We’ve been big Apple (click ticker for report: ) bulls since we became excited about the name in June of 2011 (around the time of our founding). The iPhone 5 release, a disappointment to some, will be the biggest smartphone ever, in our view. Following its courtroom victory against Samsung, we think Apple is poised to converge to our fair value estimate at over $800 per share.
Some seem concerned that the new iPhone is an incremental upgrade rather than a re-invention. However, we think that’s the new normal for the smartphone market: what more can be done to a phone? Still, we think the pent-up demand for the device is absolutely incredible, as people from all walks of life have been anticipating this release since earlier in the year. Even those who don’t see the upgrades as “worthwhile,” will probably purchase new iPhones because, well, it’s the new iPhone.
We think the major risks presented from the new iPhone lie in the mobile carriers and at rival firms. Verizon’s (click ticker for report: ) CFO announced that the iPhone 5 will cost Verizon $449 each in subsidies and will only have a small impact on margins. He did mention that if demand is incredibly high, the impact could be more substantial. However, we do expect demand to be incredibly high, so we think AT&T (click ticker for report: ), Verizon and Sprint (click ticker for report: ) could see margin pressure throughout the holiday season. With 4G capabilities, we could see Sprint and its popular unlimited data options gain some market share, but we don’t think market share shifts will be too significant.
We expect competitors to be the biggest losers, especially Android (click ticker for report: ), Samsung, Nokia (NOK), and Research In Motion (click ticker for report: ). The Samsung/Google cohort, already damaged by its legal loss, will likely lose more market share, in our view. We think the iPhone 5 will completely overshadow any smartphone releases for the next several months. For Nokia and RIM, the release simply highlights how far behind the curve these two companies continue to be. We expect the two firms to continue to lose market share, though we admit, the new Nokia phone shows some promise.
On the other hand, we think Facebook (click ticker for report: ) could be a big winner. Apple has focused on seamlessly integrating the social network throughout iOS 6 (Apple’s new operating system). Shares of Facebook have been on a bumpy ride since its IPO, mostly staying within our fair value range (in fact, it’s now trading about in line with our fair value estimate after its huge fall). However, we think successful ad placement on the Facebook app could help lift the firm’s fortunes.
All things considered, we continue to like shares of Apple and hold the name in the portfolio of our Best Ideas Newsletter. Shares score a 7 on our Valuentum Buying Index (our stock-selection methodology), so we think it remains a very interesting investment opportunity. Apple initially registered a perfect 10 on our Valuentum Buying Index on June 17, 2011, and has never looked back.