The Irony of Apple Rallying on iPhone 7 Optimism

Despite considerable disdain from the media about the removal of the headphone jack in the iPhone 7, Apple (AAPL -0.81%) has seen a significant increase in investor interest since its unveiling event earlier this month.

In this segment from Industry Focus: Tech, Motley Fool analyst Dylan Lewis and Fool contributor Evan Niu talk about what has investors so excited about Apple, and why their interest is a bit ironic in the context of the company's recently stated goals.

A full transcript follows the video.

This podcast was recorded on Sept. 16, 2016.

Dylan Lewis: The company predictably took some flak for its decision to ditch the headphone jack, like we talked about, and questionable use of the word "courage" throughout the presentation. But, the stock is up 10% in the last five days. For a company Apple's size, that's pretty noteworthy. Any time you see something like that, I think it's less to do with the product specs and more to do with what's going on with pre-order information that we've seen from a couple different outlets.

Some of the different wireless carriers announced what they were seeing in terms of pre-order activity. T-Mobile said the two new iPhones have shattered previous sales records. I believe orders are coming in at something like four times what the iPhone 6 did. Sprint also saw very high pre-order numbers. They said orders were up 375% over the first three days of pre-order availability compared to last year. AT&T and Verizon were a bit more muted in what they were talking about related to the iPhone line, and said that pre-orders were pretty much business as usual, business as expected.

Evan Niu: I think AT&T said at a conference the other day that they were just above expectations. Still pretty vague.

Lewis: Yeah. Some really nice color from T-Mobile and Sprint, not so much AT&T and Verizon. But, I can't say that I'm surprised we're seeing some really good pre-orders. No. 1, it's an iPhone, and No. 2 the wireless carriers, most of them, I think all four of them, have gone with the free iPhone 7 promotion. So, it's tough to parse out how much of that is what would be a full-price purchase iPhone versus a free iPhone that's coming with an upgrade and a two-year commitment to that wireless provider. So, that's the grain of salt that you need to take with any of those pre-order numbers.

Niu: Like you said, the stock has been up 10% or so over the past few days. And I think that's interesting, because it's on heavy volume. If you look at the volume activity, the gain is on in the back, there's a lot of volume. There's a lot of people coming in, it's not a light-volume move. There's a lot of people that are coming into the stock on all this iPhone 7 optimism, which is kind of ironic, because there's basically this idea, there's a sentiment that iPhone 7 is going to be strong, the carrier stuff you mentioned. But the irony is, Apple has been trying really hard to shift away from focusing so much on unit sales numbers, which is also partly why I think they're not going to release their launch weekend sales for the first time in five-plus years. They've always announced launch figures every year, but this year, they said they're not going to.

Lewis: Yeah, I believe a company spokesperson said, and I'm actually taking this from an article you wrote, "These initial sales will be governed by supply, not demand, and we have decided that it is no longer a representative metric for our investors and customers."

Niu: The silly part about that is that that's been true every year.

Lewis: Yeah, that's always the case.

Niu: I don't really believe their reasoning for why they're saying it, because there has always been supply constraints. Every year it's supply constraint. That's not a new thing. So, them saying they're not going to give this number because of that, I think that's kind of a cop-out. I think it's part of the broader strategy to get people to stop focusing on unit sales, because what they want people to focus on, particularly investors, is to look at these recurring revenue sources. They've been touting all this installed base purchases and services revenue and all these things that are not tied to unit sales. They're trying to get investors to focus on those numbers instead of unit sales.

But, obviously, investors are still focused on unit sales, because when you hear all these positive storylines about the iPhone 7, they go out and buy the stock. Also, combine this with the fact that the Samsung Note 7s are exploding, that also helps. So I think there's a lot of positivity around the iPhone 7, despite the fact that Apple is trying to shift the focus away from how many units they sell.

Lewis: Yeah. I think you're absolutely right. You look at the way their revenue mix is going, it's going to play out that way. Like I said earlier, the iPhone contribution to revenue was, in the past, about two-thirds. I believe it was down to about 56% as of their most recent quarter, and that's because of that rising service revenue. You also have the introduction of the Watch line, and things like that, which they updated in this most recent press event. But, yeah, the iPhone, while it's going to be the cash cow for them, I think they're making efforts to highlight other parts of the business.