Shares of Apple, (NASDAQ:AAPL) have surged in recent months, based primarily on high hopes for the upcoming iPhone 6. (Optimism about the introduction of new product categories has also helped.) Shares touched a new all-time high above $100 early this month, before retreating a bit.
Apple has announced a media event for September 9, and most tech observers agree that the company will reveal the iPhone 6 at this event. Many investors are hoping that Apple reveals a game-changing iPhone, providing a catalyst to take Apple shares well beyond $100.
It's impossible to predict how stock prices move in the short-term. This doesn't really matter -- in the long run, the key determinant of Apple's success will be the strength of iPhone demand. However, we won't learn anything about this at Tuesday's event. In fact, investors will have to wait until 2015 to get a reliable reading on the extent of demand for the iPhone 6.
Limited initial supply, as always
One key point that investors should keep in mind is that demand routinely outstrips supply for at least 2 months following a new iPhone launch. Last year, it took until the end of November for iPhone 5s supply to come roughly into balance with demand, and even then Apple was not able to guarantee same-day availability.
A similar situation played out in 2012 with the iPhone 5. It took until the end of November that year for the iPhone 5 to be readily available in U.S. Apple Stores. That was true even though Apple didn't start selling the iPhone 5 in China (its second-biggest market) until December, 2012.
All signs point to another prolonged period of shortages following the iPhone 6 launch. In recent weeks, suppliers have been racing to churn out essential components. However, a last minute change to the display specifications may cause production bottlenecks, according to a late August report by Reuters.
Significant pent-up demand
On the flip side, there is likely to be very strong demand for the new iPhone 6 in the initial weeks after its release. At least in the U.S., a large number of people appear to be waiting for the new iPhones to upgrade. This is not very surprising, considering that Apple is expected to offer its first big-screen phones this year: a 4.7" model, and possibly also a 5.5" "phablet" model.
For example, at top domestic carrier Verizon, just 28% of postpaid customers have upgraded their phones in the last year. With most Verizon customers on 24-month contracts, about half of the postpaid subscriber base is eligible to upgrade each year. This means that there is now a large pool of people eligible to upgrade.
iPhone sales growth over the past year owes more to new user gains than to strong upgrade demand. In April, Apple CEO Tim Cook stated that more than half of the people registering iPhones in the previous 6 months were new to iPhone.
With lots of people eligible for smartphone upgrades -- and relatively tame upgrade demand among iPhone users over the past year -- the iPhone 6 launch will probably drive an immediate burst of upgrade activity. As a result, iPhone sales could be supply constrained until very close to the end of 2014.
Putting it all together
For Apple shareholders, the notion that iPhone 6 upgrade demand could be so strong that it sucks up all available production for several months is certainly encouraging. However, most iPhone users who upgrade this fall won't upgrade again for at least 2 years. Thus, the likely surge in upgrade demand is really a one-time phenomenon.
By contrast, growth in the iPhone user base is the primary driver of long-term value creation for Apple shareholders. If the iPhone 6 launch (along with improved distribution, particularly in China) wins new loyal iPhone customers, that creates a long-term recurring revenue stream for Apple.
The "one-time" upgrade demand from iPhone enthusiasts -- which is likely to hit as soon as the new phones go on sale -- may crowd out the potential demand from new users this fall. It won't be until 2015 that Apple has ample supply of the iPhone 6.
At that point, investors will be able to get a better sense of whether bigger-screen iPhones are truly a game changer. To be a game changer, the iPhone 6 would have to drive significant market share gains for Apple in the premium smartphone market. Most importantly, Apple would have to poach customers from top rival Samsung.
Apple's introduction of big-screen phones this fall is likely to drive a very strong replacement cycle this fall and winter. The strong interest in upgrading among current iPhone users is a good thing for Apple investors.
However, the potentially game-changing aspect of the iPhone 6 is its potential to tilt the battle for premium smartphone market share decisively in Apple's favor. iPhone upgrades won't alter the market share statistics -- only customer defections from other vendors can do that.
The expected spike in upgrade demand this fall could keep the new iPhones in short supply for the rest of the year. Until supply catches up with demand, it will be impossible to know just how much the iPhone 6 launch has altered the premium smartphone landscape.
Of course, investors can try to glean some information in the next few months from proxies like the posted wait time for iPhones purchased through Apple's online store. However, the real test of the iPhone 6's impact will come in 2015, when demand will be the only constraint on sales.
Adam Levine-Weinberg is long January 2016 $80 calls on Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.