Buy the rumor, sell the news. That was again the lesson of yesterday’s new product launch, where Apple (AAPL) rolled out their new premium 5s and low-end 5c iPhones. So many commentators heaped such abuse on the company in the run up to the release that today’s weakness was a sure thing.
Failure to announce a deal with China Mobile (CHL) in Beijing last night was the immediate reason for today’s $30 plunge, which prompted several houses to downgrade the stock. It was a classic “closing of the door after the horses have bolted” moment. As with time immemorial, your broker is asking you to buy high and sell low, delivering to you a perfect money destruction machine.
However, this time, there is far more than meets the eye. China Mobile wasn’t the barrier to greater access to gargantuan 700 million mobile users. It was compatibility with China’s unique 3G TD-SCMA networks. The new plastic $99 iPhone 5c bridges that gap.
Chinese customers can now buy the iPhone 5c retail unsubsidized, as are 70% of the mobile phones in the Middle Kingdom, and use them on the local China Mobile network for the first time. Analysts expect this will enable Apple to pick up 6% of China’s mobile market share immediately, much at the expense of rival Samsung. The full China Mobile subsidy package, which the uninformed and non-technical have been looking for, could still be years off, but has been rendered irrelevant by Apple CEO, Tim Cooks, move.
The reality is that Apple’s unit sales will remain stable, or even grow modestly, with no new products whatsoever, its marketing presence is so overwhelming. So the next version of the Mac Book Pro and iPad, due out in coming months, can only deliver upside surprises on profits. Expanded carrier distribution, better ASP’s, and higher margins will be the inevitable result.
The company also has plenty of room to cut prices and build market share as existing products, like the iPhone 4 and 4s, age. It’s clear that the ultimate low end entry point for Apple products will be the iWatch, to be launched early next year.
The net net here is that Apple’s earnings estimates will be revised up for the first time in more than a year.
This is happening with the additional rocket fuel of a massive $50 billion share repurchase program that continues unabated. Corporate raider and major shareholder, Carl Icahn, is trolling in the background demanding more.
It also helps that the company carried off one of the largest corporate bond deals in history at the absolute peak in the bond market five months ago, a brilliant move that resulted from no small amount of prodding from me.
My tumultuous personal life aside, I am entering this trade cautiously as usual, adding a deep in the money call spread that limits my risk. Note too on the chart that the strikes align nicely with major support levels that should provide an extra safety margin. These only have to hold for five weeks for the October expiration to work.
Take a look at the China Mobile (CHL) chart as well, which will go ballistic if the China recovery story is real.