Apple: Making Money On The iPhone 5 Launch

Sep. 3.12 | About: Apple Inc. (AAPL)

Apple (NASDAQ:AAPL) has won a significant battle against Samsung in its smartphone patent war. There has been much hype on this announcement, and the stocks of both companies have reflected market perceptions. We have already discussed these effects in detail. Samsung (OTC:SSNLF) has announced its first Windows WP8 based smartphone (Microsoft's (NASDAQ:MSFT) new platform). Nokia (NYSE:NOK) is also set to release its Lumia Arrow and Phi next week. The launch of the iPhone 5 is right around the corner; considering the smartphone series contributes more than 50% to revenues, it's an important event for all stakeholders. We believe there are trading opportunities for investors in either case. We believe that AAPL is a good buy in both positive and negative scenarios of the iPhone 5 launch. Therefore, we are bullish on AAPL.

Fundamentals

A quick look at the quick ratio and current ratio tells us that both ratios are above industry averages. The company doesn't have any long term debt.

Financial Strength

Company

Industry

Sector

Quick Ratio (MRQ)

1.54

1.16

0.87

Current Ratio (MRQ)

1.57

1.45

2.71

Click to enlarge

Source: Reuters

One of Apple's biggest strengths has always been its ability to come out with amazing products by spending on research and development. This extraordinary efficiency is reflected in its profit margins and makes it the world's most valuable company. The iPhone has a profit margin of approximately 58%. The graph below shows how the tech giant dominates the industry in terms of profit margins. A look at the graph shows that Apple is the leader in profitability in all different profitability metrics. The company performs better than the sector average in most ratios.

Click to enlarge

Source: Reuter's Data

The driving force behind Apple was none other than its management in the form of the late Steve Jobs. The ratios below show that the company's management is still doing a better job as compared to the industry. The company beats both the sector and the industry in every performance metric. The ROA for the company is nearly 4 times the industry average; the ROI is more than twice that of the industry average. The five-year performance of both ROI and ROA are better than the industry.

Management Effectiveness

Company

Industry

Sector

Return on Assets (TTM)

29.77

8.87

14.42

Return on Assets - 5 Yr. Avg.

23.02

8.98

15.54

Return on Investment

38.27

14.33

18.89

Return on Investment - 5 Yr. Avg.

31.94

16

21.04

Return on Equity

44.32

15.96

20.37

Return on Equity - 5 Yr. Avg.

36.21

17.89

22.64

Click to enlarge

Catalysts

We believe that for the time being, the effects of the Samsung verdict have been priced in. The market can however react positively or negatively to September injunction hearings. For the time being, the most important catalyst for AAPL is the release of the iPhone 5. Therefore, we will analyze the stock price movement of past model releases. There is still no official release date for the iPhone, but we will assume a release date of September 12 for our calculations. The graph shows the return on iPhone launch events in a two week prior period.

AAPL on release Date

15 days before Release

Absolute return

% return/loss

iPhone

Jan 9 2007

$92

$82

10

12%

iPhone 3G

Jun 9 2008

$186

$174

12

7%

iPhone 3GS

Jun 8 2009

$143

$125

18

14%

iPhone 4

Jun 7 2010

$250

$242

8

3%

iPhone 4S

Oct 4 2011

$372

$412

-40

-10%

Click to enlarge

The stock reflects the performance of the market until the launch date. The market was initially disappointed with the launch of the iPhone 4S, as most people were expecting the release of the iPhone 5. The phone was later a success with customers.

Apple has a long history of keeping absolute secrecy on almost everything. Therefore no judgments can be made as yet on the success of the product before it is released to the public. However, using the past data, we can create an approximate target in price in either the case of a successful or unsuccessful launch.

Expected Launch Date

Sep 12, 2012

Upside/Downside

Current Price

$664

Positive Response

$724

9%

Negative Response

$598

-10%

Click to enlarge

The stock can go up to $724 or come down to $598, depending on whether the market is disappointed or excited about the launch.

Conclusion

In either case, we are bullish on AAPL. We believe there is money to be made on the iPhone 5 launch. In case of a disappointing release, the dip in prices can be another good entry point for long term investors. Therefore, we maintain our buy rating for AAPL.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by Qineqt's Technology Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article.