Apple (AAPL) announced strong results for the quarter that ended in June. Earnings per share beat analyst expectations, but revenue was $600 million lower than Wall Street was expecting. Investors initially weren't happy.
Still, the stock posted strong gains Wednesday based on positive comments by analysts. As of 11 a.m. ET, the stock was up nearly $3 a share, or 3 percent, to $97.50. Why are investors so upbeat? It's all about the iPhone 6, which is expected to launch later this fall.
There is risk with such enthusiasm already in the share price before the new device has even debuted. If sales disappoint, Apple's stock could be punished.
For years the iPhone has been the main profit driver for Apple. It continued last quarter during which the company sold 35.2 million units, a 13 percent increase from the previous year. Apple can thank sales in China for the important boost. More than half of all the company's revenue comes from the iPhone, which also offers the bulk of profits.
That makes Apple dangerously dependent on a single product which it apparently can't charge as much for. Last year the average sales price of an iPhone was $581. This year it is $561. The days of $650 or higher unit sales are long gone because there is significant competition in the smartphone market.
Apple has always looked to innovation to create new product categories that could keep its momentum. The iPod was an earlier one. The iPad was supposed to be the most recent, except unit sales of iPads last quarter were 9 percent under 2013, representing the second straight quarterly drop. Per-unit revenue was up slightly, but the volume simply isn't there to take the weight off iPhone expectations. Apple sold almost as many Macs as iPads.
There continues to be excitement over the possibility of an Apple smartwatch to debut this year, but analysts expect a small initial launch, which won't have a major impact on financials. Macquarie Capital wrote, "The bottom line is that the iPhone 6 reception is what matters right now (the iWatch is also expected to come this year, but we expect very limited supply)," according to Reuters.
Slowing sales of the iPad could also help explain the reports that Apple plans a larger screen variation on the iPhone. Many consumers are buying such devices so they don't need to also carry a tablet. Such a trend might have had an impact on the iPad's popularity and growth.
Apple has partnered with IBM to bring mobile devices and apps to larger businesses. It's a form of insurance given the volatility consumer markets can see. But given existing market penetration in the U.S. it is unclear whether the alliance can ultimately yield the sales increase that a killer new consumer device would.