On September 21, Apple (AAPL) is set to launch its iPhone 5. For Apple, this latest product release is shaping up as yet another sales bonanza. The Apple iPhone 5 further ignites criticism that Cupertino is now moving units through leverage of brand appeal, rather than offering up unique technical specifications. Largely due to Apple's own marketing, the smartphone is more of a fashion accessory than it is a telecommunications device. As such, Apple loyalists are likely to embrace simple functionality and design above raw computing firepower. At this stage of the smartphone business cycle, Silicon Valley competitors and financial analysts must now account for the idea that specifications are largely irrelevant to the bottom line. In Wall Street terms, the Apple logo alone is worth tens of billions of dollars in "goodwill."
Steve Jobs' Halo Effect
Apple's "I'm a Mac - I'm a PC" campaign lays down the gauntlet for today's consumer electronics market. In this series of advertisements, Apple personifies itself as a chic yet eager to please hipster. Juxtaposed against Apple, Microsoft is a boring company man who cannot get out of his own way. From here, Apple differentiates itself as a consumer-oriented brand that fuses technology together with artistry. The Apple brand is notable for both its clean design and functionality. Alternatively, the Silicon Valley competition is dismissed as technocrats who value fancy terminology above utility.
Over the past decade, Apple's closed and horizontally integrated ecosystem has emerged to dominate the conversation. Zack Whittaker and ZD Net describe Apple's draconian control over its supply chain as "corporate paranoia." The Steve Jobs regime and drive for near perfection have delivered an Apple ecosystem that includes the iMac, iPod, iTunes, iPad, and, of course, the iPhone. Loyal consumers expect revolution with each product launch, largely due in part to the Steve Jobs' halo effect.
The iPhone is Apple's financial focal point. For the quarterly period ended June 30, Apple reports sales of 26 million iPhones, which is a 28% increase above the year-over-year period. Last quarter, the iPhone accounted for $16 billion of Apple's $35 billion in total net sales. Interestingly, Peter Oppenheimer, CFO, effectively dismisses Apple's Q3 2012 earnings as a disappointment due to customers holding off purchases in anticipation of the iPhone 5 launch. In response, Apple shares gapped up from $580 to $700 over the past two months.
Apple's strong financials highlight its leverage above a smartphone duopoly. According to research firm IDC data, Apple iOS and Google (GOOG) Android now control 17% and 68% of the smartphone market, respectively. At the very bottom, Linux, Microsoft (MSFT) Windows, Nokia (NOK) Symbian, and Research in Motion (RIMM) divide the remaining 15% piece of the pie between themselves. At present, Research in Motion's Blackberry garners a meager 4.8% share of the smartphone market. In a scathing piece, Jesse Hicks and The Verge rail against arrogant Research in Motion executives for pandering to IT professionals and ignoring the consumer oriented iPhone threat at the expense of profits.
Silicon Valley is scrambling from behind to compete against the Apple Way. In doing so, the larger players continue to work on the build out and integration of their own computing, entertainment, and telecommunications platforms. Lawsuits between Apple and Samsung highlight the trend that gaps in technical specifications are closing quickly. On August 24, a California jury ordered Samsung to pay $1.05 billion in damages to Apple for patent infringement. The following week, a Japanese court ruled Apple innocent of the very same charges. Contradictory legal wrangling confuses the smartphone market and effectively proves that purchasing choices between leading platforms are becoming more so a matter of feel and familiarity.
Apple iPhone 5 Specifications
The Apple iPhone 5 stands 4.9 inches tall by 2.3 inches wide. This svelte phone weighs in at 112 grams and measures a mere 7.6 millimeters in thickness. The iPhone 5 features a 4-inch screen capable of displaying graphics at 1136 by 640-pixel resolution. Aesthetically, the Apple iPhone 5 negotiates a compromise between the relatively short and thick iPhone 4S and Samsung's Galaxy SIII. During the 2012 Summer Olympics, Samsung pitched its Galaxy phones as a stand-in for track batons in order to play up this vertical and large screen look. Further, Apple's design team must have taken note that the Galaxy SIII and Microsoft Surface tablet are both lauded for thin profiles and lightweight portability.
For telecommunications and sharing data, the Apple iPhone 5 connects to the 4G Network. As a camera, the iPhone 5 takes pictures with an 8-megapixel sensor and records 1080p high-definition video at 30 frames per second. Apple's new iOS6 operating system and fully customized A6 microprocessor combine together for smoother transitions and faster speeds relative to the iPhone 4S. Technical gurus are eager to compare these new chips alongside the Qualcomm 1.5 GHz Snapdragon dual-core processor that powers Windows 8 phones. Beyond technical specification sheets, AT&T executives and media outlets, such as ABC News, foreshadow a record-setting launch for the iPhone 5.
Despite the hysteria, The Week cites a slew of critics who dismiss Apple iPhone 5 specifications as "evolutionary" if not "boring." For good reason, Apple iOS6 represents linear growth when juxtaposed against Windows 8. Microsoft and Nokia are forced to embrace revolution because these companies operate from the dubious position of battling for every inch of smartphone share. Alternatively, Apple lords over what Warren Buffett would refer to as a "moat." For now, Apple can thusly afford to take a conservative approach.
Today, the tables have turned. Microsoft's Windows 8 poses the most significant threat to Apple's counter-culture appeal. As a well-heeled underdog, Microsoft can is well positioned to take the risk that consumers may embrace this new version of Windows. Set for release on October 26, Windows 8 is a fusion of traditional personal computer, tablet, and smartphone interfaces. A Windows 8 consumer can enter touch screen desktop commands at work, before heading commuting home and running Excel calculations through his smartphone. Over the past month, Nokia and Samsung executives have presented demonstrations for new Windows 8 phones at trade shows in Berlin and New York. The Nokia Lumia 920 and Samsung ATIV S will both launch during this Holiday Season.
The ATIV S is striking for its metallic finish, which is a departure from Samsung's typical plastic finish. This Windows 8 phone weighs 135 grams and stands 5.4 inches tall by 2.8 inches wide. The Samsung ATIV S is also notable for its relatively large 4.8-inch, Super AMOLED screen. Alternatively, Nokia markets its Lumia 920 as a fun phone that is available in five separate colors. The Nokia phone converts into an 8.7-megapixel camera, which is a slight upgrade above Apple iPhone 5 specifications.
Despite such bold attempts to challenge Apple, Wall Street remains unimpressed. Microsoft is a $260 billion behemoth notorious for tracking the S&P 500 Index and paying out dividends. Meanwhile, Nokia, formerly the world's leading handset maker now effectively trades as a call option at $2.90 per share. In fact, Nokia stock lost 15% of its value immediately following the September 15 Lumia 920 demonstration. When weighing potential risks versus rewards, Apple stock offers ideal leverage above the smartphone market, despite relatively mundane iPhone 5 specifications.
Apple's Bottom Line
Phone carriers have now discounted the iPhone 4S to a bargain bin $99 price in anticipation of the iPhone 5 launch. The 16GB iPhone 5 begins at $199, if you agree to the terms and conditions of a two-year contract. For additional memory, 32GB and 64GB versions of the iPhone 5 retail for $299 and $399, respectively. Angela Moscaritolo and PC Magazine report that Apple will sell the unlocked iPhone 5 for $649, $749, and $849. AT&T (T), Verizon (VZ), and Sprint (S) are therefore eating $450 in up-front subsidies, in exchange for hopes of generating roughly $100 in monthly cash flow on each iPhone 5 sold. Because of this subscription model, the iPhone 5 offering will help to improve phone company cache and traffic, at the expense of substantial bottom line profits. AT&T and Verizon investments may therefore also be classified as beta stock dividend income plays. Service providers are effectively utilities.
For 2013, I am projecting that Apple will ship out 150 million iPhone 5 units for $95 billion in revenue. This estimate calculates 20% annual growth in iPhone related sales. 2013 financials, of course, will include sales of Apple's $29 iPhone 5 adapter to match Lightning to peripheral equipment. Lightning is the name of Apple's new and controversial dock connector that is 80% smaller than the now obsolete 30-pin standard. Despite this inconvenience, I will foreshadow that the iPhone 5 will account for $25 billion, or half of Apple's then $50 billion in net income by the end of 2013.
If Apple maintains a price multiple of fifteen times earnings, it would then carry a $750 billion market capitalization into fiscal 2014. A $750 billion market capitalization divided by 929 million shares outstanding calculates out to an $800 per share one-year price target. At today's $700, one share of Apple stock trades for sixteen times earnings and carries $125 in cash and investments.
Apple stock is still a solid value. For now, iPhone 5 technical specifications do not necessarily matter.
Disclosure: I am long AAPL.