The Apple (AAPL) rumor mill is grinding again. The Financial Times reported yesterday that Apple is on the verge of a $3.2 Billion deal to buy Beats Electronic, the maker of high end headphones. Today we hear that Taiwan’s Economic Daily News is reporting that Apple will launch the iPhone 6 in August with a 4.7” screen, followed one month later by larger (5.5 or 5.6 inch) screen versions.
First off, let’s be clear about one thing. Both of these are reported rumors. The Beats acquisition has less of a feel of idle speculation, but, at the time of writing, there is no confirmation of either story. The fact is, though, that as anybody who has ever traded will tell you, rumors can drive markets a long way.
The Beats thing passes the initial smell test because in many ways, AAPL spending around 2% of their available cash to buy the company makes sense. Beats recently launched a subscription music service, an area that has left Apple behind. The Cupertino giant has been accused by many of resting on their iTunes laurels and failing to see the rise of streaming, as opposed to single tune purchase, online music.
That, in and of itself, may be reason enough for the deal, but the real possibilities are in the “wearable computing” field. Internet connected headphones delivering Beats sound quality are an intriguing prospect. Conventional wisdom is that Apple has fallen behind in this field too, as Google (GOOG, GOOGL) launched Glass and Facebook (FB) acquired Oculus Rift. If some kind of wearable device is the long term aim, then moving in a different direction as those two do battle in the visual arena looks pretty smart.
The iPhone 6 rumors are a little different. Even if they are true and that was what Apple had planned, it is extremely unlikely to happen now that there is speculation about it. Launching the iPhone 6 with the possibility of an “instant update” a month or so later would be one surefire way to ensure that the launch was a failure.
It would be more in character and make more sense for Apple to launch a larger screen iPod shortly after the new phone. That would give them a chance to test the market and iron out any potential kinks before committing to the move on the iPhone. I have no inside knowledge or evidence that this will happen, but while we are in the area of idle speculation I prefer theories that wouldn’t involve a huge, savvy consumer products company upsetting a large part of their customer base.
What we do know is that there will be some kind of Apple product launch this fall, and if history is any guide then speculation around that knowledge will drive the stock higher in the next few months. That coupled with the still relevant fact that AAPL is cheap (P/E of 12.8), leaves my bullishness on AAPL intact, and maybe even a little stronger. The most interesting question to me, though, is does any of this suggest any other trades to carry us through the summer doldrums?
A couple of weeks ago, I wrote a piece that detailed my preference for Corning (GLW), the supplier of the Gorilla Glass currently used in the iPhone, over GT Advanced Technologies (GTAT) who would seem to be the front runner as supplier if Apple switches to sapphire screens. GLW is flat to small down since, but following disappointing earnings, GTAT has been hammered over the last couple of days, making my advice for holders of the stock to take some profit in front of earnings look pretty good. (See 3 Month charts below)
Given the sell-off in GTAT and in the light of the news, I would amend that advice and suggest holding both as the rumor mill picks up pace. That GTAT would drop on poor performance was, to me at least, predictable, but those that are rushing for the exit now are missing the point. This was never a play on GTAT’s core solar energy business that is driving current performance. It was based on a belief that Apple’s $578 Million investment on the company wasn’t just a charitable donation and that they had “favored son” status when, and if, Apple switched to a sapphire screen. That is still possible. Indeed, if larger screens really are on the horizon for either the iPhone or iPod, it may even be more likely now than before.
Once again, all of this is conjecture, but that seems to be in vogue over the last couple of days when it comes to AAPL. In the past, the stock has usually moved up in the run up to product launches, and the more rumors there are the more pronounced that has been. This will likely repeat itself, so AAPL is still a good core holding, but, as the title-tattle increases, the implied benefit for either Corning or GTAT could drive both stocks higher.
Remember, you don’t have to believe rumors to profit from them, you just have to act on them.