AAPL - Apple Inc.

[abyli]

Co-ask. I do not know why ValueInv was not liked here. His comments and posts  helped me a lot on understanding the Apple company.

[jeffmori7]

Side question..Where did ValueInv go? I hope he wasn't actually banned.

 

Wait what was he banned for? He made decent posts in the AAPL thread at least.

 

If I remember well, he quit by himself. His insights on Apple and tech were good, but his attitude was not. I had hope he would change, but he finally decided to leave.

[DCG]

Side question..Where did ValueInv go? I hope he wasn't actually banned.

 

Wait what was he banned for? He made decent posts in the AAPL thread at least.

 

 

I don't know that he was...I'm just asking, as he hasn't been on here in a while. I like reading his posts.

[RichardGibbons]

Pretty sure ValueInv was banned after being asked to be courteous to people, and then returning a very discourteous response.

 

Interesting that people believe that he had insight into Apple and tech.  I thought almost the exact opposite, that he was so stuck in his one-sided point of view that he added negative value by distorting reality, making it harder to make correct decisions.

 

That said, I did find him entertaining in the contortions he'd go through to justify his view of the tech world.

 

[ni-co]

Not, it is more likely because they pay full prices for them, and not 2 yr contracts. And no, they dont last well necessarily, my iPad 2 keeps crashing two years after purchase.

 

Why are people jumping to justify a sales decline?

 

I didn't want to "justify" anything here. I'm looking for an explanation to a perfectly valid question: Why did such a steep iPad "growth" curve flatten out so abruptly?

 

Interesting thoughts from Benedict Evans at the a16z podcast from Andreessen Horowitz: http://pcasts.in/CcUJ

He says that because of the shape of the sales curve it cannot be the replacement cycle. The curve looks more like AAPL is "running out" of people to sell it to.

[Liberty]

Not, it is more likely because they pay full prices for them, and not 2 yr contracts. And no, they dont last well necessarily, my iPad 2 keeps crashing two years after purchase.

 

Why are people jumping to justify a sales decline?

 

I didn't want to "justify" anything here. I'm looking for an explanation to a perfectly valid question: Why did such a steep iPad "growth" curve flatten out so abruptly?

 

Interesting thoughts from Benedict Evans at the a16z podcast from Andreessen Horowitz: http://pcasts.in/CcUJ

He says that because of the shape of the sales curve it cannot be the replacement cycle. The curve looks more like AAPL is "running out" of people to sell it to.

 

Ben Thomson has an interesting perspective:

 

http://stratechery.com/2014/dont-give-ipad/

[fareastwarriors]

http://www.bloombergview.com/articles/2014-04-25/apple-stores-aren-t-so-genius-anymore

 

 

Apple Stores Aren't So Genius Anymore

[Liberty]

http://www.bloombergview.com/articles/2014-04-25/apple-stores-aren-t-so-genius-anymore

 

 

Apple Stores Aren't So Genius Anymore

 

Retail at Apple has been leaderless (or with a bad leader) for a while now. I'll be curious to see what Angela Ahrendts can do. She starts at Apple next week, and she's done a great job at Burberry.

 

[VAL9000]

I didn't want to "justify" anything here. I'm looking for an explanation to a perfectly valid question: Why did such a steep iPad "growth" curve flatten out so abruptly?

 

Interesting thoughts from Benedict Evans at the a16z podcast from Andreessen Horowitz: http://pcasts.in/CcUJ

He says that because of the shape of the sales curve it cannot be the replacement cycle. The curve looks more like AAPL is "running out" of people to sell it to.

 

The reason is competition.  In 2012 Apple's share of the tablet market was 53%.  It has since fallen to 36%.  The competitors are offering almost the same product at a much lower cost.  Apple's is better, but not double-the-price better.

 

Unlike the smartphone market, which is heavily distorted by contracts, carriers, and Apple's relationship with carriers, the tablet market is a typical business-to-consumer model that uses traditional internet and retail channels.  Customers are voting with their wallets, and they are choosing to more frequently vote for something that isn't Apple.

 

[tradevestor]

Another reason (in addition to competition), was posted earlier in this thread:

http://recode.net/2014/02/06/our-love-affair-with-the-tablet-is-over/

 

At Netflix, we witnessed a dramatic increase in phone usage for the streaming service. The reason was obvious: As phone apps improved in terms of quality and speed, users abandoned their tablets for the device in their pocket that could access the Web anywhere and anytime from Wi-Fi or cellular connections. Conversely, only 12 percent of tablets have cellular connections, instantly making them non-mobile devices. And very few people will shell out for a second wireless plan in addition to their phone. Based on the momentum of the phone, Netflix decided to merge the tablet and phone UIs.

 

What we are witnessing today is a merger of phones and tablets, not just at Netflix but everywhere, which is why this decade’s attempt at tablets is nearing its death — just four years after Jobs launched the original iPad.

[VAL9000]

Another reason (in addition to competition), was posted earlier in this thread:

http://recode.net/2014/02/06/our-love-affair-with-the-tablet-is-over/

 

At Netflix, we witnessed a dramatic increase in phone usage for the streaming service. The reason was obvious: As phone apps improved in terms of quality and speed, users abandoned their tablets for the device in their pocket that could access the Web anywhere and anytime from Wi-Fi or cellular connections. Conversely, only 12 percent of tablets have cellular connections, instantly making them non-mobile devices. And very few people will shell out for a second wireless plan in addition to their phone. Based on the momentum of the phone, Netflix decided to merge the tablet and phone UIs.

 

What we are witnessing today is a merger of phones and tablets, not just at Netflix but everywhere, which is why this decade’s attempt at tablets is nearing its death — just four years after Jobs launched the original iPad.

 

Seems plausible.  I was going to buy a Nexus 7 last year, but decided to wait and buy a Nexus 5 to replace my iPhone and save on the cost of a tablet.  It was a good decision, because I use my phone a lot more now. (And my iPad a lot less.)

 

 

[Liberty]

http://cdn.macrumors.com/article-new/2014/04/chitika-tablet-2014-april.jpeg

 

The iPad is the dominant tablet in North America with a mobile web traffic share of 77 percent as compared to 8.3 percent from number two Samsung. Amazon's Kindle Fire devices generated 6.3 percent of web traffic, while Google's Nexus tablets accounedt for 2.2 percent. The remaining tablets from Microsoft, Asus, Acer and others contributed 4.5 percent combined.

 

http://www.macrumors.com/2014/04/25/ipad-mobile-web-traffic/

 

I guess people who don't really use their tablets don't buy Apple (the numbers are similarly skewed to the iPad for number of apps bought, dollars spent on ecommerce, customer satisfaction, etc). Not hard to figure which market segment is profitable and which is low-or-no-margin commodity.

 

In 2012 Apple's share of the tablet market was 53%.  It has since fallen to 36%.

 

What people always forget when they look at market share is how fast each segment of the pie is growing relative to each other. Not every customer is worth the same. With new tech, at first everything is high end, but after a bit the low-end grows much faster than the high end, so the relative market share of the high end goes down rapidly. But if that part of the market is barely profitable, who cares? As long as Apple keeps owning the profitable segment, they're doing about as well as they can (ie. Mac computers don't have massive market share, but they have massive profit share in the PC industry). Apple is sucking out over 80% of all the profits in the smartphone market (Samsung's in the 30% range and the rest is negative), and I don't have the numbers for tablets, but it's probably similar if not higher.

 

Now I'm not saying that there's no impact from increased competition. Some people who would've bought an iPad when there was little else might now buy something else, and cannibalization from more capable smartphones is real, etc. But it just isn't as simple as looking at market share numbers without taking segmentation into account. If Apple made $100 tablets they'd have a huge market share but would make no money on those and hurt their high end business, so what would be the point?

 

As for the death of the tablet, well, let's revisit that in 5 years. They're still forecasting about 20% growth this year for the overall market. I think the rumors of its death are greatly exaggerated, as the saying goes. It's already the fastest adopted new technology ever and I seriously doubt it's going anywhere whatever some article says, though I do believe expectations were probably too high and growth won't be like smartphones. We'll see.

[stevevri]

Market share is definitely overrated when it comes to usage. The iPads show up much more in almost all usage statistics and so again Apple is getting the better users while the more casual users that don't care pick up whatever they feel like that is cheaper which is often Android.

 

While my sample size of one is totally irrelevant, I own a Kindle Fire HDX, an android tablet, and an iPad. I've traditionally been an Apple hater (even own a Windows Phone) but when it comes time to use my tablet I seem to prefer the iPad 90% of the time and the other two almost always have a dead battery.

 

I will say the upgrade cycle for tablets is definitely longer and there isn't really a compelling killer app yet that really pushes your tablet. People feel more compelled to upgrade Phones & even Computers. If you have one of the first iPads maybe you feel compelled to get a new one. I don’t have the air but the model before and while I like the air, I don't feel in anyway compelled to need the air anytime soon. There just isn't anything that taxes my existing one.

 

People keep their tablets longer. Maybe part of it is the phone subsidies but another part is just how they are used and how there isn't much that compels the widest majority of users to need a newer faster one for longer.

 

I wouldn't be surprised if in the future phone upgrade cycles extend but there still seems to be a status symbol to a new phone more so then a new tablet.

[VAL9000]

What people always forget when they look at market share is how fast each segment of the pie is growing relative to each other. Not every customer is worth the same. With new tech, at first everything is high end, but after a bit the low-end grows much faster than the high end, so the relative market share of the high end goes down rapidly. But if that part of the market is barely profitable, who cares? As long as Apple keeps owning the profitable segment, they're doing about as well as they can (ie. Mac computers don't have massive market share, but they have massive profit share in the PC industry). Apple is sucking out over 80% of all the profits in the smartphone market (Samsung's in the 30% range and the rest is negative), and I don't have the numbers for tablets, but it's probably similar if not higher.

 

Apple's market share declined.  Their sales volume also declined year over year.  So I think it's safe to say they are losing customers in their coveted demographic, given that they haven't changed at all the segment they have been targeting.

 

Unless Apple can figure out how to make money on that substantial usage (real money, not just their tiny app store profits), then usage and ideal customers are not particularly relevant to Apple's business.

 

[Liberty]

Apple's market share declined.  Their sales volume also declined year over year.  So I think it's safe to say they are losing customers in their coveted demographic, given that they haven't changed at all the segment they have been targeting.

 

Unless Apple can figure out how to make money on that substantial usage (real money, not just their tiny app store profits), then usage and ideal customers are not particularly relevant to Apple's business.

 

Apple is not losing customers, revenues are up YoY, and Apple is making great margins from apps and content (that segment has sales of over 4.5 billions just in one quarter), so usage is nicely monetized. But the point wasn't about that money, though, it's that better users will pay more for better and differentiated devices, which is why apple has the highest margins in the industry by far. If Motorola could price its phones like iPhones and sell them at close to 40% gross margins, it would.

[Viking]

I think we are in the process of seeing sentiment change in Apple with investors. It looks like Google and Amazon have peaked for this cycle and the Wall Street machine needs a new darling; my guess is it will be Apple.

 

The company owns the premium segments in smartphones, tablets and pc's; they continue to grow share in all three categories (in the premium segment) which was a big red flag a year ago. Gross margins have stabilized (actually improved) over the past year and this was another big red flag a year ago. Their competitors are losing momentum, most importantly Samsung, which was another big red flag a year ago. And they are about to release products into brand new categories which also was a big red flag a year ago (i.e. Company can't innovate without Steve Jobs around). Earnings are finally growing: they earned about $40/share last year (Sept YE) are on track to earn about $44/share this year and are expected to earn $48/share next year (not including new category launches). With the stock trading at $570, the current PE = 13 and the F2015 PE = 12.  They currently have $152/share in net cash. They also will spending $45 billion over the next 7 quarters solely to repurchase shares; at an average cost of $600/share they would be able to buy 75 million shares; with 870 million shares outstanding this would reduce the shares outstanding by about 8%. The share count could drop from 946 to 800 million in 10 quarters (June 2013 to Dec 2015) which for a company of this size is amazing. The dividend was increased to $3.29/share = 2.3% yield (annualized). The 7 for 1 stock split will be good for the stock near term for the simple reason that Wall Street likes these sorts of things.

 

With Apple over the next year we likely will see the beautiful trifecta:

1.) growing earnings (perhaps high single digit or even low double digit)

2.) lower share count

3.) increasing market multiple attached to the stock

It would not surprise me to see Apple earn $50/share and for the market to give the company a PE multiple of 15 = share price of $750 which is a 30% gain from where shares are trading today. Should earnings exceed expectations (think iPhone 6) and the market attach a multiple higher than 15 (think new product categories) then shares will leave $750 in the dust.

 

In Reminiscences of a Stock Operator, Larry Livingstone says that the big money is made by identifying the big trends, establishing a large position and then sitting. One year ago when Apple fell below $400 we all were given a wonderful opportunity to buy a world class company when it was out of favour and on sale. A year later the stock has begun its big move and is up more than 40% (from its lows). It looks to me like we are about 1/2 of the way there. And just like it ran too far on the downside last year, I am hopeful that it also has a similar wacky ride to the upside over the next 12 months.

[VAL9000]

Apple is not losing customers, revenues are up YoY, and Apple is making great margins from apps and content (that segment has sales of over 4.5 billions just in one quarter), so usage is nicely monetized. But the point wasn't about that money, though, it's that better users will pay more for better and differentiated devices, which is why apple has the highest margins in the industry by far. If Motorola could price its phones like iPhones and sell them at close to 40% gross margins, it would.

 

Apple as a whole are not losing customers, but if you look at just the iPad market, it's hard to argue otherwise.  Apple posted a 13% sales volume drop year over year in a market that grew about 50% last year.  They're losing customers. 

 

Here's some food for thought on monetizing existing devices and the real growth Apple is seeing.

 

In the past year, Apple has sold about 231 million iOS devices (iPad + iPhone volumes).  In total to date, they've sold about 850 million iOS devices.  So backing out the numbers, total growth on iOS devices was 231 million / (850mm - 231mm =  619mm) = 37.3% *.  Pretty amazing growth.

 

Let's take a look at how much revenues from iTunes, Software, and Services has grown.  Oh.  11%.

 

If these customers are such high users of the devices, and they are such big spenders, then why is there such a huge difference between dollar spend on content and new users?  They can't all be existing customers replacing their old phones, can they?  Or maybe most of them are and growth is truly topping off at around 10-15%.  If Apple sold ~ 150mm devices in the same period 2 years ago, and the replacement cycle is about 2 years, and Apple retains 90% of their customers, then perhaps 140mm of the 231mm units sold are replacement products.  Which then indicates a growth figure of 91mm / 619mm = 14% new customer growth.  This would imply closer to negative growth on the user monetization side, which is perfectly in line with pricing trends on apps:  http://blog.flurry.com/bid/99013/The-History-of-App-Pricing-And-Why-Most-Apps-Are-Free

 

I think this evidence points to Apple not really doing a good job at monetizing their user base.  If they can't figure it out then the only trick this pony has is high margin devices.  In which case, the iPad's deteriorating sales figures are simply pointing the way to the old glue factory.

 

* I know this ignores things like replacement cycle, destroyed/discarded product, and resold product which have a real impact on both numerator and denominator, but I chose to ignore this.  Feel free to adjust with your own assumptions and offer alternative numbers.

[Liberty]

Apple's not doing a good job monetizing? Who's doing a good job of monetizing?

 

You seem to be forgetting that Apple made it's OS and major software free in the past year and took big charge against the Itunes, Software, and Services line. That number would be quite a bit higher otherwise. Now you'll say: See, they had to do this to stay competitive and to grow. That might be partly true (though just a little -- who buys an iPhone because Pages is free? or a Mac because Mavericks is free? almost no one), but there are major strategic benefits to this move, such as further reducing fragmentation in their user base (everybody on the last version with all the greatest features) which makes their ecosystem even more differentiated and gives developers a much better target (they can be cutting edge, rather than be held back by having to support a few versions back like Android, which is expensive to do, meaning that iOS and OSX will be overall more attractive across the whole existing user base -- if that's not worth a few billions in lost software revenue to help support the much larger hardware business, I don't know what is). It also further reduces the ability of others to make money on software, and we know they're not making much money on hardware, so it's defensive.

[VAL9000]

Apple's not doing a good job monetizing? Who's doing a good job of monetizing?

Netflix, Google, Amazon, Facebook, Spotify, Uber, and Square are doing good jobs.

 

It's not the dollars, it's the model.  Subscription, transaction, and ad-supported are good, sustainable models.  Selling content, not so much.  Look at the record companies and look at the data on app pricing.

 

You seem to be forgetting that Apple made it's OS and major software free in the past year and took big charge against the Itunes, Software, and Services line. That number would be quite a bit higher otherwise. Now you'll say: See, they had to do this to stay competitive and to grow. That might be partly true (though just a little -- who buys an iPhone because Pages is free? or a Mac because Mavericks is free? almost no one), but there are major strategic benefits to this move, such as further reducing fragmentation in their user base (everybody on the last version with all the greatest features) which makes their ecosystem even more differentiated and gives developers a much better target (they can be cutting edge, rather than be held back by having to support a few versions back like Android, which is expensive to do, meaning that iOS and OSX will be overall more attractive across the whole existing user base -- if that's not worth a few billions in lost software revenue to help support the much larger hardware business, I don't know what is). It also further reduces the ability of others to make money on software, and we know they're not making much money on hardware, so it's defensive.

 

The impact from Mavericks being free is like $800mm over the upgrade cycle (assume 40mm upgrades at $20).  It'll impact the numbers but the growth still lags the growth in iOS devices based on my calculations.

 

I think the other stuff you mention does make sense and these are smart moves for Apple.  We'll see if it makes a difference, but I don't think it will.  My thesis continues to be commoditization and increasing price pressure from alternatives.

 

[Liberty]

It's not the dollars, it's the model.  Subscription, transaction, and ad-supported are good, sustainable models.  Selling content, not so much.  Look at the record companies and look at the data on app pricing.

 

These models would have important strategic costs for Apple. It wouldn't be able to make the best products for its users if it was simultaneously trying to show them ever more ads and gather as much personal information on them to target those ads. Part of the premium experience is they annoy and creep you out as little as possible (the bar is always higher for hardware because you pay for it -- facebook and google couldn't be as creepy if they charged money directly). Apple sells content because it makes their devices better, and because other content providers never figured out how to do a good job until Apple stepped in. It's not a primary business for them. If it was, they would try harder to sell it on other platforms.

 

We'll see. Apple's been operating in commodity industries since it was created, and as long as it doesn't lose track of what its strengths are (like when they had crappy management and way too many undifferentiated products...), it seems to do pretty well. I'm more afraid of the company losing focus than of competitors.

 

More on the iPad:

 

https://medium.com/five-hundred-words/1800acf5410d

[krazeenyc]

Apple's not doing a good job monetizing? Who's doing a good job of monetizing?

Netflix, Google, Amazon, Facebook, Spotify, Uber, and Square are doing good jobs.

 

It's not the dollars, it's the model.  Subscription, transaction, and ad-supported are good, sustainable models.  Selling content, not so much.  Look at the record companies and look at the data on app pricing.

 

 

It's crazy the notion that Apple doesn't do a great job of monetizing their customers. Apple monetizes their customers better than almost anyone. When a person buys an Apple iPhone they:

 

1) buy a new iPhone every 2 years - ~$600

2) buy other apple products, iPad, Mac, Time Capsule, Airport, etc.

3) buy apps, music, etc.

 

To be honest, imo Apple made 3 major breakthroughs and many nice incremental improvements. IMO, they monetized these 3 major breakthroughs pretty well.

 

1) MAC

2) iPod (and iTunes)

3) iPhones

[Viking]

A year ago the consensus view was Apple was a deeply troubled company. It's flagship iPhone, representing a majority of sales and profits, was being killed by the competition.

 

'Commoditization' (buzzword of the day) was in the process of destroying Apple's grip on the high end smartphone market. Samsung was leading the assault on Apple with the Galaxy S3 and their nifty commercials mocking Apple users. RIMM was finally launching their new OS and phones. Motorola, with a full year under Google ownership, was going to launch iPhone knockoffs at much lower prices. The Microsoft and Nokia partnership was finally gaining traction. HTC 'one' might actually be the best smartphone on the market. Apple's gross margins had fallen from 47 to 36%. Commoditization would ensure Apple margins continued their inevitable march lower, likely to 30% or below. Apple's stock fell from $700 to below $400 with some analysts calling for it to fall below $300. Worst of all, Apple was no longer cool.

 

But a funny thing happened. What 'the market' expected to happen did not. Samsung failed miserably in their bid to become the innovation leader in smartphones and the dominant player in the premium segment; the S4 was met with a big yawn. Later in the year the Galaxy Gear just served to reinforce how bad Samsung is at true innovation. RIMM imploded and sales are tanking. Due to continued poor sales, Google decided they had lost enough money, threw in the towel, and sold Motorola. The Microsoft/Nokia partnership failed to gain any traction in the high end segment; in a fit of desperation Microsoft paid $7 billion for Nokia. HTC is losing money hand over fist. Except for Samsung, every major competitor to Apple ended the year in a much worse position than when it started. And the honeymoon is clearly over for Samsung as they lose share to Apple in the premium segment and Chinese manufacturers in the low end. And the newly released S5 has been met with another big yawn (no 64 bit and fingerprint ID that is much worse than what Apple launched last year).

 

Over the past year what company has improved its position the most in the smartphone category? Apple. And in September Apple will likely launch a larger sized iPhone at a $100 premium; they will likely see record global sales (number of units) and record profit per unit which will lead to growing total revenue and total profits.

 

Looks like Apple is cool again!

[Liberty]

I think the thing that a lot of Apple-watchers misunderstand is that commoditization doesn't work the same way for consumer products as for enterprise products.

 

In the enterprise, products are judged by how they can do the job that eventually leads to the company making money, they are measured against a very clear yardstick. If you need to host the company's website and can do it more profitably and without losing necessary functionality on a cheap server rather than an expensive one, that's what you should do (when it doesn't happen, it's usually because of vendor lock-in). Will the more expensive one be better designed and nicer? Probably, but the IT bean counter probably won't ever see the servers that he's buying anyway, so that's no even a consideration, and if he does work on what he buys, he probably can't justify the extra cost to the boss who's looking at the bottom line.

 

For consumer stuff, the equation is different. You don't have that profitability benchmark to judge things against. The person buying is the same person who will use the thing. Other factors play a much bigger role and products are judged in relation to each other, not in relation to an invariable external benchmark like making a profit. Spending a few bucks more on something that you'll use for hours each day for a couple years might feel totally worth it even if "you could do all the same tasks on a cheaper product".

 

That's why despite the fact that a modern Honda Accord is probably more luxurious, fast, safe, and reliable than a Mercedes from a couple decades ago, there's still a luxury car market. The low-end didn't become 'good enough' and people stopped buying higher-end cars. As long as the high end stays relatively better than the low-end, it'll have a market with people who want something better (not everybody does, or can afford it, but that's part of the differentiation). That's why expensive running shoes still exist (Nike, etc) despite the fact that cheap ones are now much better than the cheap ones from years ago.

 

There's no 'good enough' line over which improvements don't matter in consumer stuff. Better always matters, and I don't see a company in the world that is operating on the level that Apple is in its categories (I mean on the product level -- people will always find individual areas where Apple is slightly behind, but to make a good product, you need the whole package). And it's a self-reinforcing cycle, with Apple attracting many of the best designers and engineers because they want to work on the best (it's like joining the marines), and because they're so profitable, they have a lot more money to spend on cool R&D and very expensive manufacturing processes rather than count pennies and use cheap plastic molds and such (who else is making hundreds of millions of products with CNC aluminum milling? and soon sapphire glass? custom SOCs that nobody else can get rather than mostly off-the-shelf chips?).

[Palantir]

I agree that higher end will always have a place, but the question is how big will that higher end be? If the low/mid end starts becoming really good, the higher end may shrink. People seem to be speaking as if Apple's sales are binary, when in fact Apple can still make high margins off a shrinking base. Furthermore, you're only focusing on low end disruption, when there's the possibility of another firm matching or even exceeding Apple in quality. One great example is in software, to your point the best engineers don't join Apple, at least not in software, and that's where Apple has a weakness - apart from iOS and OSX most of their software products have been mediocre from (today's) iTunes to Pages, Numbers, etc.  I expect that weakness to get even more stark as we move into cloud services. (My iPhone still doesn't beam my photos to iCloud Photostream, but is doing so with OneDrive.)

[blainehodder]

New Macbook Air released today.

 

https://www.apple.com/macbook-air/specs.html

 

100 bucks cheaper, perhaps slightly better specs?