Apple: iPhone 5 Will Push The Envelope

by Ramu Iyer

Apple (AAPL) is set to introduce the new version of the iPhone on September 12 even though no official announcement has yet been made. According to sources in the company, this will be a new overhauled design of their most successful product. The new phone will sport a larger screen and a thinner body and is expected to be compatible with the next generation long-term evolution wireless networks being introduced by the wireless carriers such as Verizon (VZ) and AT&T (T) according to equity analysts. The changes in design will be the first since 2010 when it launched the iPhone 4. Last year’s phone, the 4S, had the same look as its predecessor. The anticipation of this introduction affected Apple’s sales in June, costing the company to miss the consensus estimate of sales and profits for that quarter. Apple and Samsung are involved in a cutthroat battle for dominance in the approximately $220 billion global market for smartphones. Apple only introduces one new phone every year, while Samsung has become the largest handset manufacturer in the world by introducing several different models every year.

In line with its normal practice, Apple has maintained complete silence about the new phone, but information gathered from various knowledgeable sources suggests that the Apple iPhone 5 will operate on an iOS 6 operating system which is expected to offer better security as well as payment programs. The enhanced security might include fingerprint recognition and the blocking of inappropriate content. It is also expected to come with the larger screen and improved resolution in line with the moves by its rivals Samsung and Nokia (NOK). There may also be an exaggeratedly vertical design for the screen which will improve the visuals while maintaining the feel of the phone.

Meanwhile, Apple remains the epitome of cool, and Nokia, Microsoft (MSFT), Google (GOOG), Samsung, and Research in Motion (RIMM) are all doing their best to destroy this dominance so that they can acquire some market share. Microsoft is pursuing a course of action that suggests that its partnership with Nokia is unraveling and it has recently been reported that Microsoft would not provide Windows updates on Nokia Lumia phones that are already in use. At the same time, Microsoft announced plans to provide software for Chinese handset manufacturer Huawei Technologies. The problem is that both the Windows and the Android operating systems are turning smart phones into commodities so that, rather than compete with Apple on innovation, its competitors are competing against one another on price. However, the Blackberry 10 should be available in 2013 and may cut into Apple’s market share while Google has launched the Nexus tablet at the rock bottom price of $199. It is too early to predict the impact on the Apple iPad. Amazon (AMZN) is expected to create several variations of the Kindle Fire.

Meanwhile, Apple reported results for the third quarter with profits of $8.8 billion on revenues of $35 billion amounting to an earnings per share of $9.32 per diluted share. For the same quarter in the previous year, revenues were $28.6 billion, profits $7.3 billion and EPS $7.79 per diluted share. Gross margin was 42.8% as compared to 41.7% on a year on year basis and international sales accounted for 62% of revenues in the third quarter. 26 million iPhones were sold in this quarter showing a 28% growth over the corresponding quarter in the previous year. The sale of 17 million iPads represent and 84% growth year-on-year and the sale of Macs showed a two per cent increase to 4 million. 6.8 million iPods were sold showing a 10% decline in volume from the same quarter last year. The board of directors declared a cash dividend of $2.65 a share of the common stock. The company also announced that guidelines for the fourth quarter were revenues of about $34 billion and earnings per diluted share of about $7.65. In fact, the share price slipped by around 6% on the lower than expected results and created a rare buying opportunity for Apple stock.

One point that is sometimes overlooked is the sheer power that the cash mountain on Apple’s balance sheet bestows on the company. The total cash and cash equivalents were in excess of $117 billion at the end of the quarter and around 80 per cent is held overseas for tax planning reasons. These deep pockets give Apple a major advantage when it comes to protecting component supply and the supply chain to ensure ready availability. It has been reported that in some cases, compliments are not available to other manufacturers because Apple has selected the same component and has locked the supply. None of its rivals have the liberty to use their cash to cripple the competition.

I must confess to being a great fan of Apple not only for its outstanding products but also for the sheer quality of its management. In my book, Tim Cook has made all the right moves so far and is proving to be a worthy successor to Steve Jobs. When you consider that iPhones provide almost half the company’s revenues, there is no reason why the Apple iPhone 5 should not continue to drive the company’s amazing success story. It has the competence and the track record not to mention the cash which reinforces my confidence that this will be a growth stock in the future as well. It is extremely rare to see a blue-chip stock with this kind of growth potential and prospective performance. I have absolutely no hesitation in recommending the stock in the belief that the new iPhone will prove to be a winner.