On October 26, Microsoft Corporation (MSFT) will release its much-anticipated Windows 8 software. Microsoft shareholders, of course, hope that this new Windows 8 program will serve as the backbone of a lucrative ecosystem that includes personal computers, tablets, and smartphones. Microsoft's plans are being orchestrated as a direct challenge to Apple Inc.'s (AAPL) dominance over the consumer electronics market. As a group, the Microsoft supply chain is now hell bent upon developing a beachhead telecommunications device that can match the Apple iPhone and its revolutionary appeal.
To date, the Nokia Corporation (NOK) Lumia 920 and Samsung ATIV S Windows 8 phone prototypes have already been unveiled for public consumption. The silence surrounding these Windows 8 phone events is remarkably deafening, in comparison to the hysterical response over the iPhone 5. Yet again, Apple is set to unleash another "must-have" product onto the marketplace. After the smoke clears, Microsoft will remain a beta stock that tracks the S&P 500 and pays out healthy dividends. Alternatively, "fan boys" must recognize that the Apple's story stock cannot trend upwards ad infinitum. Most likely, the iPhone 5 will symbolize Apple's last hurrah as an aggressive growth investment.
The Apple Ecosystem
Apple's devastating "I'm a Mac - I'm a PC" campaign effectively frames the terms and conditions for today's consumer electronics battleground. In a series of advertisements, Apple personifies itself as a chic, yet functional hipster who is eager to please. Alternatively, Microsoft is a bespectacled company man in a tweed suit who cannot get out of his own way. The "I'm a Mac - I'm a PC" series of advertisements highlights a Steve Jobs halo effect that extends over Apple's closed and horizontally integrated iMac, iPod, iTunes, iPhone, and iPad machines. In Wall Street parlance, this halo effect would be described as "goodwill."
According to nominal financial metrics, the iPhone platform is the primary driver behind Apple's growth story. For its latest third quarterly period ended June 30, Apple reports 26 million in iPhone unit sales. This sales activity calculates out to 28% year-over-year growth in iPhone shipments. In terms of revenue, the iPhone accounted for $16 billion of Apple's $35 billion in Q4 2012 total net revenue. This performance is especially remarkable, considering the fact that Peter Oppenheimer, CFO, claims that Apple enthusiasts are holding off on purchases in anticipation of the iPhone 5 launch.
Apple's $620 billion market capitalization is much indicative of a smartphone duopoly dominated by iOS and Google Android. A recent comScore report estimates that the iOS and Android platforms combine to garner an 85% share of all smartphone subscriptions. This data is juxtaposed against an environment where Samsung and Apple account for 26% and 16% of total handsets sold, respectively. Rivals Samsung and Apple now wage smartphone warfare in the courts. Recently, a California jury ordered Samsung to pay Apple $1.05 billion in damages, while a Japanese court ruled Samsung innocent of patent infringement charges.
Contradictory Apple versus Samsung verdicts will only confuse the smartphone market and do little to help the cause for Microsoft Windows 8. In terms of smartphone subscriptions, Nokia, Research In Motion (RIMM), and Microsoft are all bottom feeders battling over the remaining 15% share of the smartphone subscriptions. Without a blockbuster Windows 8 launch, Microsoft will be unable to alter the current dynamics of the smartphone duopoly and improve upon its meager 3.6% market share.
Windows 8 and Apple iPhone 5 Specifications
According to Dan Costa and PC Magazine, Microsoft is taking a "huge gamble" that consumers will appreciate the fusion of traditional personal computer, smartphone, and tablet interfaces beneath one Windows 8 umbrella. For example, a Windows 8 user will be able to execute desktop commands via touchscreen, before picking up his smartphone and toggling through tile icons for Word and Excel. To stoke demand, Samsung and Nokia are both now falling all over themselves to demonstrate Windows 8 phone prototypes at technical trade shows. Samsung's ATIV S and Nokia's Lumia 920 are both scheduled for a Holiday Season launch.
On August 29, Samsung unveiled its ATIV S as the first Windows 8 phone handset at IFA in Berlin. This phone is notable for its brushed aluminum finish, which is an aesthetic upgrade above Samsung's standard plastic look. Weighing in at 135 grams, this Windows 8 phone stands 5.4 inches tall by 2.8 inches wide. The Samsung ATIV S features a 4.8-inch, Super AMOLED screen capable of displaying 16 million different colors at 720 by 1280 resolution. As a camera, this Samsung handset records 1080p video at 30 frames per second and takes pictures with the help of an 8-megapixel sensor.
Earlier this month, reactionary Nokia was to present its very own Windows 8 prototype at a New York City demonstration. Nokia promotes its Lumia 920 as a phone "designed to wow," and manufactures this handset in five separate available colors. In terms of dimensions, the Nokia Lumia 920 is more compact and heavier than its Samsung ATIV S competitor. Besides its physical appearance, however, the 920 features technical specifications, such as an 8.7-megapixel camera and Nokia Music Store that may be described as standard equipment for the smartphone market. Qualcomm's dual-core 1.5 GHz Snapdragon S4 processor powers both Nokia and Samsung Windows 8 offerings.
Windows 8 phones have yet to impress Wall Street. On September 5, cynical traders sat through Stephen Elop's Lumia 920 presentation, while simultaneously entering orders to dump Nokia stock at a 15 percent loss on the session. Juxtaposed against Apple, Nokia's staggering decade-long collapse towards yesterday's $2.88 per share price highlights a changing of the telecommunications guard. The beat goes on, as reports out of ABC News, AT&T, and Apple all indicate that the looming iPhone 5 release will shatter sales records.
On Friday, September 21, the iPhone 5 is set to launch. In all likelihood, metropolitan Apple Stores will effectively transform into see and be seen nightclubs. Aesthetically, the sleek iPhone 5 is an extension of both the Samsung Galaxy SIII and Microsoft Surface tablet, where Silicon Valley design teams are now embracing a vertical, yet thin look. The svelte iPhone 5 measures 7.6 millimeters in thickness and weighs in at 112 grams. Apple's latest handset stands 4.8 inches tall by 2.3 inches wide. The Apple iPhone 5 features a 4-inch screen that displays graphics at 640 by 1136 resolution.
James Kendrick and ZD Net describe iPhone 5 technical specifications as "evolutionary," if not "disappointing." Apple's new A6 processor and iOS 6 offer slight improvements in performance. The iPhone 5 converts into one 8-megapixel camera and separate recorder that plays back 1080p video at 30 frames per second. Apple's new dock connector, Lightening, arguably generates as much buzz as any other iPhone 5 feature. Lightening is 80 percent smaller than the 30-pin 4S dock connector. This change forces consumers to either upgrade their Apple peripherals, or purchase adapters for each existing device. Apple's Lightening Adapter now retails at the Apple Store for $29.
In anticipation of the iPhone 5 launch, phone carriers have already slashed 4S prices down to $99, if you agree to the terms and conditions of a two-year service contract. With a contractual agreement, network carriers will offer the 16GB iPhone 5 for $199. 32GB and 64GB iPhone 5 models retail for $299 and $399, respectively. The iPhone 5 launch is shaping up as a sales bonanza, despite the objections of tech gurus who rail against Apple's slight and linear progression of handset improvements.
The Bottom Line
Microsoft, alongside telecommunications carriers AT&T (T) and Verizon Communications (VZ) are typically beta stocks. As beta stocks, these investments track the S&P 500 Index over the long term, while underlying businesses generate high levels of nominal cash flow. Rather than reinvesting earnings for growth, investors should expect beta corporate managers to write fatter dividend checks over time. Microsoft, for example, doubled its quarterly dividend from 10 cents to 20 cents per share between Q4 2007 and Q1 2012. At present, Microsoft is a $260 billion corporation averaging $17 billion in profits over the past five years. The looming Windows 8 release does little to change the modus operandi at Microsoft. Microsoft will generate the bulk of its revenue from licensing software to a dying PC industry.
Nokia stock is now effectively a call option. For its latest fiscal second quarterly period ended July 19, Nokia reports $2 billion in losses. Nokia's bottom line losses are indicative of a business grinding through a 39% year-over-year decline in smartphone device sales. The situation is especially precarious, considering the fact that Nokia reports a mere $13.2 billion in cash and investments to cover $27.4 billion in liabilities. Reported valuations for Nokia's intellectual property and goodwill must be revised sharply downward, if not dismissed altogether. Google's recent $12.5 billion acquisition of Motorola may serve as evidence that telecommunications players in the market for patents are choosing to bypass Nokia.
Microsoft Windows 8 will not save Nokia. Most likely, Nokia shareholders can expect another round of warnings, steep operating losses, and job layoffs that buy time until the inevitable bankruptcy. Nokia is not Ford (F) Motor Company. When cornered, Finland Prime Minister Jyrki Katainen rejects any ideas of a government-sponsored bailout for Nokia. Says Katainen, "this is not our business."
Alternatively, Apple fan boys can take solace in the idea that "haters" banking on the demise of this stock are likely to remain severely disappointed into the near future. At $700, Apple trades for sixteen times earnings, which still makes this stock cheap when juxtaposed against the corporation's 66% average annual profit growth over the past four years. For the latest quarter, Apple closed out its books with $117 billion in cash and investment securities to cover $51 billion in total liabilities and 929 million shares outstanding on the balance sheet. Taken further, this position breaks down to roughly to $70 in net liquidity per share.
Apple's iPad, alongside its looming iPhone 5 launch, looms large as a growth driver over the next year. I am projecting a downshift to 50% and 20% year-over-year growth into 2013 for the iPad and iPhone, respectively. For 2013, I estimate that Apple will sell 150 million iPhone 5 units for $95 billion in revenue. This $95 billion in revenue would trickle down to $25 billion in fiscal 2013 net income.
By the end of this year, the iPhone 5 should account for half of Apple's $50 billion in projected bottom line profits. Apple would then have grown into a $750 billion corporation, on the condition that this company carries its current multiple of fifteen times earnings forward. These assumptions establish a one-year price target at $800 for Apple shares. After one year, aggressive investors may opt to dollar-cost-average out of Apple shares and scour Silicon Valley financial statements for "the next big thing."
Over the long term, it is inevitable for Apple's improbable story stock run to wind down. After one last hurrah for the iPhone 5, I foreshadow that Apple will shift into the product maturation stage within this Web 2.0 business cycle. Apple product launches would then parallel the feel of Nike's (NKE) Air Jordan line, instead of Steve Jobs' revolution. Several years after the passing of Steve Jobs, brand loyalists can maintain older iPhones as collector's items, alongside neatly lined rows of Air Jordan shoes.
Disclosure: I am long AAPL.