As iPhone fans await news of Apple new iPhone 5, due to launch tonight, there are concerns that Apple will not meet expectations with the new iPhone. Some analysts are suggesting that Apple will have its work cut out in a market in which Android has taken the lead with ever increasing competition; others speculate that Apple may not be able to meet demand due to component shortages; plus news that HTC and Samsung are suggesting Apple has infringed 4G patents, has some worried.
Apple’s share price has fallen over the past few days, from $680.44 on Friday 7 September, to $660.59 last night. The cause of the decline is most likely investors selling up prior to the launch of the new iPhone, in order to avoid the inevitable decline following the launch. While many of Apple’s investors are long-term investors, there are short-term investors looking for quick money, and they are likely to cash in prior to the event, rather than risk losses.
See also: Live Feed: Apple iPhone 5 launch event
As the Wall Street Journal points out: “Considering the stock’s sharp rally throughout the last few weeks, a little profit taking doesn’t come as a total shocker.”
However, Tomi Kilgore of Dow Jones’ notes: “That type of behaviour can either be called a ‘bearish engulfing’ or a ‘key reversal day’. Either way, it warns of short-term pullback.”
Another reason for the decline could be the news that HTC and Samsung believe they have a case against Apple when it comes to 4G patents. Both companies are claiming that Apple is infringing on their 4G patents, although Apple does own a collection of LTE 4G patents (around 318 were acquired, and another 44 were developed by Apple, notes Motley Fool.)
It is expected that the new iPhone will boast LTE 4G functionality, although it is unlikely to offer 4G to UK users, despite yesterday’s announcement from Everything Everywhere that they would be introducing LTE 4G to the UK this year. That said, at the the launch of EE's 4G, in traditional Apple style, CEO Olaf Swantee said with a knowing and suggestive look: "Oh and one more thing, we will be announcing more devices very shortly."
Another issue could be the result of the various Apple verses Samsung patent cases that have taken place around the world. While Apple won its case against Samsung in the US, in other countries it hasn’t been as successful.
Could Apple be banned from selling the iPhone 5 if it is found to infringe on any of the patents in question in these various trials?
Another issue that could affect the sales of the iPhone 5 is component shortages. News that the first batch of new iPhones is said to feature screens and memory chips from suppliers other than Samsung, which could hint at, or lead to, supply issues.
Predicting Apple’s stock
These factors may have come into play in the decision of investors to pull out of Apple in the run up to the event, but it should be noted that it’s a common effect of an Apple product launch that the stock soars on the rumour and then declines following the announcement. However, referring to the behaviour of Apple shares around launch events, Sterne Agee analyst Shaw Wu said: “It’s very hard to predict.”
MarketWatch notes that the reaction of the Apple stock over the last four iPhone launches has been mixed. According to that report, the shares have picked up around 4% in the month prior to the announcement and then averaged another 3% gain in the period between the announcement date and launch date.
However, in the month following the launches, the stock has averaged a decline of about 8.5%. For example, MarketWatch notes that Apple’s shares traded down 10% in the month following the launch of the iPhone 4S.
Bernstein Research analyst Toni Sacconaghi’s research seems to support this. He notes that Apple shares appear to outperform in the two months prior to a product launch, but in the two months following the launch they tend to generally underperform.
J.P. Morgan analyst Mark Moskowitz has told investors that they should “not be alarmed by any near-term selling pressure,” according to his figures; Apple’s shares have gained an average of 5.2% in the 30 days following the last seven Apple product announcements.
Why the iPhone matters so much
An iPhone announcement is far more important to Apple’s bottom line than any other product announcement because it contributes half of Apple's revenue and accounts for the majority of its profit.
Where Apple has held the lead during previous iPhone announcements, now, with Android taking more of the market, and recent announcements from Nokia, Samsung, and Motorola, as well as disputes over patents, the company will have its work cut out maintaining its exemplary profitability levels, and keeping investors happy.
As Reuters notes: “The new iPhone 5 has to be more than just another smartphone as it carries the weight of Apple Inc's future on its slim frame.” That report suggests that Apple is looking “increasingly defensive”.
Sterne Agee analyst Shaw Wu said: “They were the upstarts before. Now they are more in a defensive role.”
Gartner analyst Carolina Milanesi said: “It is getting tougher to expand the market share," reports Reuters.
NPD lacks confidence that Apple will see the sales of the iPhone 5 many are expecting. According to a Fortune report, NPD Group's Stephen Baker is pouring cold water on expectations for stellar sales of the new iPhone in the NPD Group blog. Baker writes: “The iPhone 5 will launch into a US smartphone market with very different dynamics than the launch window of the iPhone 4 or the iPhone 4s.”
He refers to data from NPD that shows that the total growth of the US smartphone market “was just 9 percent in the second quarter (Q2), and all that growth was the result of the increased prevalence of pre-paid devices in the market...”
Baker suggests that it will be a tough time for Apple. "As the market matures the challenges of growing faster than the industry multiplies. Blowing away all weakened competition, as Apple has done to this point, makes it infinitely harder to continue to blow away the remainder, because they are, by virtue of their current position, much more competitive than those that have fallen by the wayside," he writes.
A report on the BBC, notes that Apple’s iPhone launches no longer excite. That reporter isn’t sold on the idea of a bigger iPhone – Apple is expected to extend the length of the iPhone to accommodate the larger screen. He also thinks “Apple has become boring”.
However, maybe Apple doesn’t need a breakthrough, perhaps the pent up demand for its new iPhone will be enough to see it achieve the sales that the analysts and investors are looking for. Piper Jaffray analyst Gene Muster predicted that Apple could sell 10 million iPhones in the week following its launch because there is so much pent up demand for the iPhone 5.
Topeka Capital analyst Brian Whites is also confident. He has told investors that the anticipated Apple iPhone 5 launch could be the biggest upgrade in consumer electronics history.
It has even been said that the iPhone 5 could boost the GDP of the US by $3.2 billion in Q4, according to JP Morgans Michael Feroli. JP Morgans is expecting up to 8 million iPhone 5 sales before the quarter ends on 30 September.
Apple is expected to be able to sell 48-53 million iPhones in the fourth quarter, according to Morgan Stanley analyst Katy Huberty. That’s compared to 26 million iPhones in the third quarter of 2011, a feat that wouldn't be possible without the launch of the iPhone 5.
One analyst is suggesting that Apple will disrupt the mobile phone industry when it launches the iPhone tonight. Challenging the other smartphone manufacturers with better battery performance, larger screen size, and slimmer form factor.
Long-term investment in Apple
The message is clear, short term in vestment in Apple can reap rewards, but it is a risky business. On a long-term basis, however, the rewards have the potential to be great. Sterne Agee analyst Wu believes that Apple’s shares have potential. He thinks that since Apple has only 8% of the world’s total mobile-phone market there is plenty of room for it to continue expanding its market share over its weaker rivals.
It should be noted that Apple’s stock is up nearly two thirds since the beginning of the year. “For long-term investors, now is as good a time as any. We think the stock has more upside from here,” said Wu.