Take a Bite Out of Apple as iPhone Sales Are Set to Soar

Apple (Nasdaq: AAPL) shares moved up 3% on Monday to a record high on a rumor its upcoming iPhone 13 will feature satellite connectivity.

The tip comes from Ming-Chi Kuo, a reliable Apple analyst, who believes a satellite connection could give iPhone users connectivity even when they have no direct access to a wireless signal.

The news is bullish, although not for the reasons many traders believe.

Pundits on financial TV and in the media speculate that connecting iPhones to low Earth orbit (LEO) satellites is the ultimate carrier end-around for Apple. In theory, LEO connectivity allows smartphone customers to disconnect from their wireless providers. It’s a cool story, yet it makes no sense.

Carriers are critical. They sell iPhones … lots of them.

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New iPhones normally debut in early September. Recent launches have been less about innovation than cosmetic and iterative advancements in the camera.

But stagnation hasn’t stopped AT&T (NYSE: T), Verizon (NYSE: VZ) and T-Mobile (Nasdaq: TMUS) from selling devices. They have entire complexes structured around the promotion and sale of new iPhones. Jeopardizing this relationship for a network based on LEO satellites would be crazy.

And Tim Cook, Apple’s chief executive officer, is not crazy. He’s smart.

Cook understands the power of Apple’s ecosystem is not connectivity. It’s not even software and services.

•  Customers get stuck inside the so-called Apple-walled garden because they love their iPhones.

The current business model exploits this devotion with products and services that work especially well with iPhones.

Apple Watch is tightly integrated with iPhone, almost as an extension of the popular smartphone. Setup is sublimely easy as opposed to other wearables from Fitbit or Garmin (Nasdaq: GRMN).

The other part of Apple’s business plan involves creating problems, then magically fixing them. This is surprisingly lucrative.

The Cupertino, California-based company shocked most iPhone customers in 2016 when the headphone jack was removed from iPhone 7.

A dongle came in the box to connect using the existing Lightning port, but the solution was messy. The sound quality was poor. Users could not listen to music and charge the device at the same time.

The ultimate solution was AirPods, a set of wireless headphones revealed 10 minutes later.

The portfolio of wireless buds from Apple has evolved. Today, there are two sets of white, iconic Apple-branded headphones, and several sets available in multiple colors and configurations from Beats, its upscale urban subsidiary. All of the headphones are tricked out to work especially well with iPhones. Open the case for the buds and the pairing happens seamlessly.

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Kuo estimates that Apple will sell between 70-75 million units in 2021 at an average of $170 a pop. That’s a high margin business with $12.4 billion in sales created out of thin air. The category didn’t exist prior to 2016.

Cook would not jeopardize AirPods — or all the other businesses that revolve around iPhone sales — for a wonky LEO satellite network that would clearly be inferior to existing ground-based wireless services.

In my opinion, the LEO satellite story is about adding a feature to new iPhones to increase sales.

 

AAPL shares recently traded near $152.51.

Savvy investors should consider using any near-term weakness as a buying opportunity.

Best wishes,

Jon D. Markman

About the Editor

Jon D. Markman is winner of the prestigious Gerald Loeb Award for outstanding financial journalism and the Society of Professional Journalists' Sigma Delta Chi award. He was also on Los Angeles Times staffs that won Pulitzer Prizes for coverage of the 1992 L.A. riots and the 1994 Northridge earthquake. He invented Microsoft’s StockScouter, the world’s first online app for analyzing and picking stocks.

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