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  • Why The New IPhone Does Not Matter 0 comments
    Sep 6, 2013 1:41 PM | about stocks: AAPL

    The media is abuzz about the announcement of a new iPhone on Sept. 10. The press's favorite game seems to be guessing what features the new iPhone will have and what colors it might come in. What you need to understand is why none of this matters to your decision to invest in Apple (AAPL).

    Just an upgrade

    The original iPhone was a category killer that provided its users with benefits they had never before received from their mobile phones. The new iPhone is basically going to have the same benefits as the original just with some new features. The iPhone 5 will just be another upgrade.

    You need to realize that no matter what features the new version has it will still not be enough for the press. Every news story about the introduction of the new phone will prominently feature quotes from experts telling you what is wrong with the new version.

    The color does not matter because most iPhone owners buy covers for their phones. The screen size does not matter because it will be a size that is good enough for most buyers.

    None of what will be said matters to you, the investor, who is intelligently grounded in the fundamentals.

    What does matter

    The number one thing that matters is the answer to this question. Will there be profitable sales?

    Here are the questions you need to be asking yourself along with my answers:

    1. Will millions of Apple fanatics decide to replace their iPhone 5 with the new version? Yes.
    2. Will millions of Apple customers with older models that are out of contract decide to replace their old phones with the new phones? Yes.
    3. Will millions of people in China or the developing countries buy some version of an iPhone? Yes.
    4. Will Apple continue to maintain its industry leading profit margins rather than focus on market share? Yes.

    If you, too, can answer "yes" to these questions, then the next step is to answer the following list of questions:

    1. Will revenue and profits continue to increase? Yes.
    2. Will Apple continue to upgrade and profitably sell its existing product line? Yes.
    3. Will Apple continue to buy back its stock? Yes.
    4. Will Apple continue to make enough profit to pay its dividend? Yes.
    5. Will the dividend increase? Yes.

    You do not even need to get bogged down by crunching all the numbers. Carl Ichan and George Soros have already done that for you. Do you think they would be investing in Apple if there wasn't profit potential beyond what they have already made just by saying they have been buying the stock or setting up a dinner with Tim Cook?

    Those nagging buts

    1. But Apple's market share is dropping.
    2. But gross margins are dropping.
    3. But there is strong competition.
    4. But it does matter because the iPhone is such a big piece of revenue.

    You should expect market share that started at 100% to drop as new competitors enter the market. The important figure is the number of units in customers' hands which is still increasing. This is business, not some sporting event. The company does not need to win the market share battle to be hugely profitable.

    Of course, gross margins have dipped a little bit. Reduced margins are a natural occurrence in a market with more competitors. However, Apple is still managing more than double the margin that Samsung makes from smartphone sales.

    Strong competition is good for Apple. The company will fight harder and create better products for its customers. One of Apples biggest strengths is playing to its core customer base. It does not try to be all things to all people.

    There are enough smart people working at Apple to make sure that they do not blow the new iPhone launch. There will be significant revenue no matter what bells and whistles the new version will offer.

    Low expectations

    Yes, we are looking at this from a viewpoint of low expectations because that is the best way for a fundamental investor to evaluate the stock. If you think that Apple remains a growth and income powerhouse at low expectations, then anything over that is extra profit. Apple looks to be in a very solid position for at least another 2 to 3 years. I believe that if you buy this stock, you will not be disappointed.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Themes: long-ideas Stocks: AAPL
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