iPhone 5 Release: Cascading Ramifications

by: Douglas Ehrman

When a company becomes the largest on the planet, it means that any new release of its most iconic product has cascading ramifications, often across multiple industries. This has never been as true as it is for the impending release of Apple Inc.'s (NASDAQ:AAPL) iPhone 5 later this month. September should prove to be a critical month in the smartphone arena, as the iPhone 5 is unveiled, Microsoft Corporation (NASDAQ:MSFT) and Nokia Corporation (NYSE:NOK) release the new Windows Phone 8, and more news from the Apple vs. Samsung (OTC:SSNLF) case is revealed. Furthermore, given the relative strengths and weaknesses of iPhone wireless carriers, investors may see swirling results within that industry as well. Overall, the success of the iPhone 5 has the potential to change the fates of many companies. What follows is a brief discussion of the critical points that impact each:

Apple: Perhaps the most critical feature that the iPhone 5 must possess is the ability to run on a 4G LTE network. Apple is nearly a year behind on this feature. While consumers were somewhat willing to accept the excuse that Apple wanted to "perfect" the technology a year ago, this is unlikely to be the case again. When the iPhone 5 morphed into the iPhone 4S in 2011, delivering the retina display and Siri to the world, the Apple faithful were pleased that there was no antennae issue. A failure to deliver on 4G LTE could prove disastrous for the new device.

Microsoft and Nokia: Having to compete with the iPhone 5 could have a real impact for the Windows Phone 8. While the new phone from Microsoft and struggling manufacturer, Nokia, will be released first (September 5 versus a rumored release date of September 21), this could have a mixed impact. In one sense, the Windows Phone will get to stand alone for a few weeks without having to share the stage. On the other hand, if consumers delay the purchase of a Windows Phone while they wait to "check out" the iPhone 5, a report of slow initial sales could create a false "negative" for the phone. The net result is probably positive because it will give reviewers a chance to really understand the new phone, but this a critical launch for both companies. When one also considers that the recent patent decision may slow down the progress of other iPhone competitors, the Windows Phone 8 will have a unique chance to come out as the aggressor.

Google Inc. (NASDAQ:GOOG): As has been widely covered, Google's Android ecosystem was a silent loser in the recent patent decision. If the iPhone 5 has a stellar launch, it should help Apple pick up momentum as the war for smartphone dominance continues. Android - which has taken over as the most-used platform for smartphones - took a big hit in the legal battle because Samsung is the largest producer of Android phones. A lukewarm reception for the new iPhone will give Google time to regroup and work with various manufacturers to be sure that no further patent infringement occurs. Also of note, the judge in the case is expected to rule on Apple's requested ban of the Samsung Devices. Should that be granted - which seems very improbable - a big release will hurt Google significantly.

AT&T (NYSE:T) and Verizon Communications (NYSE:VZ): The impending release could have a significant impact on each of these stocks, particularly if it includes 4G LTE capabilities as expected. The degree of disproportionate capabilities in this capacity of the two carriers is staggering. Where AT&T is limping along with a paltry 80 million people in its coverage area, Verizon already has 230 million and is expected to add another 260 million by the end of the year. While AT&T has shown a marked advantage in its ability to retain customers, this disparity may cost it significantly.

Sprint Nextel Corporation (NYSE:S): As the only carrier that still offers an unlimited data plan, Sprint has found a solid point of differentiation against its competitors. Depending on the specific functionality that is included in the new phone, this option may serve Sprint well. If the device offers features that favor more network streaming, the ability to capitalize on this without the threat of expensive data overages should play to Sprint's advantages. Thus far, most smartphone users fall well short of their data allotment, making the feature appeal to a limited market. If this reality changes, Sprint may become a more important player in the wireless carrier mix.

Trading the News

While interesting as an academic exercise, the real question for investors is how to capitalize on the news. As far as the Apple stock goes, the risk-reward relationship is not favorable. Trading near all-time highs, the stock is priced for perfection and looking for an excuse to correct. Anything less than a blockbuster launch may provide the catalyst for such a correction, and there are simply better choices.

Microsoft looks like a strong option going into the launch of the Windows Phone 8, particularly since it will be followed by the release of Windows 8 and its tablet, the Surface, in late October. Microsoft is a buy. Nokia, on the other hand, looks more speculative. The investor looking for a speculative play will appreciate this stock at current levels, but the conservative value investor can find more stability elsewhere.

For the carriers, Sprint is an unknown and therefore receives a neutral rating. The great divide in network capability makes Verizon a buy and AT&T a sell.

Overall, the release will have far reaching implications and needs to be carefully watched. When Windows Phone 8 comes out later this week, the fun should really begin.

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.

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