As you probably know, Apple’s (NASDAQ:AAPL) earnings last week were a rare disappointment, thanks in large part to lackluster iPhone 4 sales. Well, no kidding. Would you have bought an iPhone 4 in the past month or two if you knew the latest, greatest version was going to be released in October?
A lot of people did, of course, which is one reason Verizon’s (NYSE:VZ) earnings were so strong. But a lot of people decided to wait, too. That’s why, on the first day of the new iPhone 4S launch, Apple registered more than 1 million pre-orders, blowing away the previous record of 600,000. And in the first three days after launch, more than 4 million 4S phones were sold, more than doubling the previous record set by the iPhone 4.
Investors apparently weren’t convinced, though, as AAPL fell 5.6% the day after releasing results. So the stock must be a screaming “buy,” right?
Well, not so fast. There’s a better way to play the iPhone’s game-changing success.
Let me be clear: I’m not saying that buying AAPL would be a big mistake. During the past 10 years, Apple has changed the way we live, work, play, listen to music and communicate. It has been able to out-innovate, out-think and outmaneuver every other competitor on the planet, and I fully expect it to remain one of the dominant forces in consumer technology for years to come. But with success comes expectations, and it’s getting harder and harder to keep up the torrid 45% to 82% year-over-year growth rates investors have come to bank on.
As Apple’s devices and their markets mature, it will be increasingly difficult to consistently add new features that wow people enough to upgrade to the newest version immediately. Even a slight slowdown in the upgrade cycle impacts growth. It also will become harder to differentiate the iPhone from the competition as much as before, so Apple might need to lower prices to try to undercut competitors — another potential drag on growth. And speaking of pricing pressure, let’s not overlook the recent introduction of Amazon’s (NASDAQ:AMZN) much cheaper tablet, the Kindle Fire, which has real potential to eat into the phenomenal growth of Apple’s other blockbuster product, the iPad.
Apple will be just fine, but with challenges to its extraordinary growth mounting, I see better opportunities out there with more upside potential.
Look Behind the Curtain
An interesting way to play the iPhone’s success — and the blockbuster trend toward all things mobile — is to pull back the curtain and peek at what’s going on behind the crystal-clear display and slick touchscreen.
Example: What’s the first thing consumers do after buying an iPhone? Activate it, of course. And given that most people can’t wait to play with their new toy, they don’t waste a minute getting it operational. One way to activate it is online, and that’s where a little-known company called Synchronoss Technologies (NASDAQ:SNCR) comes in. SNCR plays a prominent role in all of AT&T’s (NYSE:T) online iPhone activations, which is now roughly 30% of all activations.
Synchronoss is involved with more than just AT&T and more than just activations. The company also helps with transactions involving AAPL with Verizon and Sprint (NYSE:S), too, bringing in around $7 to $10 for each transaction. Looking ahead, SNCR’s new initiative, called Smart Mobility, expands into other areas for mobile devices including connectivity, synchronizing content, customer service and more.
SNCR dipped below $23 in the early October selling, and it has since moved back up toward $30. That’s still short of its 52-week high of $36 and well below all-time highs near $45 set back in 2007. Current analyst estimates call for Synchronoss’ earnings to grow about 25% in 2012 to $1.06, which makes the forward P/E 26.7 — reasonable for a smaller, exciting growth company.
As of this writing, Hilary Kramer did not own a position in any of the aforementioned stocks.
