Shares of Best Ideas portfolio and Dividend Growth portfolio holding Apple (click ticker for report: ) showed considerable relative strength following solid third quarter results July 24. Pricing momentum was augmented when legendary money manager Carl Icahn (or iCahn) sent out a series of tweets about the tech giant on August 13.
iCahn Moves the Market
Icahn needs no introduction, as he boasts a rumored net worth in excess of $20 billion, has engaged in numerous high-profile corporate battles (US Steel, Dell, TWA), and without question is considered one of the greatest money managers of his era. When Icahn speaks (or tweets), markets listen.
While Icahn’s presence as an Apple shareholder has little, if any, fundamental change on the company, his belief that shares of Apple are undervalued could help lift interest in the stock.
Icahn’s tweets also demonstrate the power of Twitter and social media companies such as Facebook (click ticker for report: ) and LinkedIn (click ticker for report: ). Instead of investors waiting for the next quarter’s 13-D filings (the latest 13-D does not list Apple as a position), Twitter circumvented the process and achieved wide distribution. Icahn didn’t need to contact any traditional media outlets such CNBC (click ticker for report: ) and Fox Business News (FOX, FOXA), demonstrating just how many eyeballs view Twitter on a daily basis. This news certainly bodes well for the future of social networks as an information dissemination mechanism (and an investment tool).
iPhone Developments Bode Well for Revenue Growth
Apple is also benefitting from reports of new product launches. It is largely assumed that Apple will unveil the iPhone 5S in September, and recent reports indicate the 5S may launch with a gold colored model, marking the first time Apple has offered more than white or black iPhone form factors.
Color is nothing new for Apple. iPod Nanos, Shuffles, Touches, and the Mini all have come with color options at some point, and we would not be surprised to see the iPhone 6 come with even more bold color options. Though this idea is far from revolutionary, it may modestly broaden the appeal of the iPhone, particularly in countries where cases aren’t the status quo.
Why would Apple launch a gold colored phone? In our view, it has nothing to do with duping people into thinking it is actually made out of gold or any other ridiculous notion, but rather it appeals to both Chinese and Indian consumers, two markets where Apple is relatively weak.
It also appears likely that Apple will be launching the iPhone 5C. The 5C will likely be a lower-priced phone with a plastic outer cover that comes in a variety of colors. This phone will be Apple’s response to those critical that the company has lost significant market share to Google’s (click ticker for report: ) Android because it refuses to compete at the low-end of the market.
Ultimately, we tend to believe US consumers will prefer sticking with the traditional high-end model, but the new phone may sway fringe buyers and lower-income consumers into joining the Apple ecosystem. More importantly, this could be the phone that ignites international growth, particularly in markets where phone purchases aren’t subsidized.
Margins
The big question we have about the new iPhone iterations are about margins. Assuming the 5C is a slightly (technically) inferior device, we doubt the components would be as expensive as those on a flagship iPhone model, thus offsetting the lower retail price and maintaining gross margins.
Further, the iPhone 5S should maintain or even build upon the margins achieved by the iPhone 5 since both phones share the same build. The 4S model carried robust gross margins, and we are optimistic that the 5S will follow suit.
Building an iWatch
The next blockbuster product on the horizon could be the iWatch—a project we’ve speculated on before. Apple already recruited Yves Saint Laurent CEO Paul Devene to work on “special projects,” and now Apple has nabbed key Nike Fuel Band (click ticker for report: ) consultant Jay Blahnik. Blahnik has previously consulted on projects for Apple, and it is believed he will work on the iWatch and potentially fitness-related products.
Even though the iWatch doesn’t technically exist yet, we get the feeling it will be released at some point in 2014, but only when the product is good enough to live up to lofty expectations.
Valuentum’s Take
Recent developments surrounding Apple seem to be drumming up interest in the world’s largest company (by market capitalization). We are excited to see the newest generation of products and note that we still haven’t seen the launch of iTunes Radio and iOS 7—two additional positive catalysts.
As for Icahn, investing on the same side as a Wall Street legend is rarely a bad thing. Like Icahn, we continue to hold shares of Apple in our actively-managed portfolios and believe shares look significantly undervalued.
Disclosure:
RJ Towner owns shares of the following companies mentioned in this article: AAPL