Bull Vs. Bear - The iPhone 5 Is Not Enough For Apple To Reach $1,000

By Stephen D. Simpson, CFA | September 11, 2012 AAA

Question: Will the iPhone 5 bring Apple stock to $1,000?

Bear's Response
(Nasdaq:AAPL) is a marvel by any meaningful sense of the word, but gravity pulls on the marvelous and not-so-marvelous alike. Given the huge revenue base at Apple and the shrinking quality gap between Apple phones and those of rivals such as Samsung, Google (Nasdaq:GOOG), Nokia (NYSE:NOK) and HTC, a simple repeat of an old formula may no longer be enough to keep Apple as the big dog.

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Timing Is Everything
Much has been made of the fact that Samsung's Galaxy S-III has recently become the top-selling smartphone, but using that data point as proof of Apple's declining power is unwise. I have no doubt that there is significant pent-up demand for the iPhone 5 and that satisfying that demand will rocket Apple back to the top of the list. But for how long? Samsung's Galaxy line has not only closed the performance gap at the high end, but the company has also taken a broader view of the market and introduced feature-rich phones at multiple price points. Even though Apple's success in court against Samsung may very well slow the Korean giant's momentum, it's not going to keep it at bay forever.

Likewise, Google is talking up three new RAZR phones with larger screens, strong battery life and (theoretically, at least) faster connection speeds. There are also new introductions to consider from Nokia and HTC, not to mention Windows phones coming in 2013.

It's a Size Problem
Let's say that Apple can maintain its present valuation ratios. Getting to $1,000 implies about $220 billion in revenue, or an incremental addition of about $71 billion (or about 48%). Now, the ongoing success of the iPad can certainly fill in some of that, but only the most bullish of analysts think that Apple can achieve that mark in 2013. Consequently, using a strict reading of the question, I do not believe that the iPhone 5 itself is going to be enough to send the shares to $1,000.

Nobody Wins Forever
Simply comparing features and prices of top-of-the-line phones leads me to the conclusion that Apple owes a great deal of its success to the logo on the phone. In other words, while Apple definitely took the smartphone concept to a new level and raised the bar for the industry, I no longer believe that the company's performance edge matches its perception edge.

Admittedly, this could all change in less than a few weeks if the iPhone 5 contains new features and technologies that yet again leave competitors sputtering in rage and shoppers oohing and ahhing in the Apple Store. What seems clear with each generation, however, is that the competitors are gaining. As that performance/feature gap shrinks, more and more consumers are going to ask themselves just exactly why they need to pay up for Apple's phone when a Samsung, Motorola or HTC will do 90% of the same things for less than 90% of the price.

The Bottom Line
I hope readers don't interpret this as a bearish call on Apple, nor a condemnation of the company's future. I think Apple has a very bright future and I do think that the valuation on the shares is reasonable (if not cheap). What I don't believe, however, is that the iPhone is somehow an untouchable paragon of technology, nor do I believe that the iPhone alone can send these shares to $1,000 in the near future, barring some major leap forward in functionality.

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

Don't forget to read the Bull Side of this debate and weigh in with your opinion below.

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