The Irony of Apple Rallying on iPhone 7 Optimism

By Markets

Despite considerable disdain from the media about the removal of the headphone jack in the iPhone 7, Apple(NASDAQ: AAPL) has seen a significant increase in investor interest since its unveiling event earlier this month.

Continue Reading Below

In this segment fromIndustry Focus: Tech, Motley Fool analyst Dylan Lewis and Fool contributor Evan Niu talk about what has investors so excited about Apple, and why their interest is a bit ironic in thecontext of the company's recently stated goals.

A full transcript follows the video.

A secret billion-dollar stock opportunity
The world's biggest tech company forgot to show you something, but a few Wall Street analysts and the Fool didn't miss a beat: There's a small company that's powering their brand-new gadgets and the coming revolution in technology. And we think its stock price has nearly unlimited room to run for early in-the-know investors! To be one of them, just click here.

This podcast was recorded on Sept. 16, 2016.

Continue Reading Below

Dylan Lewis: The company predictably took some flakfor its decision to ditch the headphone jack,like we talked about, and questionable use of the word "courage" throughout the presentation. But, the stock is up 10%in the last five days. For a company Apple's size, that's pretty noteworthy. Any timeyou see something like that, I think it's less to do withthe product specsand more to do with what's going on withpre-order information that we've seenfrom a couple different outlets.

Some of thedifferent wireless carriersannounced what they were seeing in terms of pre-order activity.T-Mobilesaid the two new iPhones haveshattered previous sales records.I believe orders are coming in at something like four times what the iPhone 6 did.Sprintalso saw very highpre-order numbers. They said orders were up 375% over the first three days ofpre-order availability compared to last year.AT&TandVerizonwere a bit more muted inwhat they were talking aboutrelated to the iPhone line, and said that pre-orders werepretty much business as usual, business as expected.

Evan Niu:I think AT&T saidat a conference the other daythat they were just above expectations. Still pretty vague.

Lewis:Yeah. Some really nice color from T-Mobile and Sprint,not so much AT&T and Verizon. But, I can't say that I'm surprised we're seeing some really good pre-orders. No. 1, it's an iPhone, and No. 2 the wireless carriers, most of them,I think all four of them, have gone with the free iPhone 7promotion. So, it's tough to parse out how much of that is what would be a full-price purchase iPhone versus a free iPhone that'scoming with an upgrade and a two-year commitment to that wireless provider. So,that's the grain of salt that you need to takewith any of those pre-order numbers.

Niu:Like you said,the stock has been up 10% or so over the past few days. And I think that's interesting,because it's on heavy volume. If you look at the volume activity, the gain is on in the back, there's a lot of volume. There's a lot of people coming in, it's not a light-volume move. There'sa lot of people that are coming into the stock on all this iPhone 7optimism,which is kind of ironic,because there's basically this idea, there's asentiment that iPhone 7 is going to be strong, the carrier stuff you mentioned. But the irony is, Apple has been trying really hard to shift away fromfocusing so much on unit sales numbers, which is also partly why I think they're not going to release their launch weekend sales for the first time in five-plus years. They've always announced launch figures every year, but this year, they said they're not going to.

Lewis:Yeah,I believe a company spokesperson said,and I'm actually taking this from an article you wrote, "Theseinitial sales will be governed by supply, not demand, andwe have decided that it is no longer a representative metric for our investors and customers."

Niu:Thesilly part about that is that that's been true every year.

Lewis:Yeah, that's always the case.

Niu:I don't really believe their reasoning for why they're saying it, becausethere has always been supply constraints. Every year it's supply constraint. That's not a new thing. So, them saying they're not going to give this number because of that,I think that's kind of a cop-out. I think it's part of the broader strategyto get people to stop focusingon unit sales, because what they want people to focus on,particularly investors, is to look at these recurring revenue sources. They've been touting all thisinstalled base purchases and services revenue andall these things that are not tied to unit sales. They'retrying to get investors to focus on those numbers instead of unit sales.

But,obviously, investors are still focused on unit sales,because when you hear all these positive storylines about the iPhone 7, they go out and buy the stock. Also, combine this with the fact that the Samsung Note 7s are exploding,that also helps. So I thinkthere's a lot of positivityaround the iPhone 7,despite the fact that Apple is trying toshift the focus away from how many units they sell.

Lewis:Yeah.I think you're absolutely right. You look at the way their revenue mix is going, it's going to play out that way.Like I said earlier, the iPhonecontribution to revenue was, in the past, about two-thirds.I believe it was down to about 56%as of their most recent quarter, and that's because of that rising service revenue. You also have the introduction of the Watch line, and things like that, which theyupdated in this most recent press event. But, yeah, the iPhone, while it'sgoing to be the cash cow for them,I think they're making efforts tohighlight other parts of the business.

Dylan Lewis owns shares of Apple and Verizon Communications. Evan Niu, CFA owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool recommends T-Mobile US and Verizon Communications. 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.