AAPL - Apple Inc.

[Liberty]

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.

 

Or it may grow as the global middle class becomes bigger and competition keeps stagnating (Galaxy S5 vs iPhone 6? That'll be interesting). We're not talking about $100k Teslas here, we're talking about sub-$1k phones that bring tons of real value to anyone's life and are considered must have. Not that hard to justify. Even if you could save a couple hundred bucks on a less desirable phone, what is that over the 2-3 years that most people keep their phones? Less than $5 a month? Remember, consumer products are not bought to do at a certain job at the lowest cost, otherwise whole industries wouldn't exist.

 

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.)

 

iOS and OSX are what matters, and it's where having great engineers and designers matters. It's what differentiates their products from all the other PCs that run windows and all the other phones that run Android, and they are the platforms on which thousands of developers build. The fact that Pages isn't the best word processor matters relatively little.

 

As for iTunes, it has its quirks and problems, but it's massively more successful than any other media software/store made by anyone else ever, and it further adds value to the whole ecosystem of products, differentiates, and locks in. And all those accounts with credit card info can be leveraged into future products too:

 

http://i.imgur.com/IX0JXNs.jpg

 

Apple's real weakness is in services (cloud stuff, maps, etc), but they're aware of that and it's an opportunity to improve, and they don't mind partnering with others when it makes sense (though they've been burned in the past). Facebook and Twitter support is built in the OS, Yahoo provides weather data, and the new Microsoft sounds like it'll make for a good partner too.

 

At their scale, there are things that are harder to do than for others who have a few order of magnitude fewer customers... But f.ex., I expect them at some point to give you iCloud backup storage equal to the size of the storage on your device (ie. you buy a 32gig phone, you get 32 gigs of backup in iCloud)... They just have to first build a zillion datacenters to handle the hundreds of millions of devices...

[Viking]

When people expect the iPhone to commodotize I think they are getting the business segment mixed up with the consumer segment. Below is a link to a humorous Michael Saylor interview by Motley Fool from 2011. At the 2 minute mark in the interview he discusses the question of whether Apple can maintain its margins. His answer is he sees the iPhone as a product somewhere between a piece of clothing, jewelry and accessory; the phone is no longer just a utilitarian brick type product. You put it up to your face for much of the day. It is an existential part of you. With it you are making a fashion statement. He says there isn't an 8 year old on the planet that does not want an iPhone. His view is Apple can absolutely maintain its high gross margins. Premium brands and products have been around for 10,000 years and they will be around for another 10,000 years.

 

http://michael.com/2013/01/the-motley-fool-interview-part-3/

 

[VAL9000]

This idea that there won't be commoditization for the iPhone is crazy.  The consumer thing has nothing to do with it.  I mean, just look at what the iPhone is:

- it's a computer

- it's a digital camera

- it's a gps device

- it's a tv

- it's an mp3 player

- it's a mobile phone

 

Every single example of what an iPhone is has endured significant price pressure in both a consumer and enterprise environment.  Its predecessors were chewed up and spit out by the innovation cycle - what specifically makes the iPhone immune to this same fate? 

 

It's a tough position for Apple.  The more expensive they are relative to competition, the fewer people will buy the phone.  Having a smaller footprint means fewer benefits of scale, including developer/ecosystem support.  This would kick off a death spiral.  On the other hand, cutting prices means cutting margins, and margins (and innovation) are all anybody cares about with respect to Apple.

 

[Liberty]

This idea that there won't be commoditization for the iPhone is crazy.  The consumer thing has nothing to do with it.  I mean, just look at what the iPhone is:

- it's a computer

- it's a digital camera

- it's a gps device

- it's a tv

- it's an mp3 player

- it's a mobile phone

 

Prices of those components will go down - many of the individual components will commoditize - and Apple will benefit from those lower costs as well as others. Almost certainly the overall price of iPhone goes down over time, but the product itself can maintain superior margins and profitability if it remains a superior product. You are missing the forest for the trees. It's like saying that a Martin Scorsese film is just a bunch of frames of people talking and doing stuff, shot with ordinary cameras under ordinary lights.. Why is that so special?

 

You have a spec list mental model, but consumers think at the product level. For a decade people bought more expensive iPods when they could've bought much cheaper mp3 players. The only thing that killed the iPod is Apple making a much better iPod inside a smartphone. People have been paying more for iPhones for 7 years now because they feel its worth it, and if you look at it as a continuation of the iPod, they've been paying more for almost 15 years (same for Macs)...

 

Every single example of what an iPhone is has endured significant price pressure in both a consumer and enterprise environment.  Its predecessors were chewed up and spit out by the innovation cycle - what specifically makes the iPhone immune to this same fate?

 

They're not magically immune, that's for sure, just like Porsche and Nike aren't immune to competition. They have to work hard to have better products. But I don't see any other company that has the ability to out-compete Apple right now. Nobody's set up to do that. When I see something, I'll be worried and reconsider. And Apple isn't worth any price either, so if the stock becomes really expensive, I'll reconsider too.

 

Oh, and despite being a consumer product, the iPhone has been beating others in the enterprise because it is so desirable that companies are changing their IT rules to either allow BYOD or to buy iPhones outright... Not bad for a product that didn't target the enterprise and is more expensive than other smartphones.

[GregS]

This idea that there won't be commoditization for the iPhone is crazy.  The consumer thing has nothing to do with it.  I mean, just look at what the iPhone is:

- it's a computer

- it's a digital camera

- it's a gps device

- it's a tv

- it's an mp3 player

- it's a mobile phone

 

- it's an O/S

 

Apple's success rests on providing a better overall user experience.  People have been willing to pay up for that.  Will they continue?  Can their competitors match that experience?  These are the questions that matter, not whether someone makes a cheaper phone with better specs.

[Viking]

Val, when you think of a smartphone you may think of it as a computer, gps, camera, tv, MP3 player etc. I think you are a rare breed, probably a very rational person. It sounds like brand power has no effect on your purchase decision for stuff you buy; you likely buy the no name cereal and not Kelloggs. I think businesses think primarily this way when they purchase items (what are the features, benefits and cost). Consumers do not think in such a fact based way when they buy stuff; emotion is a huge part of the purchase decision. I worked at Kraft foods for many years; their products sell not because they are the best quality or the cheapest price but primarily because of the power of the Kraft brand and all the marketing they do. Marketing and brands rule the consumer segment and once established can have an incredibly long like (Kraft has been around for over 100 years).

 

If I asked my 14 year old daughter to describe why she loves her iPhone 5 I don't think she will list any of the things you mentioned. My guess is she loves the way it looks and works and most importantly how it makes her feel when she uses it. You should have seen the look on her face when she got it, used it for the first time, told her friends she had just purchased it and then took it to school the first time. Her friends did not say "hey, that looks like you got a great pocket computer". They likely said, "wow, is that the new iPhone? You are sooooo lucky! I wish I could get one too." (And of all her friends, my daughter is the most grounded and rational of the group so it tells me something what I see her react in this way.) I think you are way, way misunderstanding the power of a brand. Apple is now the clear number 1 brand on the planet. And they are getting stronger.

 

I think we are going to be pleasantly surprised by what Apple releases beginning at WWDC in June and carrying right through to September and October. I think Apple is getting sick and tired of all the naysayers (can't innovate without Steve Jobs). The good to come from all the pessimism is that it has likely given the Apple workforce something to rally around and motivate them to be even better (guess I am an optimist).

[Liberty]

Val, when you think of a smartphone you may think of it as a computer, gps, camera, tv, MP3 player etc. I think you are a rare breed, probably a very rational person. It sounds like brand power has no effect on your purchase decision for stuff you buy; you likely buy the no name cereal and not Kelloggs. I think businesses think primarily this way when they purchase items (what are the features, benefits and cost). Consumers do not think in such a fact based way when they buy stuff; emotion is a huge part of the purchase decision.

 

Brand and emotion is important, but I would disagree with anyone who said that this was the main difference between an iPhone and a Galaxy (ie. they're both just as good and well designed, but somehow Apple has this great brand so people think it's better).

 

The brand is the result of making better products for a long time; the products aren't better because they have a good brand, the brand gets better because the products are good. People get cause and effect mixed up in that one sometimes.

 

The experience of a product is composed of all the little things put together. What comfort is it to your mother that the specs are similar on paper if when she uses a phone she gets annoyed more often and things aren't as easy/fun/nice/secure?

[GregS]

The brand is the result of making better products for a long time; the products aren't better because they have a good brand, the brand gets better because the products are good. People get cause and effect mixed up in that one sometimes.

 

This ^^

[rkbabang]

They're not magically immune, that's for sure, just like Porsche and Nike aren't immune to competition.

 

It's funny that you mention Nike, I was just thinking that here's a company that can't possibly survive.  It makes shoes!  What kind of moat is there in shoes when I can go to WalMart and get running shoes for less than $14.  I can then use the money I save to buy an android tablet and save even more!

 

[Steve]

 

Aswath Damodaran on current IV for Apple and interesting analysis:

 

http://aswathdamodaran.blogspot.com/2014/04/watch-gap-apples-long-and-twisted.html

 

-Steve

[Viking]

Steve, thanks for posting. The biggest driver of the stock post earnings might be the big surprise in iPhone sales. iPhone represents the majority of Apple's earnings. In January the stock fell $50 due mainly to a big miss in iPhone sales.  Looking through the iPhone lens, the immediate moves in the stock (day after earnings) in January and last week are pretty explainable. The $20 move in the stock yesterday may simply be all the buyers who wanted to be in the stock (before the new products are released this summer and fall) but who expected to buy the dip post earnings (which never materialized).

[ni-co]

The brand is the result of making better products for a long time; the products aren't better because they have a good brand, the brand gets better because the products are good. People get cause and effect mixed up in that one sometimes.

 

This is a very good and important point. Unlike e.g. Nike, AAPL's advertising plays only a supporting role for building the brand. The main brand building tool is user experience.

 

In this post from last year, Horace Dediu showed pretty clearly that AAPL spends far less in advertising their products than competitors, especially when you look at their respective business sizes:

http://www.asymco.com/2013/04/02/the-cost-of-selling-galaxies-updated/

[Liberty]

Speaking of Dediu: http://www.asymco.com/2014/04/30/the-ipad-discontinuity/

[Viking]

Apple's most important product is the iPhone. Understanding what is happening to iPhone sales is critical to where Apple's profitability (and it's stock price) is going. Sales growth over the next 6 months will be dominated by international, in particular China and Japan. However, recently sales in the US have been flat.

 

What can Apple do to get US sales growing once again? Morgan Stanley just released a report stating IF Apple launches a 5" iPhone in Sept they could grow sales in the US as much as 30%. http://appleinsider.com/articles/14/04/30/survey-suggests-apple-could-sell-15m-more-iphones-in-us-with-larger-5-display-option

 

We have also been told for the past year that much of Asia prefers smartphones with screens 5" or larger so I think we can safely assume that China sales would also be favorably impacted if Apple launched a 5" phone.

 

The key to Apple in the short term appears to be whether or not they launch a larger iPhone in Sept. If they do, all the signs point to much higher sales, growing margins, record total profits, much lower share count, record earnings per share. Morgan Stanley just raised their target price to $690 and now feel Apple deserves a 15PE. Can anyone say 'growth company'?

[Liberty]

Apple's most important product is the iPhone. Understanding what is happening to iPhone sales is critical to where Apple's profitability (and it's stock price) is going. Sales growth over the next 6 months will be dominated by international, in particular China and Japan. However, recently sales in the US have been flat.

 

What can Apple do to get US sales growing once again? Morgan Stanley just released a report stating IF Apple launches a 5" iPhone in Sept they could grow sales in the US as much as 30%. http://appleinsider.com/articles/14/04/30/survey-suggests-apple-could-sell-15m-more-iphones-in-us-with-larger-5-display-option

 

We have also been told for the past year that much of Asia prefers smartphones with screens 5" or larger so I think we can safely assume that China sales would also be favorably impacted if Apple launched a 5" phone.

 

The key to Apple in the short term appears to be whether or not they launch a larger iPhone in Sept. If they do, all the signs point to much higher sales, growing margins, record total profits, much lower share count, record earnings per share. Morgan Stanley just raised their target price to $690 and now feel Apple deserves a 15PE. Can anyone say 'growth company'?

 

Not only that, but over the past 15 years, there's been a very strong effect when people buy their first Apple product (whether a Mac, an iPod, an iPhone); it significantly increases the chances that they'll buy other Apple products. I think it's partly because all the products share a design philosophy, quality level, aesthetic sense, etc, but also because they all inter-operate very well.

 

A little while ago, people used to get an iPod and then when they needed a new computer, they got a Mac because they liked the iPod so much. How many Macs were sold because of iPods? I don't know, but I think it's a significant number.

 

That halo effect is now happening with the iPhone. People who aren't in the Apple ecosystem get iPhones, and then they look at iPads and Macs and Apple TVs (and soon wearables?). It doesn't all happen immediately, but over time there seems to be a strong pull... So they don't only get the ecosystem lock-in from the phone, but from a bunch of devices that are collectively more useful because they augment each other (that's what CarPlay primarily is - a way to make an iPhone more useful, not a way to drive iTunes Radio revenue or whatever). I don't think that Samsung gets much of that effect...

 

Another way to think about it is that if each product line of Apple was spun off into a different company, their sum would be worth less than having all of them inside Apple, because each lines helps sell the other lines' products, and they make each other better by being in an ecosystem (thus valuable to customers, so they're ready to pay more).

 

I think that's part of the reason why entering new categories is so interesting. No only because of the money made by the new gizmos themselves, but as a way to further strengthen the whole edifice and make other Apple products more sticky and desirable.

[constructive]

Speaking of Dediu: http://www.asymco.com/2014/04/30/the-ipad-discontinuity/

 

I don't understand. Isn't the lack of iPad growth over the last year conclusive proof of a "growth discontinuity"?

 

iPad unit sales are a hard number. Penetration is a much rougher estimate. It seems like he is massaging the penetration model to obscure the hard numbers instead of clarifying them.

[Guest wellmont]

Speaking of Dediu: http://www.asymco.com/2014/04/30/the-ipad-discontinuity/

 

I don't understand. Isn't the lack of iPad growth over the last year conclusive proof of a "growth discontinuity"?

 

iPad unit sales are a hard number. Penetration is a much rougher estimate. It seems like he is massaging the penetration model to obscure the hard numbers instead of clarifying them.

 

when your website exists to spin every piece of data as + for apple you get analysis such as this.

[Liberty]

I think Dediu is more interested in the technology than the financials (he's more a tech analyst than a financial analyst, though he looks at that too), so his analysis centers on how the technology is being adopted. Penetration is more interesting than sales to him.

 

I think a big difference that must be taken into account is the replacement cycle, which has a huge impact on sales.

 

If the average person keeps an iPhone 2 years and an iPad 5 years, over 10 years you'll sell 5 phones an 2 tablets to that person. That's quite a big difference for products that are priced similarly. So if the phone and tablet had been launched on exactly the same day of the same year, over time you could have sales of one going much stronger than the other despite having exactly the same penetration curve (that's the theory).

 

Now, I'm not someone who makes detailed models of sales years in advance and all that (I'd rather be approximately right than precisely wrong - though I'v also been approximately wrong many times, so ymmv), but I do know that I'm not judging things by a flat quarter.

[Viking]

Wellmont, yes, you can tell from Horace's articles that he has a favorable view of the company. Having read Horace's articles for the past 18 months or so, he has also been one of the more accurate writers with an Apple focus. He also is an original thinker, not afraid to publish material that is a little different. Given all the trash published on Apple by the mainstream media the past 18 months, I have appreciated reading Horace's detailed articles very much as they have taught me a lot about Apple and the industry (not that I always agree with his conclusions). I wish we had more such writers sharing their views (and their rationale).

[Viking]

I have been watching Microsofts smartphone and tablet business closely to see if it is getting traction. My thought is Microsoft has one key area of strength that it may be able to leverage to increase sales in mobile: it's dominant position in the enterprise segment.

 

Good Technology has just released is survey of business activations in mobile (smartphones and tablets) and it does not look like Microsoft is getting and traction at all with 1% of total activations (same as last 4 quarters).

 

The big winner continues to be Apple with 72% of total device activations; android had 27%. Apple has not been viewed as an enterprise company; this looks to be changing as they ride their dominant position in mobile activations to establish a beachhead in the enterprise segment. With Windows struggling, current share will likely not change much moving forward which bodes well for the big leader, Apple. One has to wonder how much their dominance in mobile is helping Mac sales.

 

Looking at smartphones, Apple had 65% of activations, Android had 34%, Windows had 1%.

Looking at tablets, Apple had 90% of activations, Android had 10%.

 

http://appleinsider.com/articles/14/05/07/apples-ios-takes-93-share-in-enterprise-apps-ipad-takes-92-of-business-tablets

[txlaw]

Just got an alert that Apple is in talks to buy Beats Electronics for over $3 billion.

[fareastwarriors]

Just got an alert that Apple is in talks to buy Beats Electronics for over $3 billion.

 

 

Apple in talks to buy Beats for $3.2B

 

http://www.cnbc.com/id/101655459

[OracleofCarolina]

So does this mean Andre Young (Dr. Dre.) will be a billionaire and buy the Clippers?

[PatientCheetah]

Beats is mostly a brand, very little technology. This is a departure of Apple's usual incremental technology acquisition.

[Sunrider]

Shit. That would be a dumb acquisition if I ever saw one!

 

If that does happen then I think I finally have to sell my AAPL. I really hope that's just the usual rumour mill - surely Tim Cook can't be stupid ... and Jony Ive and Beats? These things are plasticky crap, the design of which could've been done by Lady Gaga (come to think of it, I think she does have her own Beats edition).... so the design of which may as well have been done by a Dell laptop designer ca. 2005.

 

C.