Apple is still the cheapest stock on the market. While the company will likely hold that title for the rest of the year, I do worry the Street is still putting too much of the company's success -- or for that matter its valuation -- on the possibility of a new iPhone.
This is despite Apple CEO Tim Cook, recently proclaiming Apple is a "software company."
Case in point: The stock surged almost 3% last week immediately after Brian Blair, analyst at Wedge Partners, said Apple willl release its new phone, presumably called the "iPhone 5S" to China Mobile this July. In a note to investors, Blair wrote:
"We believe that Apple will launch the iPhone 5S at China Mobile this July, as it launches the next iteration of the iPhone globally. We believe this handset will be a TD-SCDMA model of the iPhone 5S and will likely begin production next month.
"The announcement of China Mobile will be meaningful for Apple iPhone units, as Apple has yet to direct-sell its iPhone to the carrier and its 710 million subscribers. In addition to China, India is another market that we believe Apple is working to tackle this year, and we understand the company is deploying significantly more people in the nation this year in an effort to grow iPhone/ iPad sales."
That's all well and good. But how much will and should it matter?
I'm not suggesting the iPhone, which is Apple's highest-margin product, is not important. But analysts have been making all sorts of predictions for the past two years. This is despite the company remaining secretive on these matters. Besides, investors might fall into the trap of raising expectations only to get disappointed.
We saw this with the iPhone 5, which was only incrementally better than the iPhone 4S. It's worth asking how much of a difference a new phone can make to the state of Apple today, especially since the quality gap Apple once enjoyed over its rivals -- particularly Samsung, has been shrinking.
Also, given the lack of excitement on the Street in BlackBerry's new phone, Apple has to blow the market's mind just for its device to be considered good.
This is not another indictment on Apple. But the point is, the company is more valuable than what a new phone might reveal. Instead of looking at all of the possible markets that Apple will enter in the coming years, the Street continues to appraise Apple on how fast the gap is closing with its competition. Investors shouldn't fall for it.
However, the company understands this. This is why Apple has changed how it reports earnings -- from one single data point to a range of numbers for revenue, operating expenses and of course, margin. But with earnings coming up in a couple of weeks, how much improvement should investors expect?
That said, because "Apple is Apple," I'm sure the new phone will generate plenty of buzz and demand. Revenue will likely skyrocket because the Apple logo will be so prominent. But I don't expect the stock to do the same. The market dynamics have changed. And as such, expectations on the company are no longer through the roof.
We can talk about revenue all we want, but margin will certainly be the main focus since it continues to be Apple's biggest drawback. Management guided for a range of 37.5% to 38.5%. But it pales in comparison to where margin was a year ago at 47.4%.
It's worth noting that Samsung's Galaxy S4, which was released last month, and one full quarter ahead of Apple's new phone, has the potential to impact sales, which the Street is calling for $42.8 billion. I do wonder, though, what features will the phone present that will propel the stock to go above $500 -- for that matter, how about $600?
Can Apple achieve (let's say) $200 billion in revenue by this time next year? Better yet, can the new phone bring in enough EPS growth to get the stock back to its all-time high level of $705? Even if the ongoing success of the iPad and the iPad Mini were to help meet these robust revenue figures, will there be enough margin to support a P/E above 15?
While there are certainly plenty of question marks, I do believe in the long-term prospects of this company. Given that first-quarter unit sales fall short of expectations, coupled with growing competitive threats, Apple has to deliver more than just incremental improvements to the iPhone to get investors to believe again.
At the time of publication, the author was long AAPL.
This article was written by an independent contributor, separate from TheStreet's regular news coverage.