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Are You Missing the iPhone 6 Rally?

22 August 2014 in Trading Ideas

Come now, you didn’t forget about the power of Apple, have you?

Following the leadership transition as a result of the death of Apple’s iconic founder Steve Jobs and coupled with the release of the popular-but-not blockbuster iPhone 5C and 5S updates, it seemed that was the case for many investors. The company’s shares dropped more than 40% in the seven months following their high point at the iPhone 5’s release in September 2012, with not much in the way of new products to revive investor enthusiasm after that point.

Well, investor enthusiasm for Apple is back. On Wednesday, the stock hit a new intraday all-time high above $100 (split-adjusted, for those of you with memories of Apple at $700), marking a run-up of 36% since the company’s strong quarterly results in mid-April.1

 

Part of the new mojo is likely due to the imminent approach of Apple’s launch of the iPhone 6, which promises a larger screen, a popular smartphone feature that has had Apple actually trailing the competition.

Consumers seem to like the move, in theory. In a recent survey by investment firm Robert W. Baird cited by Barron’s, 6.8% of respondents said they plan to purchase Apple’s next phone, compared with 5.3% who said so before the launch of last year’s iPhone 5S.2

Interestingly, among Android users, just 1% said they were interested in an iPhone, but 11% said they would be more or much more interested in one with a larger screen. For iPhone users, even among those who upgraded last year, 41% said they will or might buy the 6.

The iPhone 6 anticipation has also appeared to offer a tailwind to the overall mobile internet sector. The Mobile Internet Tsunami motif has increased 3% in the past month. In that same time, the S&P 500 is up 1%.

In 2014, the motif has risen 13.8%; the S&P 500 has risen 8.9%.

Barron’s, by the way, also pointed out that its thesis delivered in March for Apple’s shares to rise 20% over the next 12 months – they’re now up nearly one-third – is still intact.

One part of its premise at the time was that Apple is now less a hit-driven gadget maker than a hardware annuity business that lures users and keeps them with sleek software for managing pictures, music, movies, and more. Another was that it was headed for success with its big-screen debut. A third part was that shares looked too cheap at 12 times calendar 2014 earnings vs. 14.4 times back then for Microsoft.

Five months later, Barron’s said, we have seen Apple post profit growth of 12% on a 13% rise in iPhone units – small screens and all – and an 18% rise in Mac computers, showing Apple can deliver strong numbers without an obvious hit.

As for valuation, Barron’s pointed out that Wall Street is looking for 11% growth in earnings per share for both this fiscal year and next. As of the middle of last week, the stock was selling for 14.2 times projected earnings for the next four quarters, vs. 15.4 times for the S&P 500 (and 15.7 times for Microsoft).

Even though the stock has run ahead of Barron’s expectations, the publication suggests holding onto the shares, as the stock has tended to outperform leading up to a new iPhone release. It’s worth watching if the entire mobile internet sector follows suit.

1Johanna Bennett, “Apple Hits New Intraday Record at $100.77,” barrons.com, Aug. 20, 2014.

2Jack Hough, “Why Apple Could Continue to Shine,” barrons.com, Aug. 16, 2014.

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