Apple's iPhone 5S: Innovation on the Tip of Your Finger (Update 2)

Updated from 112:31 p.m. EDT to provide analysts' comments regarding larger iPhone in the 12th paragraph.

NEW YORK ( TheStreet) -- Apple ( AAPL) is going to launch the iPhone 5S (or whatever it decides to call the next iPhone) sooner rather than later. We all know that. What we don't know is what Apple will include to show consumers, Wall Street and the media that innovation at the tech giant is alive and well. That innovative feature could be the tip of your finger.

Apple acquired in the middle of 2012 AuthenTec, a company that deals with mobile and network security solutions. Before the merger, AuthenTec had been a major supplier to Apple rivals Samsung, Google ( Google) and other handset makers for smartphone dominance.

AuthenTec's fingerprint technology could be used in the next iPhone to unlock the phone, or perhaps even for payments processing. When the deal was first announced in 2012, Wells Fargo analyst Maynard Um speculated this could be the reason for the AuthenTec deal.

"We believe this deal signals the potential for fingerprint sensors in upcoming Apple devices, which not only increases device security, but could also be a mechanism to assure security needed to execute mobile payments on iPhones. We see this as likely one of the primary reasons for the acquisition," Um wrote in the note.

Topeka Capital Markets analyst Brian White agreed with the thought after attending a technology trade show in China.

"Additionally, we believe fingerprint identification technology will be part of the iPhone 5S and this is likely to be the major new feature used to market the iPhone 5S, similar to what Siri was to the iPhone 4S," White wrote in his note. He rates Apple "buy" with an $888 price target.

White also noted the screen size would be same as the iPhone 5, though the camera would be larger, and the left side buttons could be arranged differently.

Apple is hurting for good press these days (yours truly, notwithstanding), so any sign of innovation from the Cupertino, Calif.-based technology giant should be received well, at least initially.

In addition to the fingerprint technology that may come with the latest iPhone, there are rumors that iOS 7 is getting a major revamp, with Jony Ive, Apple's senior vice president of Industrial Design, now taking a more active role in software. Ive is responsible for the beautiful hardware designs Apple has released in the past, but with the management shakeup in 2012 that led to Scott Forstall's ouster, this has put Ive in a more active role as it pertains to software.

There have been concerns that Apple's iPhone, it's major revenue driver, has seen the peak growth days, and that's caused a huge slump in the share price since the iPhone 5 was released.

One thing Apple could do to avoid the peak-iPhone phenomenon would be to launch a lower-cost iPhone, White noted. Many analysts have opined on Apple releasing a cheaper alternative, with the consensus being it would be bullish for Apple. White's research noted that Apple will launch a lower-cost iPhone later this year. The cheaper iPhone would have a curved back with colored plastic and be thicker than the iPhone 5; it could cost as much as $400 without subsidies. "We believe this price point will provide relief for those investors concerned that Apple would be sacrificing too much margin or brand to serve the lower price band of the smartphone market," White noted.

Samsung, HTC and other OEMs have demonstrated that there is a market for larger smartphones, especially in China. Apple's iPhone 5 is the smallest smartphone among the newest set, at 4-inches, and White believes that if Apple were to release a larger phone, it could be a boom in Apple's second most important market.

"... We believe it is inevitable that Apple will need a 5-inch to 5.5-inch iPhone or "iPhad" if the Company wants to remain competitive in China and elsewhere in Asia," White wrote in his note.

AAPL Chart AAPL data by YCharts

Apple shares were lower in Friday trading, off 0.98% to $430.09.

-- Written by Chris Ciaccia in New York

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