Apple Inc’s iPhone launch could surprise investors

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Apple Inc.’s annual event in Cupertino, California on Tuesday is easily the most-anticipated iPhone launch in a long time, as the tech giant will make major form factor changes to the popular smartphone.

It’s also the first event to be held at the company’s new headquarters, which includes the Steve Jobs Theater – a 1,000-seat, 20-foot-tall glass auditorium that reportedly includes leather seats, a revolving elevator and a hidden demonstration area.

Last week, Apple’s share priced dipped sharply from its recent record highs, leaving it relatively cheap based on future earnings potential in the mind’s of many investors. But if the market interprets Tuesday’s event as a disappointment, there could be more weakness.

However, the iPhone 8 is expected to be a game-changer given its revamped form factor, including an edge-to-edge display, and the device is also expected to have several new features to enhance the user experience. That will likely prompt the long lines – and market hype – seen during Apple’s biggest releases in the past.

“We expect the next iPhone to include innovations that will be clearly visible, marketable, and useful for the mass-market globally,” said Benjamin Schachter, an analyst at Macquarie in New York. “The days of pure spec increases driving demand are long over.”

His confidence stems largely from high expectations for pent-up demand. When the iPhone 6 was launched, screen size proved to be a key factor behind what became the largest iPhone upgrade cycle.

Since then, the device has seen relatively limited innovation and visible change, yet Apple sold more than 215 million iPhone in the past 12 months.

“With the enhancements we expect for the next iPhone, we have full confidence that demand will be as strong or stronger than when the iPhone 6 and its larger screen came,” Schachter said.

Of course, a revamped iPhone won’t be everything Apple unveils on September 12. The company’s co-founder, Steve Jobs, always used the phrase “one more thing” to surprise event attendees during his keynotes. Some of those announcements included the ability to purchase and download movies through iTunes, and the introduction of FaceTime.

Current chief executive Tim Cook is unlikely to disappoint in that regard this time around.

“Although expectations remain high, we think the event still has potential to surprise investors on the upside, particularly as some of the new iPhone features are demonstrated live,” said Amit Daryanani, an analyst at RBC Capital Markets.

He expects Apple will also introduce a new Apple Watch with a cellular connection, making it a better standalone product. It should also have improved water resistance, battery life and biomedical capabilities.

Cellular connectivity will enable the watch to be more functional as an independent device, but it also may require a supplemental data plan.

Apple could also unveil a new TV product that offers 4K streaming, as well as software updates for all of its devices, but for investors, the iPhone remains the focal point. Expectations for a higher average sales price for the flagship smartphone peg the cost at between $999 and $1,199.

So not only are the smartphone’s new features expected to drive unit sales and average prices higher, but Daryanani thinks it should allow Apple to improve its gross margins in the first quarter of fiscal 2018 (ending in December).

J.P. Morgan analyst Rod Hall noted that the specific week of October that the device begins shipping will have a few million units of impact on Apple’s December earnings.

He also highlighted uncertainties related to the pricing of the new smartphone, which could be called the iPhone X (to mark the device’s 10th anniversary), but pointed out that price elasticity (price-based changes in demand) is low in the luxury market. That’s the space Apple is targeting with this device.

“It is true that Apple’s products don’t tend to be that price sensitive, but for a company whose margins are already quite high, it still remains a big risk on a psychological basis, and in particular in markets where consumers appear to be leaving it longer to replace what are already quite expensive pieces of hardware,” said Michael Hewson, chief market strategist at CMC Markets (UK).

He noted that while consumers usually don’t mind spending a lot of money on a good laptop computer because it usually has a shelf life of at least three years, Apple’s products don’t offer that sort of flexibility. Hewson believes that could limit the new iPhone’s appeal in some markets, despite cutting-edge upgrades that are embraced by Apple’s hard core fans.

Investors also likely want to see more TV providers, such as Hulu, be integrated into Apple’s content aggregation app.

“The most important thing that Apple is likely to say about the Apple TV financially relates to the content available on the device,” Hall said, adding that Amazon Prime Video should finally be made available.

Netflix Inc. and Inc. continue to invest heavily in online streaming content as the race to add subscribers and related revenue heats up. Apple has fallen behind, particularly since it was an early adopter of streaming content through Apple TV.

“This may be an area that is addressed tomorrow,” Hewson said.

Much like the Apple TV hardware, the Apple Watch isn’t a meaningful earnings driver, but as Hall noted, it certainly increases the stickiness of the iOS platform, and adds value to a variety of users, baseball players included.

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