Does the iPhone 5 Wow Enough?

The new iPhone 5 is the thinnest, lightest, and fastest version of the Apple Inc. (Nasdaq: AAPL) handset to hit the market. In addition to a larger 4-inch Retina display (featuring 1136 x 640 resolution), the iPhone 5 boasts improved camera functionalities and runs on fast 4G LTE networks. It is simply a nicer piece of hardware for the price (the 16GB version is $199 with a two-year contract) when compared to the current 4S.

Of course the iPhone 5 will sell well. The company has a huge installed base of devoted users who are inclined to continuously snap up the latest Apple gadgets. But the real question is: Does the iPhone 5 get consumers excited enough (especially given increased competition from Android handsets) that sales will beat Wall Street's wildly bullish expectations?

With the stock market a game of perception, Apple shares could begin to underperform if investors start to get a sense that the company is losing its magic touch.

While positive, the initial reaction to the iPhone 5 debut was muted, with Apple shares on Wednesday rising 1.3%. The stock did gain nearly 2% yesterday during the big market rally and could get a short-term boost next week when the new handset is released on Friday (pre-sales start today) if there are lines wrapped around the block, as we've seen in the past.

For now, Wall Street is generally upbeat on the new phone. Sterne Agee raised its Apple price target to $820 from $780, saying it expects the iPhone 5 to trigger a massive upgrade cycle.

William Blair & Co. is a bit concerned that the handset lacks a "wow factor" in that there are no game-changing features, but the firm is still optimistic that the September 21 release date will drive meaningful upside to September quarter expectations.

Piper Jaffray, which has a $910 price target on Apple shares, estimates that 6 million to 10 million iPhone 5s will be sold by the end of September, while RBC Capital sees sales of 8 million to 10 million units.

By the end of the year, the new handset is expected to be available in 100 countries via 240 carriers. Bernstein Research points out that the iPhone 5 will have a faster international rollout compared to previous versions, with the handset available in nine countries on September 21, and 20 more countries the following week. Given the quicker launch cycle, there are some concerns about supply constraints, but Goldman Sachs, which raised its price target to $810 from $790, thinks the fears are overblown.

The real test will come in the December quarter. Wall Street on average is expecting Apple to sell 45 million handsets during the important holiday period, up from 37 million units in the year-ago quarter. Piper Jaffray is even more bullish, saying that its estimate of 49 million units is beatable.

At a recent price of $683, Apple trades at 15.5 times the fiscal 2012 (ending September) consensus earnings estimate of $43.99 a share and 13 times the fiscal 2013 consensus of $52.53 a share, below the expected growth rate of 19.4% for next year. Applying a P/E of 15.5 to the fiscal 2013 consensus estimate generates a fair-value target of around $814.

Keep in mind that fiscal 2013 earnings estimates will get a bump if early iPhone 5 sales indications come in positive (the current high earnings estimate is all the way up at $63.50), and there is the wildcard of a 7-inch iPad Mini possibly debuting next month to help propel Apple's holiday tablet sales.