Largely due in part to today's perpetual 24-7-365 news cycle, every Apple Inc. (AAPL) talking point degenerates into what the New York Times describes as "fan boys" against "haters." On September 21, Apple launched the iPhone 5, amid the typical speculative feeding frenzy that is now par for the course for this company. With the smoke clearing, Apple reports sales of more than 5 million iPhone 5 units during the first weekend of product launch. Wall Street, of course, is not impressed.
UBS analyst Steve Milunovich hurriedly revised his Apple estimates downwards, while shares have cratered from $700 to $660 over the past week on heavy volume. To long-term investors, the scuttlebutt and hysteria are much ado about nothing. At worst, Apple will transition into the product maturity stage of the Web 2.0 business cycle. Only a fan boy would expect this gravy train to last indefinitely. For now, reports alleging rioting at a Chinese factory, alongside technical glitches in glass screen manufacturing, highlight questions surrounding the Apple iPhone 5 supply chain.
The Apple iPhone 5 Supply Chain
Wall Street analysts were calling for iPhone 5 sales of between 6 million and 10 million units during this past first weekend of launch. According to Tim Cook, CEO, "we have sold out of our initial supply." Cook's statement may serve as evidence that either Apple fully intended to limit this launch, or that disruptive bottlenecks plague the iPhone 5 supply chain.
Wall Street is taken aback by the idea of Apple supply chain gaffes, considering the fact that Tim Cook is an operations man. Today's happenings are eerily reminiscent of the Steve Jobs mystique that seemingly revels in product shortages and consequent nightclub settings at metropolitan Apple stores. The Steve Jobs halo effect lives on.
Apple has already set up shop to sell its iPhone 5 in the United States, Canada, Australia, France, Germany, United Kingdom, Japan, Hong Kong, and Singapore. By the end of this year, the iPhone 5 will be available in more than 100 countries, with 22 of these countries welcoming product on September 28.
By nature of this schedule, Apple iPhone 5 sales receipts will appear weak over the next two quarters. Although Apple is leaving money on the table, the smartphone competition is not likely to pick up the slack.
The Smartphone Competition
According to recent comScore data, Apple iOS and Google (GOOG) Android lord over 33% and 52% of the smartphone market, respectively. Beneath this duopoly, Research In Motion (RIMM), Microsoft (MSFT) Windows, and Nokia (NOK) Symbian fight desperately over the remaining table scraps of 15% of smartphone subscriptions.
For its latest fiscal third quarterly period ended June 30, Apple reports sales of 26 million iPhone units. This performance amounts to $16 billion of Apple's $35 billion in total net sales for Q3 2012. The iPhone remains the centerpiece of Apple's closed ecosystem that includes the iPod, iTunes, iMac, and iPad. To steal Apple's shine, competing smartphone and ecosystem design are converging together. Going forward, results will therefore be largely reliant upon branding and what consumers perceive as "cool."
On August 24, a California jury ordered Samsung (SSNLF.PK) to pay $1.05 in damages to Apple on patent infringement charges. The following week, a Japanese court ruled Samsung innocent of these very same patent infringement charges. Obviously, the Apple iPhone 5 and Samsung Galaxy SIII handsets appear eerily similar, beneath the contradictory legal rhetoric.
Weighing in at 112 grams, the iPhone 5 stands 4.9 inches tall by 2.3 inches wide by 7.6 millimeters thick. This new look for the iPhone negotiates a compromise between the compact iPhone 4S and the vertical Galaxy, which Samsung promotes as a stand-in for an Olympic Track and Field baton. Both 16GB versions of the Apple iPhone 5 and Samsung SIII galaxy retail for $199, if you agree to the terms and conditions of a two-year phone service contract.
At this junction, Microsoft poses the most significant threat to today's smartphone status quo. On October 26, Microsoft is set to release its Windows 8 and Surface tablet. Windows 8 is an amalgamation of traditional personal computer, smartphone, and tablet interfaces. For example, a Windows 8 user is able to execute desktop commands through touch screen technology, before picking up the nearest smartphone and scrolling through tiles to open up Microsoft Excel.
The Samsung ATIV S and Nokia Lumia 920 Windows 8 phones are both set to launch this Holiday Season. The ATIV S is notable for its relatively large Super AMOLED 4.8-inch screen and brushed aluminum finish. Similar to the iPhone 5, Samsung's flagship Windows 8 phone converts into a camera that takes pictures with an 8-megapixel sensor.
Alternatively, the Lumia 920 is already being lauded for the picture clarity of its 8.7-megapixel camera. A Qualcomm Snapdragon S4 dual-core processor powers both Nokia and Samsung Windows 8 phones. Despite Windows 8 creativity, Wall Street is not exactly impressed. Nokia stock immediately lost 15% of its value earlier this month, simultaneously alongside Stephen Elop's New York City Lumia 920 demonstration.
Apple's Bottom Line
Apple remains on course to sell between 100 million and 150 million iPhone units over the course of the next year. I project that this iPhone performance will tally $95 billion in revenue and $25 billion in fiscal 2013 profits for Apple. If iPad sales were to grow at a 50% clip, Apple may then post $50 billion in earnings. At that point, Apple would then carry a market capitalization of $750 billion, if it were to conservatively trade at a price-to-earnings multiple of 15; $750 billion in Apple earnings on top of 929 million shares outstanding breaks down to a rough $800 per share one-year price target.
For now, shareholders can take solace in the fact that the Apple Way remains a cash machine. At today's $667, Apple now trades for 24 times trailing 2011 earnings. This stock remains relatively cheap, considering the fact that Apple is averaging 66% average annual net income growth over the past four years. For Q3 2012, Apple closed out its books with $117 billion in cash and investments to cover $51 billion in total liabilities on the balance sheet. One Apple share therefore represents $71 in built-in net liquidity, after Peter Oppenheimer, CFO, effectively writes a check to pay off all debt.
If anything, the Apple bandwagon is inevitably destined for a trip up The 5 Freeway to unite with Microsoft as a beta stock. By beta definition, Apple would then track the S&P 500 and offer regular dividend payment increases. A special dividend would signal that Apple is shifting into the product maturation stage of this Web 2.0 business cycle. In July 2004, Microsoft approved a one-time, $3 special dividend to help relieve itself of a bloated, $56 billion cash position.
Besides generate income, Microsoft, personal computer investments, and the S&P 500 Index have done nothing for more than one decade. Apple will follow a similar pattern, if the iPhone 5 proves to be this corporation's last hurrah as a blockbuster event.
Disclosure: I am long AAPL.