The Exchange

What to Expect When You’re Expecting: Apple iPhone Upgrade Edition

The Exchange

Shares of Apple (AAPL) remain well off their all-time peak of $705.07 but they’ve been on a tear of late, up 28% since the beginning of July, fed by numerous leaks and rumors about the company’s next iPhone.

Today, at 1 p.m. Eastern time, investors get to see just how close the leaks came to reality. Last year's iPhone 5 unveiling helped drive Apple to that peak price. Will this year's upgrades do the same?

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The most exciting development from an investor’s point of view has been the possibility that Apple will release a lower-priced phone, dubbed the iPhone 5C by the rumor mill, to better compete in the fastest-growing segment of the market without hurting profit margins.

The iPhone, Apple's biggest-selling product by far, remains healthy and profitable thanks to strong sales in wealthy countries such as the United States. But the phone has been outpaced by cheaper models from Samsung, ZTE and others in less-developed markets such as China and India. Investors worry that Apple is missing out on this high-growth opportunity and could become vulnerable as cheaper devices catch up to the iPhone and threaten its premium pricing, even in wealthy countries.

What follows is a quick rundown of the major rumors and how confirmation from Apple might impact investor views of the stock. Keep in mind that predicting Apple’s share price is no easy game and, even if investors’ wildest dreams come true, the stock could fall on the common “buy the rumor, sell the news” phenomenon.

The iPhone 5C

Investors are most excited about the lower-priced iPhone, which could aid Apple in its battle against cheap phones running Google (GOOG) Android software. However, Wall Street analysts have been steadily increasing their expected retail price for the lower-priced device, which is rumored to come in a plastic case with a variety of colors to choose from. Once predicting a $299 to $350 phone, most analysts now expect a device at closer to $399 or even $450 – the same price at which Apple sells its two-year-old iPhone 4 now.

A not-so-cheap iPhone might sell better than the iPhone 4 and could have higher profit margins for Apple. In markets such as the U.S., where carriers subsidize the price of the phone, that could mean a “free” phone for consumers.

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Galaxy gear watch

In less-wealthy markets, Apple could also discount the price, offer monthly installment payment plans and take trade-ins to boost sales, all tactics it's been using to sell the iPhone 4 in India this year.

If the 5C is priced too cheap, however, investors may worry about cannibalization of higher-end sales.

That appears to be what happened when Apple introduced the lower-priced iPad mini last year. The company’s profits have shrunk this year as more customers bought lower-end models with lower profit margins.

China Mobile

Speaking of China, Apple’s iPhone is not currently offered by China Mobile, the world’s largest mobile carrier. In part, that’s because China Mobile uses an odd cellular standard that Apple has not included in the iPhone. That could be about to change, particularly with the 5C model.

Fueling the rumors, Apple has said, in addition to its normal iPhone announcement event in California, it plans to hold a separate event in Beijing (it’s also holding events in Berlin and Tokyo).

Wall Street analysts are salivating at the prospect of a China Mobile deal and predicting such a move could boost total iPhone sales by 10% a year or more.

Trade-ins

Apple has been testing a trade-in program that could also help to goose iPhone sales and encourage customers to upgrade more frequently. Under the program, which Apple has confirmed, a customer brings an old iPhone into a U.S. Apple store and gets immediate credit against the purchase of a new phone on a two-year contract.

The credit isn’t necessarily as good a deal as the money paid by existing trade-in services such as Gazelle but it is simple and convenient. Apple’s trade-in credit is also likely considerably less than a customer could get by selling the phone on eBay.

But Wall Street loves the idea of shortening the upgrade cycle.

The iPhone 5S

How about the new flagship model? It will likely be the same look on the outside but with faster internal components. And a gold model is expected to join the line of black and white phones. That’s boring to many bloggers and Android fans but still likely enough to sell tens of millions of units in the opening months.

The new iPhone is expected to add a fingerprint reader for enhanced security. That’s a ho-hum feature for investors unless and until Apple ties the reader to a new mobile payments platform.

Google, credit card companies and others have been trying to create mobile wallet plans that let customers use their phones to make small payments for coffee or magazines, but none have caught on yet. The opportunity is vast and Apple’s huge customer base of almost 600 million iTunes users could give the company a tremendous head start. Apple has been highlighting that its upcoming software for iPhones will include a new wireless standard, known as Bluetooth low energy, that could be part of a mobile payments platform. Any move to create such a program would absolutely thrill Wall Street. But the related rumors remain vague.

iOS 7

The new iPhones will also be sporting Apple’s upgraded operating system software, iOS 7. The software has a different look and feel than prior versions, featuring bright colors and a simpler and less ornamented design.

The software also includes features that could impact other stocks. A new iTunes radio app poses a challenge for leading Internet radio company Pandora Media (P). And the inclusion of direct photo uploads to Flickr (owned by Yahoo) could impact Facebook’s (FB) Instagram service. Added search capabilities via the voice-controlled Siri feature could cut into Google’s mobile ad revenue.

Last year’s iPhone introduction, on September 12, 2012, helped push Apple’s stock price as high as it's ever been – the famed peak less than a week later. But the stock quickly tailed off and started sinking as concerns grew leading into Apple’s earnings report the following month.

Investors are hoping Tuesday's new iPhones will sustain this year’s rally.

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