Apple Bulls and Bears Take Sides
Can Apple's iPhone possibly live up to the hype?
Stock market investors sure think so. Since the iPhone was announced in early January, shares in Apple Computer have increased in price by more than 40 percent, recently peaking at an all-time high of $127 as the iPhone's June 29 debut nears.
But while millions of customers line up to be the first to own Apple's latest bit of glass-and-steel bling, some Apple stock owners are lining up to sell their shares.
"It's time to take some money off the table," says hedge fund manager Jay Somaney, who plans to sell as much as half of his Apple stock in the days leading up to the iPhone's release. "There's just no way reality is going match the hype."
To be sure, past experience suggests that few consumer technology products ever do, especially in their first generation. Take Microsoft's Xbox game player, which despite growing popularity remains a money loser for the company, or TiVo, the digital video recorder that has revolutionized TV watching but done far less for investors' brokerage accounts. Even Apple's wildly successful iPod's sales started out slowly because its much-hyped first-generation device required an Apple computer to work properly. Only when the third-generation iPod (introduced nearly two years later) included iTunes software for Windows-based computers did sales really take off.
Indeed, Jim Cramer, the host of CNBC's Mad Money, puts the chances of Apple hitting a grand slam with its first entry into the phone market at about 20 percent at best. Far more likely is that the iPhone will merely equal the hype, in which case the stock price "does nothing," he says. And if it fails to match the hype or suffers a glitch typical of first-generation products (anyone remember the early iPod's reliability problems?), "then the stock gets hammered."
But while Cramer advises stock traders to lighten up on their Apple positions in the coming days, he suggests buying back in if the stock falls by 5 percent or more after the iPhone hits store shelves. "If it gets much below $115 a share, then I'm a buyer," he says emphatically.
That's because Cramer believes Apple's overall prospects are so strong that it's a must-own stock for long-term investors. Grouping it with Google, Blackberry-maker Research in Motion, and Amazon in what he calls the "New Four Horsemen of Tech," he says Apple's impressive transformation from cultish computer maker to consumer electronics juggernaut will continue to pay off, thanks to both a slew of innovations and the marketing savvy to cash in on them.
Other analysts agree, and they've recently raised their profit estimates and one-year projections for Apple's stock price to as much as $160 a share, nearly a third higher than it is today. "New products should help stimulate revenue acceleration through 2009 with the iPhone driving another leg of the 'multiplier effect,'" UBS analyst Ben Reitz writes of a spate of new products, such as a video iPod, higher-capacity iPod nanos, and Macintosh computers that will make best use of the company's soon-to-be-released "Leopard" upgrade to the Mac's operating system.
Even those skeptical of the first-generation iPhone think it should do well once the kinks are ironed out. "The Generation 2 or 3 device will probably be a big hit," says analyst Rob Enderle, who has nonetheless dubbed the first-generation product the "Paris Hilton of cellphones–long on hype, short on substance, and (at $500 a pop) she can afford it."
Enderle's biggest concern with the first-generation iPhone is Apple's decision to forgo a keypad in favor of a touch-screen, which he says will make E-mail and text messaging far more cumbersome than with competing smart phones like Blackberry's new 8300 Curve. Moreover, the touch-screen's glass panel–while more scratch-resistant than competitors' plastic screens–means that "if you drop this thing from 2 feet, you'll have shattered glass all over the floor," Enderle says.
That, of course, can't happen until customers get their hands on it. And with about 19 million of them already interested in buying an iPhone sight unseen, according to market researcher M:Metrics, initial demand may be enough to ensure that Apple meets its goal of selling 1 million by year's end.
Enderle expects Apple to roll out its next-generation iPhone by then and another one soon afterward. "They'll work out the bugs and get this right by the beginning of next year," he says.
In the meantime, the likelihood that the first-generation iPhone won't match the hype means investors in Apple's stock may soon have a buying opportunity.