Posted September 28, 2014 4:01pm
I have been very bullish on Apple for the last few months. I believe that the iPhone 6 is a game-changer because of the demand for larger screen phones, better battery life, and the potential for future functionality with Apple Pay. Apple’s customer base is very strong, and the changes in the iPhone’s design and functionality will go a long way in encouraging people to upgrade their phones.
The China Factor
Last year, when I was interviewed on Taking Stock with Pimm Fox, I specifically stated that China Mobile was the reason I had become more bullish on Apple. China is the biggest growth opportunity for Apple. China Mobile has hundreds of millions of subscribers, which has translated into 50% y/y growth in iPhone sales for Apple. However, I think the greatest growth factor for Apple’s earning reports is the increased ASP (average selling price) and gross margins for the iPhone 6 and iPhone 6 Plus.
Growth/Margins
In 2012, the biggest reason Apple fell was because of declining growth and margins. Apple has now addressed both of those issues.
- The ASP should increase by over $100 because of the iPhone 6 Plus.
- In addition, Apple was very smart to increase the memory upgrades from 32GB to 64GB and 64GB to 128GB. The reason is because Apple only has to pay a few more dollars for that boost in memory, but is making $100 or $200 more (64GB/128GB) over the 16GB phone. There is a bigger incentive for people to upgrade from 16GB to 64GB than there was from 16GB to 32GB. For most people, an additional 16GB is not enough, so to pay $100 just to double the GB was not worth it. Now the GB upgrade offering is 4x as much, which makes the choice much more enticing for many people. This means that more people will opt for the more expensive models, which will then translate into more growth and better margins for Apple.
The Hype
The iPhone 6 has lived up to its hype. Demand for the iPhone 6 is “insatiable” according to Cantor Fitzgerald. Apple sold a record 10 million iPhones in its opening weekend, and this was without China. Apple will most likely sell out of every phone that they can make. I believe that this will translate into record earnings that will blow out sell-side analyst estimates for both the October and January earnings releases.
My Position
I am currently long the stock through July Calls (I rolled my April Calls to the July Calls to lock in profit). I see the stock ending the year at least at $110. If the broader market rallies and Apple continues to deliver positive news, I think we could see Apple trade near $115-$120 by New Year.
