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Great expectations for Apple’s live event

Apple is up 25% so far this year, but the weight of expectation threatens to punish the stock if tomorrow’s event doesn’t live up to the hype.

Apple logo
Source: Bloomberg

Towards the end of financial year 2012, Apple unveiled its iPhone 5 in a period when the stock was trading at all-time highs. Everything seemed to be going well for the company, but in the following months the share price was down 40%.

The circumstances today are eerily similar. Apple’s stock has rallied once again in recent months, and now there is the excitement of yet another possible new product – the iWatch.

To add to the parallels, Apple’s price-earnings ratio of 16 is almost the same level as it was for the end of its fiscal year in 2012. Is history about to repeat itself? The company hasn’t unveiled an entirely new product category since 2010’s iPad, and markets are pricing in a possible move of around 5% on the day.

With around 24 hours until the event we expect the launch of the iPhone 6, in two display sizes, with the larger size ‘phablet’ possibly helping to make up for iPad sales that have not shown the stellar growth witnessed by the iPhone itself. It is worth adding, however, that while sales are up 15% between FY2012 and FY2014, gross margins and net income are both down, by 11.5% and 7% respectively.

Apple isn’t doomed if it fails to announce the iWatch tomorrow, but the stock’s failure to hold $100 last week suggests that we may see another dive towards the 50-day moving average, and that this time more declines could be in order. Even with a new product, the company still faces major headwinds – a lot of Apple users are almost certain to pick up an iWatch, or one of the new iPhones, but the company still needs to broaden its appeal beyond the existing userbase. Most potential Apple fans have been converted and I’m not sure there are many of the uninitiated left out there.

The cuts in the subsidies from Chinese state-run wireless firms will see demand in this crucial market wilt just as new products hit the shelves, while increasing competition from local firms is set to erode Apple’s dominance further still.  

Existing investors could sell out following the news, and while Apple still looks compelling on a number of metrics, a lot of potential investors will wait until the stock gets closer to $90 before thinking about making a purchase.

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