'Weak' Apple iPhone 5 Sales And Maps: Eat Cake

| About: Apple Inc. (AAPL)
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On September 21, Apple (NASDAQ:AAPL) released its heavily anticipated iPhone 5. On the surface, this event was business as usual for Apple. The night before opening day, metropolitan Apple Store façades mirrored an Occupy Wall Street type gathering complete with wide-eyed, hopeful squatters. After opening for business, Apple's Genius employees maintained order amid a nightclub atmosphere featuring the iPhone 5 as V.I.P. With the smoke clearing, Apple reports sales of more than 5 million iPhone 5 units during this first weekend of launch. Despite record iPhone 5 sales, Wall Street is not impressed. Apple stock has declined from $700 to $640 over the past few weeks. Analysts, such as UBS' Steve Milunovich, are now scrambling to revise down Apple earnings estimates.

Interestingly, pundits who originally expected immediate sales of 10 million iPhone 5 units are now identifying Apple's new mapping application as the boogieman behind this perceived shortfall. Nokia and Google brass have both entered the fray to bash Apple on this front. In response, Tim Cook, CEO, is apologetically taking the heat for any and all Apple Map deficiencies. Rather than pander to the crowd, however, Apple brass should let these people eat cake. Investors will discover for themselves that "weak" initial Apple iPhone 5 sales arrive largely due to supply chain inefficiencies as opposed to flagging demand. Consumers can stop at their local Exxon (NYSE:XOM) service station and purchase an old fashioned Rand McNally map.

The Smart Phone Market

Taken together, recent comScore data estimate that Google Android and Apple iOS operating systems dominate the smart phone market, with 53% and 34% shares, respectively. The Google and Apple duopoly is still consolidating strength, as evidenced by the collective 4.1% increase in market share above the prior quarter. Meanwhile, Microsoft (NASDAQ:MSFT) Windows, Nokia (NYSE:NOK) Symbian, and Research in Motion (RIMM) Blackberry literally scrape and claw over table scraps and the remaining 15% of the smart phone market. As handset makers only, Samsung and Apple are a respective first and third in this market. Last spring, Google (NASDAQ:GOOG) closed out its $12.5 billion acquisition of Motorola, largely to proactively defend its Android portfolio against litigation.

Apple is now waging war against the smart phone market in the courts, with Samsung serving as a convenient Google proxy. On August 24, the U.S. District Court in San Jose ruled Samsung guilty of patent infringement charges and ordered the company to pay Apple $1.05 billion in damages. The following week, a Japanese jury ruled Samsung innocent of the very same patent infringement complaints. Now, Samsung is retaliating against Apple with another round of U.S. lawsuits that include the iPhone 5. These contradictory lawsuits serve as proof that the smart phone market is transitioning towards commoditization.

At this point in the product cycle, consumer behavior is more so oriented towards brand loyalty, or what Wall Street would itemize as goodwill. For its latest second fiscal quarterly period ended June 30, Apple reports $4.7 billion in goodwill and intangible assets on the balance sheet. In other words, hipsters would still describe Apple as "cool." The shift towards Apple Maps will therefore prove largely irrelevant to the bottom line.

Mapping Applications

For iPhone 5 users, Google Maps is an unfortunate casualty of the iOS vs. Android conflict. Reports speculate that the Apple machine stonewalled Google's push for more control over this mapping software. According to ZD Net ZD Net, Apple's draconian fiat above its developers and rivals borders upon "paranoia." Google's leading mapping application offers seamless transitions between search, global positioning system (GPS) technology, and snapshot landscape imagery to help travelers coordinate their bearings. Personal computer, tablet, and Mac users who transition through the smart phone market can comfortably navigate Google Maps. Google, of course, collects revenue on integrated advertising links between search, maps, and various smart phone applications.

Meanwhile, Nokia is rolling out its own mapping application for full integration within the Lumia 920 and competing Windows 8 phones. Juxtaposed against a marketplace dominated by Google, Nokia Maps search and focus functions will appear awkward. In terms of appearance, however, Nokia's satellite imagery, highway, and landmark icons are a solid improvement above Google Maps. The Nokia Map interface is notable for its clean design and lack of busy advertisements. Technical enthusiasts, including Edgar Alvarez, have offered high praise for each edition of Nokia Maps.

Apple Maps, like its predecessor Siri voice recognition technology, is showing early signs of transforming into a rare Apple bust. Apple's new navigation platform appears rushed and not yet ready for public consumption. In a scathing piece, critic Josh Lowensohn opines that Apple Map functionality could not have been much worse at rollout. Shockingly, this application is notable for its lack of detail, erroneous geography, alongside quirks in satellite and three-dimensional imagery. Apple Map technical glitches will pose unique challenges for third-party application software developers.

In order to manage expectations and contain any fallout, Apple can reframe this gaffe as a beachhead event. Apple engineers should be granted two more years to make significant improvements upon this application, before throwing in the towel and striking a deal between either Nokia or Google Maps.

The Bottom Line

Claims that the Apple iPhone 5 sales "shortfall" arrives due to this mapping debacle are absurd. According to Tim Cook, Apple sold out of its initial iPhone 5 supply. The situation is eerily reminiscent of the Steve Jobs' era, where Apple's boss reveled in shortages that inevitably stoked demand. Reports touching upon Sharp's faltering screen production alongside assembly line riots at a Chinese factory expose inefficiencies within Apple's supply chain. Apple's staggered iPhone 5 release schedules further complicate efforts to accurately assess immediate sales performance. Apple has already set up shop for the iPhone 5 in the United States, Canada, France, Germany, Honk Kong, Singapore, Japan, and the United Kingdom, before extending this launch to more than one hundred other countries by the end of 2012.

Apple remains well on track to sell more than 100 million iPhone 5 units over the next year. This performance projects out to roughly $95 billion in revenue and $25 billion in fiscal 2013 profits directly attributable to Apple's iPhone. If iPad sales growth were to decelerate to 50% year-over-year growth, Apple would post roughly $50 billion in 2013 bottom line profits. Wall Street may then value this business at $750 billion at a price-to-earnings multiple of 15. A $750 billion market capitalization above 929 million shares outstanding calculates out to an $800 one-year price target for Apple.

For Q2 2012, Apple closes out its books with $110 billion in cash and securities on the balance sheet. Apple would still carry $62 billion in liquid assets, if Peter Oppenheimer, CFO, were to effectively write a check to pay down this corporation's $48 billion in total liabilities. Now trading for $640, each share of Apple stock offers $67 in net liquidity. Apple stock remains a buy.

At worst, this Apple investment will lose alpha status and perform as a beta stock. As smart phone and tablet devices mature, Apple's hyper-growth trajectory will revert back towards mean U.S. gross domestic product indicators. Certainly, Microsoft shareholders have grown accustomed to a long-term investment that merely tracks the S&P 500 Index and pays out regular dividends.

Disclosure: I am long XOM, AAPL. 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.