Why the iPhone 5 Will Be a Success, and 5 Stocks to Benefit From It
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The much-anticipated iPhone 5 is here, and the discussion is getting hotter by the day: Should you bet on the new Apple (NASDAQ: AAPL) product or is it a big disappointment signaling the end of the good times at Cupertino?
The bearish argument for Apple and the iPhone 5 is mostly related to the operational and technological aspects of the new product. Most people in this camp are pointing to the fact that the iPhone 5 does not include any big technological breakthrough. In comparison to the Samsung Galaxy S III, for example, the Apple product seems to be behind in aspects like RAM, battery life or screen size.
On the other hand, I don´t think that's going to be the main driver of a purchase decision for most customers. People buy Apple products because of their brand differentiation, image, and user experience. When the iPod was launched, the acronym “idiots price our products” became very popular, and there were some objective reasons for that. After all, the iPod was a more expensive MP3 player lacking some valuable features, like a radio.
But the consumer business is not only about objective and measurable reasons, and there are some counterintuitive aspects to consider. A higher price tag is not always a negative for sales. Pricing is a marketing tool, and Apple has positioned itself as the premium player in the industry. The iPhone 5 may not be better than the latest Samsung product based on technological capabilities, but it’s more elegant and cooler, mostly because it’s an Apple product.
Sales are off to an auspicious start, and I would expect nothing else than a new blockbuster from Apple in spite of some well-argued, though ultimately misguided, critiques of the iPhone 5. And the good news is than betting on the iPhone 5 doesn't require any sophisticated analysis, as shares of Apple itself still offer a considerable upside potential from a valuation point of view.
Make no mistake; in spite of the fact that the share price of Apple has risen exponentially over the last years, and is even at all-time historical highs, the company is still trading at a P/E ratio of 16. This is below the average of 20 times earnings for the tech sector, and also below the five year average P/E of 22 the company has carried in the past. On a forward basis, the stock looks even more attractive with a P/E ratio of only 13.
And it doesn´t end there. Many other companies will benefit from strong sales at Apple, with Qualcomm (NASDAQ: QCOM) being one noteworthy example. The company provides chips and technologies used in the iPhone 5, as well as the iPad and other high end smartphones, so Qualcomm is actually a bet on the mobile revolution, not just the new Apple smartphone. At a P/E of 19 Qualcomm is more expensive than Apple, but still reasonably priced for a tech leader with exciting growth prospects.
Another way to bet on the mobile revolution, with Apple as a main customer and the iPhone 5 as a middle-term growth driver, is Broadcom (NASDAQ: BRCM). The company provides chips for many highly demanded technologies including mobile, wireless and connectivity chips. Broadcom operates in a very competitive industry, but the company has positioned itself as a market leader thanks to its outstanding R&D capabilities. The stock trades at a P/E ratio of 26, but on a forward basis it carries a much cheaper ratio of 12.
Cirrus Logic (NASDAQ: CRUS) provides audio chips for Apple products, the iPhone 5 included. This small company is highly leveraged to Apple, as the Cupertino giant represents more than 70% of its revenue. The price tag is higher here; Cirrus carries a P/E ratio near 35, so waiting for a pullback before pulling the trigger sounds like sensible idea for this high-growth business.
With more than 700 million subscribers, China Mobile (NYSE: CHL) is the largest cellular carrier in the world. Due to technological incompatibilities, the company has not been able to carry previous iPhone models, but the iPhone 5 is widely expected to leave those limitations in the past. Both Apple and China Mobile have a lot to win by bringing the new model to such a gigantic customer base and, at a P/E of 11, shares of this Chinese telecom stock offer plenty of potential for further gains.
Don't get confused by paying too much attention to the technological aspects of the iPhone 5. A smartphone is a consumer gadget, and few companies have such a powerful brand presence as Apple does. The iPhone 5 brings a beautiful design and all the strength of the Apple brand behind it. That´s more than it needs to be successful, and these five stocks, Apple included, stand to benefit from it.
acardenal owns shares of Apple. The Motley Fool owns shares of Apple, China Mobile, Cirrus Logic, and Qualcomm. Motley Fool newsletter services recommend Apple and China Mobile. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.