Morning Word 8/12/13: Wake Me Up When September Ends – $AAPL

by Dan August 12, 2013 7:51 am • Commentary

Morning Word 8/12/13:  All Things D reported Sunday morning, that “Apple is expected to unveil its next iPhone at a special event on Sept. 10″.  While the timing of the launch event is not a huge surprise, the rumors of the announcement of the event could not be coming at better time for AAPL’s stock.  After the nearly 15% rally since earnings, last week the stock seemed to hit a bit of a brick wall after being immediately rejected after briefly touching its 200 day moving average (yellow line) for the first time since Nov 2012 (circled – when the stock was ~25% higher than current levels), which also happened to be a 6 month high.

AAPL 1 year chart from Bloomberg
AAPL 1 year chart from Bloomberg

Media Event: So the likely pattern is that AAPL will send out a media invitation for the iPhone launch event right after labor day (Tuesday Sept 3rd), the event will take place during the second week of Sept and the phone will actually be for sale in the last week of Sept (for the iPhone 5 last year the invite went out on Sept 4th for the media event Sept 12th and the actual on-sale date of Sept. 21st).   This schedule is not just important for the few of us left willing to stand in lines outside the Apple Store for new phones, but if for some reason the launch falls into October, than the company’s fiscal Q4 that ends on Sept 30th could be in jeopardy.  Jeopardy is all relative for a company that has missed earnings estimates more often than they have met them over the last 2 years, and investors will likely be willing to give the company a pass as they know any lost iPhone sales in the Sept qtr will be made up in the Dec qtr, but the better than expected iPhone sales in the July qtr showed what appeared to be a larger than expected mix of iPhone 4s, and the longer consumers have to wait for the iPhone 5s the greater the mix is for lower end devices, and the lower gross margins go.

Expectations: Which brings us to what to expect for the media event………we already know about iOS 7, so that is likely to be a yawn, at this point, the rumors that AAPL was testing a 5 inch screen last month suggest that the form factor will be the same as the 5, keeping with its 2nd year S model pattern (so better screen and processor and possibly a fingerprint recognition button, so now the question is, what else??  The All Things D article alludes to the fact that maybe the company releases their low end iPhone, which in my mind doesn’t do a whole heck of a lot, because it will really be replacing the 4s which seems to have healthy demand.  In my mind, any newly designed low-end iPhone (to be released soon) will certainly cannibalize the 5s, and the last thing AAPL needs right now is to compete with itself in an already crowded high end smartphone market.  But if AAPL were to introduced some new tricked out plastic version for overseas, possibly with a distribution deal with China Mobile, then that would be big news for the stock, not for U.S. consumers.  Don’t get me wrong, I think they need a suite of iPhones in the U.S. and Europe, but I don’t think they should launch them at the same time.  If there were any large execution issues in 2012 it was that they did not stagger product releases well enough.

Saturation/China: It appears from the results of Samsung, HTC, Blackberry and other Smartphone OEMs that the high end of the market is getting saturated in the developed world.  Sprint is already running buy one get one free offers for the Samsung Galaxy S4 which was just launched in April.  Not entirely unexpected, the smartphone market is near the commoditized death spiral (at least for margins) that every other hardware business before it has been unable to avoid.  For AAPL though, who still enjoys way above industry average margins, they have a little wiggle room and despite (or because of) their poor showing in China in the last qtr, it appears that AAPL CEO Tim Cook was recently in China. So who knows, maybe he inks a distribution deal with China’s largest cellphone carrier with more than 700 million customers?

September to Remember: No one more than Tim Cook knows that the pressure is on for the company to get back on a winning streak, which is why last week’s “breaking news” from Fox Business that AAPL’s board was worried about the pace of innovation at the company, and were pressuring Tim Cook to come up with something fast, is so silly.  While I am sure this is true in general, I don’t believe this is a real story, at least not of the breaking kind because that is what boards do all the time. “Do what you’re doing but better!” But if the company did have “one more thing” up its sleeve and were to introduce a low priced (~$250) iWatch that was actually cool and innovative with a reasonable margin that could generate some buzz and ultimately create a new category and expand the ecosystem, then I think these guys could get their groove back.  This followed by a larger screen iPhone, distribution deal with China Mobile with a cool “enough” low end iPhone and then possibly a massive upgrade to AppleTV, then you have Cook right back where Jobs left him.  This is a company that has been dominant when they are out in front of the pack, dictating their competitors next move, not the other way around.  Make no mistake about it, September will determine whether the stock re-tests the $400 level or once again re-takes $500, but in the words of Billy Joe Armstrong, many AAPL holders may be singing Wake me up when September ends as we head into the next major catalyst for the stock.