I must admit, I do not own any Apple (AAPL) products. Not a single one. However, as a financial analyst, it is hard to ignore the amazing amount of hype surrounding the electronics behemoth.
So, I did a long, hard, (pessimistic) analysis and found that the market is definitely discounting the stock price (surprise, surprise) based on a macroeconomic and valuation basis.
Granted, AAPL has had a couple of hiccups during the last week, first the iPad order cut, and second the launch of a myriad of Amazon devices. So please be mindful of those, but also understand that these negative issues should not have a major effect on the iPhone event.
Another issue that could be swaying the current data is that AAPL has been on a tear recently, jumping as high as $422. Reaching that all-time high in the face of a lot of macroeconomic issues was amazing, but in hindsight may have been a little irrationally exuberant.
I believe that the market has already slapped AAPL with the invisible hand regarding the first two issues, and that we need to look forward to the immediate future. I propose that two specific events, both happening this month, will cause a large price appreciation as well as a general Apple fan-boy frenzy (no offense intended... sort of). This article will focus on the announcement and release date alpha trends, while a follow up article will take a closer look towards surprise earnings (October 18th).
The October 4th announcement will most assuredly bring a new round of religious fervor to Apple consumers, as AAPL unveils its new iPhone with accompanying features. There will be lines with campers just giddy to get their hands on the new iPhone. Not to mention that, although some of the previous iPhone upgrades have only offered moderate upgrades, loyal AAPL customers still continue to upgrade their hardware well before their two-year contract is up. In fact a recent study highlighted the potential by comparing the possibility of a major upgrade, denoted as the iPhone 5, versus a minor-to-moderate upgrade, the iPhone 4S. The table below highlights the possibility of a major move toward AAPL products.
Let us also remember that according to the new UBS survey, we know that iPhone users are by far the most loyal smartphone users, and other manufacturer customers plan on converting to iPhones in the future (see charts below).
This brings me to my real purpose. Continuing on the religious parallel, there is about to be a new "miracle" (just an FYI: before the original iPhone came out, one of its nicknames was "The Jesus Phone").
The iPhone 5 will be announced. Regardless of whether the market has already adjusted the NPV calculations accordingly, as Apple gets ready to bring the world the next iPhone, there will be a host of marketing going on, whether it be from Engadget's weekly podcast, a CNBC special report, or the general blogosphere and professional publications. As well, do not discount the power of the happily converted current iPhone customers willing to dish out free marketing via word-of-mouth and (unpaid) referral advertising.
So, what I wanted to do was look to see if there was a stock price effect from all the hype surrounding iPhone announcements and releases. In order to do that, I took all the announcement and release dates and calculated the alpha (AAPL return - SPY return) to see if we find any interesting trends. I started with 10 trading days before the event and went 10 trading days past the event, basically two weeks in each direction. For those of you statisticians, please check your methods at the door. There are only but a handful (4 to be exact) announcement and release series (the original iPhone, iPhone 3G, iPhone 3GS, iPhone 4) to look at. However, I think there is still value in this analysis.
In order to make adequate eye candy, I created a portfolio that invested $1,000 in AAPL and shorted SPY 10 days prior to the announcement and release dates. The chart is shown below.
Two major things pop out at me. First, we are looking at alpha figures. In other words, these returns are not dependent on the market. In fact, if you look at my article on conditional betas, my guess would be that the returns may be understated because when the market is down, stocks tend to be down farther than the standard beta suggests. What is most amazing about the alpha numbers is that we see at some points an almost 1000 bps (10%) alpha within a period of a couple of weeks for the announcement, and as much as almost a 400 bps (4%) alpha for the releases. Once again, statistical nightmare, I know... but still.
The other major finding that I noticed when I looked at the data was the index return compared to the current return before the announcement on October 4th. The chart below shows that the current announcement price trend has been grossly (around 800 bps, or 8%) lower than previous announcement alphas.
To get more granular, here is a chart showing each individual announcement, which shows that the current alpha is among the lowest we've seen for any of the announcements thus far.
The basic point of all the number slinging is to show that compared to previous announcements, the market is not giving AAPL the same alpha 'pop' as it usually does.
I have not even touched the surface related to the amount of complementary services that AAPL will offer (apps, iCloud, iTunes sales, etc.) that customers will take advantage of. This study was only for the announcement date and surrounding hype, and I expect an even larger appreciation as customers with bright and shiny new iPhones go about customizing and filling their phones with music, videos, etc.
In conclusion, I am confident that the market will come in line with its previous actions related to announcement dates, and that we should see a significant price increase (and significant positive alpha) within the next two weeks.
As well, my follow up article will show that there is also significant alpha to be gained from AAPL's earnings announcements (and constant "surprises").
Please look to my website for further research, including the posting of the spreadsheet I used for the calculations.
Disclosure: I am long AAPL, short SPY, and may initiate a short on AMZN within 72 hours.