Trading tech stocks: lessons from major product launches

Product launches can have a pronounced effect on tech companies’ stock prices. Here we review some of the biggest lessons learnt from previous launches – from companies such as Apple, Amazon, and Microsoft – to help you trade these events more effectively.

Trader
Source: Bloomberg

In the competitive world of tech, firms are increasingly looking to create ‘technology ecosystems’, where hardware is complemented by software and services. For the user, such integration can improve the overall experience, while the firms responsible hope to benefit from increased revenues and profits that can be derived from app, game or content sales. Much of the iPod’s early success, for example, can be attributed to its integration with iTunes, which made it easier than ever before to download and sync music, while Apple was revitalised by both sales of the product and subsequent music downloads.

With the potential for so much revenue to be generated via a single digital device – often for years after it is sold – it is hardly surprising that hardware is now at the forefront of the battle between major tech firms. Nor is it surprising that new product launches can have a dramatic effect on companies’ share prices. Investors are recognising that new products can have a pronounced effect on a company’s fortunes and will therefore often adjust their portfolios in response to announcements.

Our latest piece of research, Historical Stocks, pulls together some of the biggest product launches Apple, Amazon, Microsoft, Nintendo, Samsung and Sony have made in the past 25 years, showing how each product announcement affected the company’s share price over a seven-day ‘hype cycle’ – starting three days before the announcement and ending three days after. Here we explore some of the biggest lessons learnt from those launches, and how you can get the most out of your time on the markets:

1. Conduct thorough fundamental analysis

The key to understanding how to trade product launches via spread betting or CFDs is to recognise that each announcement is unique, and needs to be assessed carefully with thorough fundamental analysis. Such an analysis may take into account the size of the total addressable market, projected sales, potential ongoing revenue streams and the competitive landscape, among other factors, to determine how the markets will react.

When Apple launched the first iPhone in January 2007, for example, it was clear that the product represented a major leap forwards as the first ‘smartphone’. This, coupled with the fact competitors were still months away from launching smartphones of their own, drove Apple’s share price 10.5% higher over the course of the seven-day hype cycle.

iPhone launch

However, the launch of the iPhone 3G in June 2008 saw Apple’s price fall by 6.4% over an equivalent period, as investors factored in increased competition in the smartphone space and a lack of significant improvements over the previous device.

iPhone 3G launch

2. Consider short-term and long-term effects

It’s important to recognise that there may be opportunities to place both short and long-term trades in response to a product or service launch. Microsoft’s share price dropped by 6.04% when it announced the first Xbox, while Amazon’s share price fell by 15.5% after it announced the launch of its Prime delivery service.

Xbox launch

In both cases, the markets seemed to factor in the uncertainty surrounding these launches – which seemed like risky moves for both companies at the time – creating an opportunity for traders to go short during the hype cycle. However, as we now know, both products turned out to be great success stories for the firms, so there would also have been an opportunity to buy on the dip for position traders taking an optimistic view of the companies’ futures.

3. Trade the effects on competitors and suppliers

There may also be opportunities to trade the effect of a product launch on other listed companies, including competitors, retailers and suppliers. For example, shares in Vodafone and Telefonica fell during the seven-day hype cycle surrounding the release of the iPhone X in September 2017. These falls were likely driven by lower sales forecasts – the result of the high price point of the newest Apple device – with some analysts also citing a delayed shipment date of 3 November 2017 as a possible cause.

Several suppliers’ shares also fell in the aftermath of Apple’s announcement, including Dialog Semiconductor, STMicroelectronics, ams AG and Taiwan Semiconductor Manufacturing, as investors factored in lower revenue expectations.

4. You can trade before, during and after the announcement

Finally, it is worth remembering that there are likely to be opportunities to trade before, during and after any product launch, as investors adjust their portfolios in response to developments throughout the product launch cycle:

Before

Product announcements are usually scheduled weeks or months in advance, with press reports of these events often providing the first clues as to what can be expected. And while firms such as Apple can be very secretive about what is going to be announced at their scheduled meetings, details will often leak to mainstream news organisations ahead of time – with the markets moving in response to this information.

During

Because the impact of leaked product details will likely be priced into the markets ahead of an announcement, any difference between what was expected and what is actually announced can have a very pronounced effect on the company’s stock. As a result, there may be opportunities to trade if there are any surprises.

After

With the excitement of the product announcement out of the way, the markets are likely to move in the days and weeks that follow. Investors may adjust their portfolios in response to consumer and media reactions, so traders should review their fundamental analysis, and positions, as things develop. Remember, companies will usually present only what they want consumers and investors to see, so any sub-optimal features that could affect sales – such as poor battery life – may not come out until after the announcement.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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