Apple’s Next Generation Products – Pricey Tech Toys or Priceless Tech Gadgets?

Technical Analysis by Rajiv Singh

Free OS X Upgrade, New MacBooks and MacPro, iPad Air and iPad Mini with Retina Display- Apple Goes All In For the Holiday Shopping Season

The most important season of the year for retailers and household tech names such as Apple Inc. (NASDAQ: AAPL) is around the corner. While the jingles and ‘ho, ho, ho’ chuckles has yet to be invoked, for many diehard fans of Apple’s products, Christmas is only a week away as the company unveiled its lighter and faster iPad Air and the iPad mini with a high-resolution Retina display (resolution of 2048 x 1536) in the US and Chinese markets on Tuesday, ahead of the holiday shopping season. Apple also announced free upgrades to its new OS X, Mavericks for its PC users. These new PC-geared launches are also seen as Apple’s response to Microsoft’s recent announcement of free upgrades to Windows 8.1 from Windows 8 for all its Window 8 users. This is a first for Apple as it decides to give a free upgrade to its users.

In recent past, the company has been focused on offering improvements to its existing lines rather than launching brand new products. Nonetheless, we are currently seeing a change in its strategy following the launch of the iPhone 5C and the iOS 7 in September, with Apple getting more aggressive with new product introductions. Its new iPad Air, a full-size tablet, is about 20 percent thinner than the previous generation of tablets and weighs one pound. Its starting price will be at $499 and it will be available for sale on 1 November. Moreover, Apple’s iPad mini with a sharper Retina screen will see a start price of $399, compared with the start price of $329 for the previous mini model. Following the launch, Apple’s shares traded down 0.30% to settle at $519.87. Overall in past three months Apple’s shares have gained 24.05%, following strong Q32013 results, series of development & new product introductions.

Source Bloomberg
Source Bloomberg

With this new launch, Apple continues to boast of a leadership position in the premium tablet market, while other vendors fight it out in the sub-$400 tablet market. The iPad Air and iPad mini will compete with Microsoft’s Windows-powered Surface Pro as well as new devices to be launched over the next few months by rivals Nokia and Amazon.com Inc.

In recent quarters, Apple’s iPad sales have seen a continuous decline (as shown in the chart below) due to increased demand for Android-based tablets. With the launch of iPad Air and iPad Mini with retina display Apple will be trying to salvage its market share.

Source: Apple Inc.
Source: Apple Inc.

Taking a quick look at the iPad Air, we see that it is packed with a number of internal (hardware) improvements that were seen in the iPhone 5S, such as the 64-bit A7 chip and the M7 motion co-processor. These will help it thwart the growing challenge from tablet manufacturers like Samsung, LG and Asus which uses Google’s Android. The iPad Air is 20% thinner, 28% lighter and has 43% smaller bezels than the iPad 4. Otherwise, the 9.7 inch iPad Air is 7.5mm thick and weighs only one pound; and Apple claims that it is the thinnest full-sized tablet in the world.Moreover, it can open files and render graphics twice as fast as the iPad 4, while maintaining a 10-hour battery life.Although aesthetically appealing, the main drawback with the iPad Air is its 5MP rear iSight camera.

Loaded with two antennas to support Multiple-In-Multiple-Out (MIMO) technology, the iPad Air support nearly twice the Wi-Fi performance with data rate possible of going up to 300Mbps. Cellular models will have better Long Term Evolution (LTE) coverage as these will support more LTE networks worldwide.

In addition to the new iPads, Apple also enhanced its offering in its PC lineups with the introduction of Apple MacBooks and Apple Mac Pro. With the new product launches, Apple clearly indicates its willingness to stand by its desktop products as it continues to offer a superior compute experience to its customers. It is worth noting that most of its rivals in the PC-maker industry have been moving away from their core pc-making business.

Conclusion

The new iPad models and MacBooks were in line with our expectations for the forthcoming holiday season, whereas the free OS X upgrade came as a surprise to everyone, including us. The new OS has over 200 additional features at no additional cost to Apple users. WSA believes that recent announcements would not have much of impact on revenues. We have seen disappointment post the iPhone 5C and iPhone 5S launches. The stock is currently trading at a price multiple of 13x. Going forward, we see more downward pressure on Apple’s revenue with growing competition. We expect Apple’s EPS to be around $42.40 for FY2014 and $47.60 for FY2015. We have lowered our price target to $551 on Apple which will be subject to further change post the upcoming results on 29 October 2013.

The key risks to our price target could be a change in macroeconomic conditions, greater than expected contraction of the high-end smart phone market, or a change in market perception (the “wow” factor of Apple products) with the low-end iPhone, iPads.

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