No iPhone 'high 5' but coupled with 4S, Apple stays strong

For some time users and investors have been waiting for clarity on what the new iPhone 5 was going to look like. As expected it was rectangular in shape with rounded corners, but what was really in focus was what functions it offers compared to iPhone 4S and versus competitive products. In short, from a business perspective I am fairly confident about Apple heading into 2013. As an investor I would expect more volatility during 2013 though as Apple's business case becomes sensitive to how iPhone sales develop.

Review of last year
Personally I think the small upgrade to 4S was somehow a mistake from Apple's side. Previously it was in the lead by quite a margin, and competition was struggling to get traction. But during the last year where Apple (NASDAQ:AAPL) virtually stood still on its iPhone Samsung (KRX:005930) has had time to make a large leap forward. This is one of the reasons why Android has a 56 percent market share in the US while iPhone's is around 35 percent.

Furthermore, Win8 Mobile, which was not more than a footnote last year, has also had time to develop and Nokia (HEL:NOK1V) and Microsoft (NASDAQ:MSFT) are able to push ahead on their answer to an alternative ecosystem not defined by Apple.

My take is that if Apple had been more aggressive last year then its market dominance could have been much firmer now. Apple is actually now more in a position where it has to present new models to keep up with Samsung, Motorola/Google  (NASDAQ:GOOG) and Nokia.

So how was iPhone 5 initially received?
Apple did pretty well based on what I understand and what I see others emphasising. I won’t take a detailed look at the new phone but will make a few highlights.

Apple has brought the latest LTE technology to this phone and made the high speed network 4G available. Telecom companies are rolling out this new technology and are of course interested in having devices able to connect to it. Of course they need to have Apple included, as data transmission is a big element of the iPhone. This closed a technology gap and also a gap towards competitors. Nevertheless, this is not enough to make iPhone users automatically jump from 4S to 5.

A twice as fast A6 chip as in 4S is nice, but from my point of view not really the primary reason for an upgrade to 5. The response time on my 4S is not that slow anyway. Actually, the slowest thing is probably my fingers and even Apple can’t do anything about that!

The screen is longer and now 4 inches diagonally. It is probably better though and I like the fact that at least it is not wider. But it's still not really enough to convince me to opt for it and pass on my iPhone 4S to the kids.

The camera has some improvements, and for some users where photography is a large part of their daily communication this would be a good reason to convert, but again it is not a wow effect.

Battery life is a bit better in 5 versus 4S and that is actually an achievement as there is a risk of more and more features reducing life time. Still, it's not enough to make me upgrade right now.

My take
Notice that I am not a full blown iPhone disciple and with that in mind I would expect many iPhone users will stick to their current phone as it adequately fulfills their needs. However, there will always be some people who like to have access to the latest technology and they are probably already in the queue to buy it or perhaps even reading this post on an iPhone 4s while they wait. Looking at this from an investment perspective I am relatively confident as the expected price reduction on 4s (due to the launch of iPhone 5) would make it possible for more users to buy an iPhone and secondly entice doubters that could have bought another brand. Apple does not report a breakdown on individual model sales but just iPhone sales in general, and I guess that 4S will constitute a larger proportion than other older models prior to 4S.

A much more important thing for investors is the news that iPhone5 is compatible with China Mobile’s network. The previous versions were not and this is important as China Mobile has around 680 million users! If for example 5 percent of their wealthiest Chinese users were to shift to iPhone it would result in the sale of an additional 34 m iPhones. China has been a growth story for Apple so far but this would really change the picture.

Strategic comments
I was a bit disappointed in the 4 to 4S development last year as it provided too many opportunities for competitors to create similar products. The year before that Apple was clearly in the lead. What is important about the iPhone is that not only does it comprise around 50 percent of Apple's sales, but it is the facilitator for users to enter the whole Apple ecosystem. It is therefore important that Apple continues to stay at the techonogical forefront on iPhone going forward. Looking at iPhone 5 and 4S combined they will undoubtedly continue to facilitate and underpin the sales of other Apple products down the road.

Consensus
In the analysis in chart 1 below I have taken iPhone sales reported so far and secondly calculated in reverse the consensus estimated revenues into iPhone units. Note that Q1 2013 (which includes the Christmas season) is expected to see the sale of 48 m units which will then decline during the year until there is perhaps another iPhone launch. This is the normal pattern.

The consensus development points to a 30-35 percent increase in iPhone sales which is a substantial number of phones and an incredible growth rate. Can Apple achieve this? Firstly, the market for smartphones is expanding so Apple benefits from this trend and maybe it can recover some market share from Samsung over the course of 2013. Secondly, as mentioned above, China Mobile compatability is a huge opportunity. There is no signed deal yet but it seems a win-win situation so it will inevitably come. This will further underpin the positive development.

Conclusion
From a business view I am fairly confident about Apple when looking into 2013. As an investor though I would expect more volatility during 2013 as the business case becomes sensitive to how iPhone sales develop. Apple's sales rest heavily on the success of just one product! It's a good one right now, but an investment strategy in this company needs to look beyond 2013/14 and this will put a lid on valuation during 2013. Apple stocks will perform next year but look out for volatility. Summing up though, I am relatively bullish and would not dream of going short in Apple stock as it is right now.