by Jeff Reeves | September 12, 2012 4:33 pm
There’s no doubt Apple (NASDAQ:AAPL) is one of the most closely watched companies on Wall Street. And today’s Apple event revealing the iPhone 5was expectedly dominating the headlines after its 1 p.m. EST shindig in Cupertino, Calif.
So just how important was today’s Apple iPhone event in the greater scheme of the stock market and the iconic tech stock itself?
In a word: huge.
First, some perspective, though. Apple isn’t the end-all, be-all for either investors or the economy. Yes, it’s the largest publicly traded stock by market cap and subsequently the largest contributor to the Nasdaq Composite and S&P 500. As of yesterday, AAPL was 13% of the Nasdaq or so and 5% of the S&P 500. But while the indices may be “overweight” in Apple, this stock alone can’t carry the global economy.
Also, the WSJ MarketBeat blog had a great post to kick off the party this week, debunking the might of Apple. Here’s an excerpt:
“Data crunchers at Birinyi Associates found that Apple’s correlation to the S&P 500 clocks in at 0.41, on a scale where 1 points to a perfect directional relationship and 0 indicates no relationship. It was as high as 0.72 in January and as low as 0.35 in April, right around the time the stock dropped 10% from that recent high.
By comparison, the average stock in the S&P 500 has a 0.58 correlation to the index, according to Birinyi.
‘This year Apple has mostly been less correlated to the index than the average member,’ Kevin Pleines, an equity market analyst at Birinyi, told MarketBeat.”
In short, Apple is not the market.
Of course, the other side of the argument is that while Apple isn’t everything, it certainly is more than just a bit player. By now, maybe you’ve heard of a JPMorgan Chase (NYSE:JPM) analyst that predicted the iPhone 5 could add 0.25 to 0.5 percentage points to GDP.
Here’s the link to the JPMorgan report, and here’s an excerpt:
“This estimate seems fairly large, and for that reason should be treated skeptically. However, we think the recent evidence is consistent with this projection. The last iPhone launch was at a similar time last year. In October of last year, when the iPhone 4s first became widely available, overall retail sales that month significantly outperformed expectations. Essentially all iPhone sales occur either on-line or in retail stores. Over half of the 0.8% increase in core retail sales last October occurred in two categories: on-line sales and computer and software sales, which combined had their largest monthly increase on record. The incremental growth of Q4 sales at those stores over Q3, if due to the iPhone, would have added between 0.1% to 0.2%-point to Q4 growth, after subtracting the import drag. Given the iPhone 5 launch is expected to be much larger, we think the estimate mentioned in the first paragraph is reasonable.”
Like I said, HUGE.
And this is to say nothing about the impact of a successful (or unsuccessful) launch on Apple’s actual operations. The gadget is worth about half of revenue and is roughly 70% of all profits. Margins are gigantic on the iPhone — just take a look at current and projected profits from Business Insider.
The expectations are enormous on a volume side, too. Apple could sell as many as 10 million iPhones by the end of September alone, according to some analysts, and investors obviously are expecting a very impressive showing based on the run-up in Apple stock lately. Shares are up a whopping 63% year-to-date, about five times the S&P 500’s returns.
Then it’s also worth noting that unlike many other companies these days, the domestic market is crucial to Apple. That’s because many foreign telecoms don’t subsidize the iPhone the way carriers like AT&T (NYSE:T), Sprint (NYSE:S) and Verizon (NYSE:VZ) do. For instance, China Unicom (NYSE:CHU) and China Telecom (NYSE:CHA) don’t pay a penny, and the whole $600 cost of a shiny new iPhone lands on the consumer alone.
In some ways, Apple is an “also-ran” in China — with market share south of 10%, according to reports. So while growth potential is there, and cheaper, older versions of the iPhone might get traction, the power of lucrative U.S. sales is unmatched. Right now China only accounts for roughly 16% of Apple sales, so a big domestic splash is crucial to Apple.
To summarize, Apple’s newest iPhone could be the most important version in the history of the company. So while today’s event was a big deal … the much bigger deal will be the next few months of sales. The initial pop from the reveal and any holiday sales surge will quickly tell investors whether AAPL stock will keep up its meteoric rise, or if it’s starting to disappoint.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he was long AAPL.
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