assistant will quickly make its way into laptops and desktops as well. Apple's competitive advantage is widening by the day.

  2. In order to operate the voice assistant, iPhone 5 hardware needs a significant upgrade. 9to5 Mac is reporting that the new iPhone will include a A5 processor, or system on a chip that enables faster performance, drastically improved graphics and better gaming. In addition it will include a whopping 1 GB of RAM, an 8 megapixel camera, and a Qualcomm Gobi Baseband chipset that allows the iPhone to run on both CDMA and GSM networks. The big news is that the Siri voice assistant won't be compatible with the iPhone 3GS or the iPhone 4 because the feature requires the A5, CPU, and additional RAM. This means that the upgrade demand among current current iPhone users will be greater than normal.
  3. iPhone 5 will be fully compatible with iCloud. With all of the hoopla surrounding Apple it seems that the media has forgotten about this new platform. iCloud is not only a hard drive in the sky but it is a seamless way to access all music, apps and photos across multiple devices without performing hard line syncing. The iCloud will include a new iTunes, Photo Stream, Documents in the Cloud, and up to date organization/back up of apps, books, contacts, calendar and mail. As Apple mentions on its website... no syncing. No sending. Your stuff is just there. Everywhere you want it.

    Who will be joining iCloud? UBS analysts are reporting that their latest surveys show the iPhone with an 89% expected retention rate for their next handset. Research in Motion (RIMM) has seen its retention rate drop from 62% 18 months ago to a current 33%. 31% of Android (NASDAQ:GOOG) users indicated they are likely to switch to an iPhone for their next handset. More than 50% of those looking to switch, plan to purchase an iPhone while only 10% of switchers plan to leave Apple. It is data like this that instills confidence in Apple's growth prospects for 2011-2012.

After witnessing 142% unit growth for the iPhone in Apple's most recent quarter, we believe that the upcoming iPhone 5 will command a similar growth trajectory in the holiday quarter. Last year Apple sold 16.24 million iPhones, this year we expect they will sell at least 32.48 million units.

Interestingly enough, the market is not catching onto these iPhone 5 ramifications. We maintain our stance that yesterday's misleading report out of JP Morgan was not issued by mistake. Firms like JP Morgan don't make mistakes like that. Especially when they know that Apple will be under pressure on Wednesday because of the Amazon tablet announcement, they know that weekly options come out on Thursday and they know that the iPhone 5 event will exceed expectations next Tuesday. If hedge funds can keep Apple tame until those weeklies come out on Thursday, they could be in store for the biggest week of the year. Even George Soros is in the game with almost $100 million of Apple stock and call options. We're going to use today, Wednesday, and Thursday to average into a new 20% allocation of AAPL October 2011 $390 calls that we plan on holding up until the earnings report that was just announced for October 18th. This series of option won't expire until the 21st of October which makes them ideal for this opportunity. Today we're buying a 7% allocation.

Disclosure: I am long AAPL.