Apple will probably launch its latest phone, the iPhone 6, next month
There’s plenty of speculation out there about what the new phone – or possibly phones – will offer. Will there be a sapphire display cover? Could the ‘clock speed’ rise to 2GHz? And many other such questions…
But this techie stuff isn’t that important. For me, the big question is whether the new phone will enable Apple (Nasdaq: AAPL) to carry on selling loads of highly-priced phones on very chunky margins.
So let’s focus on that.
Bigger screens
In fairness, I shouldn’t be too dismissive of all the speculation. Obviously, Apple is more likely to prosper if it launches a new phone that genuinely excites consumers. So we need to figure out if any new specs will get people talking.
It looks like the most important change – or certainly the most noticeable change, anyway – will be the screen size. Currently, the iPhone 5s has a four-inch screen, which is a fair bit smaller than some of the rival phones from Samsung et al. Pretty much all the pundits are predicting a new 4.7-inch iPhone, which may also be accompanied by a larger 5.5-inch model. It’s not clear whether a larger phone will be launched at the same time as the 4.7-inch phone or whether we’ll have to wait a few months longer. Assuming a larger phone is on the agenda at all.
Either way, going for bigger screens is a smart move. I know that some of my friends have switched to Android for no other reason than they wanted a bigger screen. And that makes sense. Instead of lugging a phone and a tablet around the place, why not just go for a phone with a bigger screen?
No doubt we’ll also see faster processing speeds and various other bells and whistles, some of which may even be quite useful.
Anyway, the point here is that bigger screens will be a real plus for Apple, and I strongly suspect that means Apple can defend its current market share in 2015. And it won’t have to cut its margins either.
Looking further out to 2016 and beyond, I admit it’s a much harder call. But for 2015, I think bigger screens will make a real difference.
So does that mean you should buy shares?
Well, Apple’s share price has already had a good run this year, up about 18%. That gives the company a market value of $565bn. But even after that share price rise, Apple’s price/earnings ratio isn’t that high at 15. What’s more, Apple has a strong balance sheet with a chunky cash pile. Indeed Apple was able to return $8bn to shareholders in the last quarter. That’s a pretty impressive sum in just three months.
I’m also impressed by Apple’s 39% gross margin, which actually went up in the last quarter. That was a bit of a poke in the eye for all the people who said that Apple can’t maintain its margins. What’s more, the volume of iPhones sold has risen 13% over the last year – at least partly due to the fact that China Mobile now sells iPhones.
Revenue from iTunes also rose 25% over the last year. That’s a crucial point – revenue is rising because more people are now part of the Apple ‘ecosystem’. Once you’ve been an Apple user for three years and have bought loads of apps, music and so on, will you really want to defect to Android or some other system?
And then there’s the great unknown. Can Apple launch a new product type that will genuinely revolutionise that market? This might be a watch or TV-based product. My hunch is that Apple won’t ever again launch a product that will make the impact of an iPhone or iPad. But if I’m wrong, Apple is a steal at its current $94 share price.
Downsides
On the downside, recent iPad sales figures have been disappointing, so Apple is now very dependent on the iPhone. And although I’m pretty confident that Apple can maintain its margins in 2015, that may be more of a challenge in the medium term.
Short-term
But in the very short-term – ie the next couple of months – I think there’s a strong chance the Apple share price will rise further on excitement about the new iPhone. That’s assuming we don’t have a market crash.
And as a longer-term investment, I don’t see Apple as a ‘must invest’, but I think it’s a better bet than many other companies out there. As I say, I doubt we’ll see any margin erosion next year, and although that may see some slippage from 2016 onwards, I suspect the margins will remain stronger than many expect. The brand and the ecosystem are just too strong.
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