Today’s Headlines: How About Them Apples?

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Today’s Headlines: How About Them Apples?
September 16, 2014

Apple Releases New Products

Last week Apple (NASDAQ: AAPL) launched their newest products: two larger-screen versions of the iPhone and the much-rumored wearable device, the Apple Watch (it will not be called the iWatch).

To catch up with their smartphone rivals Samsung and Nokia, Apple debuted the iPhone 6 (with a 4.7-inch Retina display) and 6 Plus (with a 5.5-inch Retina display). IPhone 6 pricing starts at $199, in line with expectations, and the new phones will be available starting September 19th.

The iPhones were fairly well received by industry-watchers, with the only surprise being the exclusion of sapphire glass, the nearly indestructible glass that was rumored to be included. According to Apple, pre-orders exceeded a record 4 million in the first 24 hours alone.

Watch The Apple Watch

The Apple Watch, a new smartwatch, was introduced to a generally lukewarm response. Some of the capabilities are nice, ranging from a music player to a heart-rate monitor to a communications device (by the way, it also tells time). However, there are some disappointing factors. Most of the capabilities require tethering to an iPhone, availability is delayed until 2015 thus missing the holidays, and the price is steep at $349.

The jury is out on whether Apple Watch will catch on. Its fate may partially depend on one other capability – mobile payment through the Apple Pay program, also introduced at the press conference.

Will Apple Pay Save the Day?

Apple Pay may be the most intriguing introduction in the long run. It represents Apple’s effort to break into the mobile payment market.

They have cleverly positioned themselves to work with the credit card companies instead of appearing to be a direct competitor with their own standardized credit card (as with Google Wallet). The reluctance to introduce chip and PIN technology in the U.S. has given Apple an opening to pitch an angle of increased security.

A random token generated for each transaction makes stealing that token number at point-of-sale useless for criminals. Combined with the Touch ID fingerprint recognition system, this represents a huge security improvement over the standard magnetic stripe. Apple may try to make the case that they have introduced the best combination of security and convenience.

Of course, if only a few retailers have the readers to use it, having Apple Pay is like being stranded on a tiny desert island with your brand-new golf clubs. But if retailers embrace this new platform, Apple Pay could be a real game changer. Time will tell.

The Takeaway

It is insightful to track the Apple stock price during the announcements. The price pinballed from $96.14 to $103.08, eventually closing at $97.99, down slightly from the previous day’s close. The price rose as the iPhones were introduced, rose more rapidly with the discussion of Apple Pay and mobile payment systems, and sank after the Apple Watch was introduced.

That seems to mirror investor sentiments. Apple stock closed for the week at $101.66, reflecting cautious optimism about continued earnings growth overcoming the current relatively high stock price. The consensus of analyst’s recommendations is still to buy.

Related stocks were mildly affected, with mobile payment system stocks such as VeriFone Systems (NYSE: PAY) and On Track Innovations (NASDAQ: OTIV) rising – even though they are not directly related to Apple Pay – and eBay stock dropped based on perceived new competition for PayPal. One clear loser is GT Advanced Technologies (NASDAQ: GTAT), which had been expected to provide sapphire glass for iPhones.

Apple Pay is the true wildcard in this announcement. Apple apparently plans to make money through a cut of the transaction fees charged by credit card companies. It appears the tradeoff for the credit card companies is enhanced security and the general cachet of Apple.

Should the technology take off, the credit card companies already on board will benefit significantly over those only providing less secure (and eventually less convenient) existing magnetic card transactions. Should Apple Pay stumble, chip and PIN technologies may finally make a more significant entry into the U.S. market (and that may happen anyway as credit card companies hedge their bets on which higher-security technology will win).

Apple may have to invest more into the infrastructure of establishing Apple Pay (for example, subsidizing readers for merchants to make the technology more widely used). One could see Apple stock stay relatively stagnant if the Apple Watch fails to connect and Apple Pay is slow to gain a foothold – but it certainly does not look at this point to be a stock to sell.

Let’s see what the next 6-12 months bring, and what counterpunch Samsung and Nokia are able to dish out, before jumping to any conclusions.

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