On September 21, Apple launched the iPhone 5, amid the typical speculative feeding frenzy that is now par for the course for this company. Apple reported unit sales of more than 5 million iPhone 5 during the first weekend of product launch. Wall Street, of course, is not impressed.
UBS analyst Steve Milunovich hurriedly revised his Apple estimates downwards, while shares have cratered from $700 to $660 over the past week on heavy volume. To long-term investors, the scuttlebutt and hysteria are much ado about nothing. At worst, Apple will transition into the product maturity stage of the Web 2.0 business cycle. Only a fan boy would expect this gravy train to last indefinitely. For now, reports alleging rioting at a Chinese factory, alongside technical glitches in glass screen manufacturing, highlight questions surrounding the Apple iPhone 5 supply chain.
The Apple iPhone 5 Supply Chain
Wall Street analysts were calling for iPhone 5 sales of between 6 million and 10 million units during this past first weekend of launch. According to Tim Cook, CEO,
Cook's statement may serve as evidence that either Apple fully intended to limit this launch, or that disruptive bottlenecks plague the iPhone 5 supply chain.
Wall Street is taken aback by the idea of Apple supply chain gaffes, considering the fact that Tim Cook is an operations man. Today's happenings are eerily reminiscent of the Steve Jobs mystique that seemingly revels in product shortages and consequent nightclub settings at metropolitan Apple stores. The Steve Jobs halo effect lives on.
Apple has already set up shop to sell its iPhone 5 in the United States, Canada, Australia, France, Germany, United Kingdom, Japan, Hong Kong, and Singapore. By the end of this year, the iPhone 5 will be available in more than 100 countries, with 22 of these countries welcoming product on September 28.
By nature of this schedule, Apple iPhone 5 sales receipts will appear weak over the next two quarters. Although Apple is leaving money on the table, the smartphone competition is not likely to pick up the slack.
The Smartphone Competition
According to recent comScore data, Apple iOS and Google Android lord over 33% and 52% of the smartphone market, respectively. Beneath this duopoly, Research In Motion, Microsoft Windows, and Nokia Symbian fight desperately over the remaining table scraps of 15% of smartphone subscriptions.
According to Gartner's Q2 2012 mobile phone report, 419 million mobile devices were sold, down 2.3% on the same period last year. Here are some key numbers from Gartner's Q2 2012 report:
- Open OS (smartphone) devices accounted for over 36.7% or 153.776 million of all mobile device sales.
- Samsung sold 90.432 million mobile devices versus only 28.935 million for Apple.
- Samsung's worlwide market share of mobile devices was 21.6% compared to only 6.9% for Apple iOS.
- Android mobile devices were 98.529 million versus only 28.935 for iOS.
- Android mobile devices captured a 64.1% share of the total market compared to only 18.8% for Apple iOS
According to Gartner's Q1 2012 mobile phone report:
- 419.108 million mobile devices were sold in Q1 2012 compared to 427.845 million in Q1 2011.
- Samsung sold 86.527 mobile devices in Q1 2012 compared to 33.120 million for Apple.
- Samsung had a 20.7% share of the total mobile device market in Q1 2012 compared 7.9% for Apple.
- Samsung sold 81.067 million smartphones in Q1 2012 compared to 33.120 million for Apple.
- Android mobile devices were 81.067 million versus only 33.120 for Apple.
- Android mobile devices captured a 56.1% share of the total market compared to only 22.9% for Apple.
According to Gartner,
For its latest fiscal third quarterly period ended June 30, Apple reports sales of 26 million iPhone units. This performance amounts to $16 billion of Apple's $35 billion in total net sales for Q3 2012. The iPhone remains the centerpiece of Apple's closed ecosystem that includes the iPod, iTunes, iMac, and iPad. To steal Apple's shine, competing smartphone and ecosystem design are converging together. Going forward, results will therefore be largely reliant upon branding and what consumers perceive as "cool."
On August 24, a California jury ordered Samsung to pay $1.05 in damages to Apple on patent infringement charges. The following week, a Japanese court ruled Samsung innocent of these very same patent infringement charges. Obviously, the Apple iPhone 5 and Samsung Galaxy SIII handsets appear eerily similar, beneath the contradictory legal rhetoric.
Weighing in at 112 grams, the iPhone 5 stands 4.9 inches tall by 2.3 inches wide by 7.6 millimeters thick. This new look for the iPhone negotiates a compromise between the compact iPhone 4S and the vertical Galaxy, which Samsung promotes as a stand-in for an Olympic Track and Field baton. Both 16GB versions of the Apple iPhone 5 and Samsung SIII galaxy retail for $199, if you agree to the terms and conditions of a two-year phone service contract.
At this junction, Microsoft poses the most significant threat to today's smartphone status quo. On October 26, Microsoft is set to release its Windows 8 and Surface tablet. Windows 8 is an amalgamation of traditional personal computer, smartphone, and tablet interfaces. For example, a Windows 8 user is able to execute desktop commands through touch screen technology, before picking up the nearest smartphone and scrolling through tiles to open up Microsoft Excel.
The Samsung ATIV S and Nokia Lumia 920 Windows 8 phones are both set to launch this Holiday Season. The ATIV S is notable for its relatively large Super AMOLED 4.8-inch screen and brushed aluminum finish. Similar to the iPhone 5, Samsung's flagship Windows 8 phone converts into a camera that takes pictures with an 8-megapixel sensor.
Alternatively, the Lumia 920 is already being lauded for the picture clarity of its 8.7-megapixel camera. A Qualcomm Snapdragon S4 dual-core processor powers both Nokia and Samsung Windows 8 phones. Despite Windows 8 creativity, Wall Street is not exactly impressed. Nokia stock immediately lost 15% of its value earlier this month, simultaneously alongside Stephen Elop's New York City Lumia 920 demonstration.
Apple's Bottom Line
Apple remains on course to sell between 100 million and 150 million iPhone units over the course of the next year. I project that this iPhone performance will tally $95 billion in revenue and $25 billion in fiscal 2013 profits for Apple. If iPad sales were to grow at a 50% clip, Apple may then post $50 billion in earnings. At that point, Apple would then carry a market capitalization of $750 billion, if it were to conservatively trade at a price-to-earnings multiple of 15; $750 billion in Apple earnings on top of 929 million shares outstanding breaks down to a rough $800 per share one-year price target.
For now, shareholders can take solace in the fact that the Apple Way remains a cash machine. At Friday's $667, Apple now trades for 24 times trailing 2011 earnings. This stock remains relatively cheap, considering the fact that Apple is averaging 66% average annual net income growth over the past four years. For Q3 2012, Apple closed out its books with $117 billion in cash and investments to cover $51 billion in total liabilities on the balance sheet. One Apple share therefore represents $71 in built-in net liquidity, after Peter Oppenheimer, CFO, effectively writes a check to pay off all debt.
If anything, the Apple bandwagon is inevitably destined for a trip up The 5 Freeway to unite with Microsoft as a beta stock. By beta definition, Apple would then track the S&P 500 and offer regular dividend payment increases. A special dividend would signal that Apple is shifting into the product maturation stage of this Web 2.0 business cycle. In July 2004, Microsoft approved a one-time, $3 special dividend to help relieve itself of a bloated, $56 billion cash position.
Besides generate income, Microsoft, personal computer investments, and the S&P 500 Index have done nothing for more than one decade. Apple will follow a similar pattern, if the iPhone 5 proves to be this corporation's last hurrah as a blockbuster event.
Apple Maps Flops
Shame on Apple for releasing Apple Maps before it was ready for prime time. The new Apple mapping app which was included with the new iPhone 5 has proven to be a disaster. The fact is this folks: Apple's new maps are simply not as good as those of Google Maps. The release of iOS 6 was immediately followed by users complaining about the new maps, which lack a significant amount of detail and omit public transit directions. Access to high-quality maps is a critical feature for modern smartphones, and Apple's decision to swap out Google Maps is a rare example of the company openly placing its own interests above those of its customers. The Apple Maps blunder was so bad that on Friday, September 28, 2012, Apple CEO Tim Cook issued the following letter of apology to all Apple iPhone users.
"To our customers,
":At Apple, we strive to make world-class products that deliver the best experience possible to our customers. With the launch of our new Maps last week, we fell short on this commitment. We are extremely sorry for the frustration this has caused our customers and we are doing everything we can to make Maps better."
"We launched Maps initially with the first version of iOS. As time progressed, we wanted to provide our customers with even better Maps including features such as turn-by-turn directions, voice integration, Flyover and vector-based maps. In order to do this, we had to create a new version of Maps from the ground up."
"There are already more than 100 million iOS devices using the new Apple Maps, with more and more joining us every day. In just over a week, iOS users with the new Maps have already searched for nearly half a billion locations. The more our customers use our Maps the better it will get and we greatly appreciate all of the feedback we have received from you."
"While we’re improving Maps, you can try alternatives by downloading map apps from the App Store like Bing, MapQuest and Waze, or use Google or Nokia maps by going to their websites and creating an icon on your home screen to their web app."
"Everything we do at Apple is aimed at making our products the best in the world. We know that you expect that from us, and we will keep working non-stop until Maps lives up to the same incredibly high standard."
Tim Cook's apology went further by recommending that its iPhone users download and use "alternatives" like Bing, MapQuest, Waze, Nokia Maps and even, God forbid, Google Maps. Could you imagine if If the CEO's of HP, Lenovo or IBM recommended that its users use competing products while they improve or correct issues with their products?
This begs the question: Would the late Apple CEO and co-founder Steve Jobs apologized? That's a magical question if there ever was. I would love to hear from Apple evangelists.
Foxconn Plant Worker Revolt
In a blog post dated September 25, 2012, I reported that a revolt by 2,000 plant workers at Foxconn Technology, a major Chinese manufacturer of Apple's iPod, iPhone and iPad, erupted into a full brawl with numerous injuries. This does not bode well for Apple, because Foxconn is Apple's major producer and has encountered numerous technical gliches during the production of the iPhone 5, and has pushed plant workers to the limit to meet Apple's impossible demands for perfection, on-time delivery and lower costs. Apple's announcement that it had completely sold out of iPhone 5's over the weekend following the release, points to possible backlog issues due to these labor and technical gliches, that could eventually come back to haunt Apple as it tries to fulfill prepaid orders on the iPhone 5. Keep tuned for more.
Will Apple's Fiscal 1st Quarter 2013 Deliver More iPhone 5's?
I think that expectations for Apple to keep its stock from tanking are so high, that Apple was under tremendous pressure to launch the iPhone 5 anyway it could, and did so knowing that it would not be able to keep up with orders. If Foxconn Technology is able to resolve its plant labor issues and technical gliches (packing more electronics into a thinner phone), I have a feeling that Apple will deliver a huge fiscal Q1 2013 (ending December 31, 2012) like what it did back in Q1 2012 (ending December 31, 2011) when it sold 37.04 million iPhone 4's and 4S' (See my blog post dated January 25, 2012). As you can see from Gartner's mobile device report for Q2 2012, Apple has clearly fallen behind in mobile phones. If Apple continues to experience the above problems and issues, Samsung will only be too eager to fill in the void and steal away market share from Apple. Hopefully it will resolve the Apple Maps issue and include those revisions when it begins deliveries in Q4 2012 (Apple's fiscal 1st quarter 2013).
I am not about to write-off Apple, but just how much electronics can you pack into a mobile phone? You cannot continue to make phones thinner and lighter without sacrificing something. The same holds true for Samsung, Nokia and BlackBerry. If you ask me, I believe that the year 2012 marked a critical inflection point for mobile phones (growth remained in the low single digits in Q1 and Q2 2012), and that in 2013 phones will all have larger footprints and bigger and higher-resolution displays in order to accomodate the next generation of mobile ads and improve on the users's mobile experience without burying the display with too many ads.
Keep in mind that Seeking Alpha's rosy projections that Apple will sell between 100 to 150 million iPhones are made by a stock analyst, and should be ignored. Yeah, I think Apple will sell more than 100 million iPhone's, but it will have its work cutout for it to sell 150 million iPhone's. Samsung and Android phones now dominate the smarphone market and the similarities between Apple and Samsung have really narrowed, the Samsung Galaxy SIII in many respects is as good or better than the iPhone 5. You can bet that Samsung will be out to beat Apple with their next Galaxy phone. BTW, let's not forget the new Microsoft Windows 8 phones that are being introduced in October. That new Windows 8 operating system is killer, dude. Watchout Apple and Samsung.
Courtesy of an article dated September 29, 2012 appearing in Seeking Alpha and an article dated August 14, 2012 appearing in TechCrunch and an article dated May 16, 2012 appearing in TechCrunch and an article dated September 20, 2012 appearing in The Verge