Shares of Apple (AAPL) hit a new 52-week high on Thursday afternoon, following Wednesday's successful iPhone 5 introduction. The stock looks set to open at a new 52-week high above $689 on Friday, on the back of Thursday's FOMC announcement of further quantitative easing. While the Fed's easy-money policy could support further asset price increases, that alone is not a good reason to buy Apple stock. As I discussed at greater length on Thursday, I believe that fundamentals are a bigger driver of asset prices than Federal Reserve policy (beyond the very short term).
With that background, I don't think that this is a great time to buy shares of Apple. The iPhone 5 looks like a very nice phone, and it is sure to put up very strong sales numbers in the fourth quarter. The impact on Q3 is somewhat more uncertain as it will be limited by availability. However, with some analysts predicting as many as 60 million units being shipped before the end of the year, there seems to be little upside for Apple to blow expectations out of the water (as it did last year).
Current Q4 analyst estimates for Apple stand at EPS of $15.34 on just shy of $55 billion in revenue. While Apple earned $13.87/share last year, that period included an extra week; on an adjusted basis, analysts are looking for growth just under 20%. I think Apple is ultimately likely to beat that number, based on a strong upgrade cycle and some additional share gains for the iPhone. However, given the strong sales of the iPhone 4S during its first six months, there are a lot of customers with new iPhones right now. Many Apple enthusiasts will buy the new phone anyway, but others will not be ready to upgrade. Additionally, there was a 16 month gap between the initial release of the GSM iPhone (June 2010) and the release of the iPhone 4S (October 2011), whereas we are only 11 months from the iPhone 4S launch today. With more new (less than 1 year old) iPhones this year, strong initial sales of the iPhone 5 to Apple enthusiasts could taper off faster than we saw in the last product cycle.
Regardless of the final EPS figure, management will probably give modest guidance next month, in light of the company's predilection for under-promising and over-delivering. Based on these factors, I think that investors should wait for a pullback to $650 or lower before buying Apple. Obviously, Apple is a wonderful company, and long-term investors are likely to do well even at today's prices. However, the stock is not a slam dunk in the same way that it was below $400 last December. Even if the company releases an iPad mini this fall, this will only drive an incremental increase in Apple's earnings, given the likely pricing. The stock is not guaranteed to pull back, but I think the risk/reward is weighted toward the downside over the next couple of months.
The one event that could dramatically change this forecast is the addition of China Mobile (CHL) as an iPhone carrier partner. China Mobile is the world's largest wireless carrier, with roughly 700 million subscribers. There have been longstanding rumors that Apple will add China Mobile as a partner for the iPhone 5, in order to tap this enormous market opportunity. On the other hand, there are significant obstacles preventing this from happening, particularly that China Mobile uses a proprietary 3G standard that is not compatible with other 3G networks worldwide. Reports recently indicated that Qualcomm's (QCOM) 28 nm chipsets supporting China Mobile's TD-SCDMA are in short supply.
As a result, China Mobile will probably not launch the iPhone 5 in 2012. This takes out a lot of potential upside for Q4 (Apple's Q1FY13). However, just as Apple saw a huge boost in revenue and profit within China earlier this year with the release of the iPhone 4S and addition of China Telecom (CHA) as a carrier partner, we could see a similar boost when the iPhone finally comes to China Mobile. Pent up demand could easily permit Apple to sell 10-20 million additional iPhones within six months of adding China Mobile.
If China Mobile becomes a carrier partner sometime in the first half of CY13, the initial sales and channel fill could help counter the recent seasonality in iPhone sales. The real lift to Apple's results would be in the spring and summer of next year. As a result, it may be worthwhile to wait for confirmation of this launch before buying in. Without China Mobile, Apple is unlikely to blow away Q1FY13 estimates as it did last year. Patient investors should consider waiting for a better entry point over the next six months or so, before buying to take advantage of a potential China Mobile boost next year.