It is well known that the stock market reflects all known information (as stated by the efficient market hypothesis), rapidly processing and assimilating new data through the market mechanism of buying and selling. The stock market is also forward looking, explaining why a company's stock may fall, even when reported earnings have improved from the previous quarter. Companies must beat collective market expectations of their earnings to have a positive influence on their market capitalization. It's no accident that firms are often caught manipulating their earnings reports to match or beat estimates in order to artificially enhance their stock prices. As a result, earnings management is highly scrutinized by the SEC.
Given the modus operandi of the stock market, the release of an innovative, revenue-driving good or service is one of the few ways that a company can dramatically influence the valuation of its stock. This is because the challenge of accurately estimating the impact that an internationally distributed product will have on a company's earnings, and subsequently, the company's stock, is herculean. When Wall Street analysts are wrong, the reward can be astronomical for investors. Nevertheless, so can the penalty.
For example, Wall Street rated that the iPhone 5 would sell between 6 million and 10 million units on its first weekend being offered. Instead, the iPhone 5 sold a little over 5 million units. On Sept. 21, 2012, the official release date of the iPhone 5, Apple opened at $702.56. As of market close on Nov. 9, Apple traded at $547.06, a 22% drop in value. As Apple Inc. offers innovative products and services that are highly demanded by consumers, the company especially exemplifies the high correlation between new products and the stock price.
Apple Product Lines
Apple's main product lines are the iPhone, iPod, iPad and MacBook, which all compete in the cellular phone, media player, tablet and personal computer markets, respectively, which represents a strong diversification in their product portfolio. The Cupertino-based company has a looming presence in each market - a reputation that can be attributed to the monopoly that the company seemingly has on innovation.
Starting with the iPod, the company has found ways to create markets that didn't previously exist and revolutionize ones that did. As opposed to other Fortune 500 companies, Apple is known for its commitment to innovation through R&D, evidenced by its $3.4 billion R&D budget in 2012, up $1 billion from 2011. Other companies focus more of their energy on advertising, cost cutting or overall efficiency, and the differences between Apple and "other companies" are clear.
The Heavy Hitters: Apple Products That Made a Difference
Product releases are a potential goldmine or landslide for investors. There has been a lot of study and analysis done in the field of predicting effects of events such as product releases, as evidenced by scenario testing through game theory. With that in mind, let us look at some of the big product releases by Apple.
The first iPod was released in November 2001 and could hold up to 1,000 songs with a 10-hour battery life, all for the price of $399. On the first day of trading after the product's release date, the stock bounced around to eventually finish an unimpressive 5 cents up at $9.38. However, a week later on Nov. 19, Apple would close at $10.00 per share, a 6.6% increase.
While its initial effect on Apple's stock price was muted, this first iPod would lead a chain of hit iPod products and would set the bar for other companies in the portable media player market. In 2002, Apple released the iTunes Store as well as a Windows-compatible version of iTunes, finally making the iPod a viable option for Windows users. By the end of 2004, Apple had sold over 10 million iPods and was trading at $32.20.
Today, Apple holds approximately a 73.4% market share. However, the reign of the iPod may have come and gone: a steadily increasing number of people are carrying their music on their phones, prompting Apple to begin to phase out the product.
The MacBook computer is another example of wildly successful Apple products, specifically the iMac. The iMac was released in May 1998, with Apple trading in penny stock territory at $7.58. While it did not have an immediate impact on Apple stock, Apple was trading at $9.22, a 21.6% increase, a mere three months later.
The iMac would go on to be the "Number one selling machine through the retail and mail-order channels in the 1998 holiday season," according to the New York Times. Two years following the release of the iMac, Apple was trading at $27.53 - a whopping 263% rise! The popularity of the iMac paved the way for quality products like the PowerBook G4 in 2001 and the MacBook Pro in 2006. According to Q2 2012 estimates, Apple holds a 12% market share and is trending upwards.
Arguably, the most revolutionary tech product ever created, the first Apple iPhone was announced with much fanfare on Jan. 9, 2007. The phone boasted of a combination of three products: "a mobile phone, a widescreen iPod with touch controls, and a breakthrough Internet communications device with desktop-class email, web-browsing, searching and maps."
When the phone was officially released for sale in June 2007, it sold around 270,000 phones in its first 1.25 days on the market. Apple stock only gained 7 cents on the phone's release date, a reaction perhaps muted since the phone's early sales missed Wall Street estimates. A month later, however, the stock's price had risen to $141.43 from $122.04, a 15.9% increase. The iPhone truly changed the landscape of the mobile phone market. Today, the iPhone holds an 8.8% market share in mobile phones, while capturing 73% of cell phone profits.
The iPad finishes off our list of game-changing Apple products. Announced on Jan. 27, 2010 and first sold in early April of the same year, the iPad essentially created the global tablet market. Interestingly, Apple had actually sold a tablet in 1993. It was known as the Newton MessagePad and was used as a personal digital assistant. Nevertheless, it was a shadow of the iPad, which contained all the functionality of the iPod Touch on a much larger screen with a faster processor.
On the first day of trading following its sale, Apple stock rose slightly from $234.98 at open to $238.49 at close, a little over a 1% increase. A month later, however, Apple was trading at $266.35 a share. Just a year after the iPad's release, Apple was up to $341.19, a 43% increase. Apple currently holds a market share in the tablet arena of 50.4%.
The Bottom Line
There have been few Apple product releases that immediately resulted in a meteoric rise in the company's stock price. Day traders are known to target Apple at the release of each of its products, but the quick riches that they seek are all too often a mirage that swiftly disappears. On the other hand, each product had a noticeably positive effect on the stock over a longer period of time. The over-arching, long-term view is the one to properly frame your investment decisions in, not day-to-day volatility. Over time, the market mechanism will identify true value in the marketplace. Rely on the wisdom of the masses over the long term, not on the speculators that routinely come and go, thereby letting companies like Apple work for you.