AAPL - Apple Inc.

[KCLarkin]

One thing I've been wondering about is the impact on iPad sales of not refreshing the iPad Air last fall. They had the iPad Pro come out, which helped, but it'll always be a more niche device than the 9.7 inch form factor. That can't have been good for sales. I wonder if we'll see some catch-up when the iPad Air 3 is released, especially if it has lots of cool stuff (3D Touch? Apple Pencil support? 4 speakers? Touch ID V2? the new accessory interconnect? Variable refresh rate screen?)

 

No. I've owned almost every generation of iPad and the delta between my iPad 2 and iPad Air 2 is not significant. They are just big pieces of glass. I use the iPad a lot so the small delta is worthwhile for me. But for most users, there is little need to upgrade and no reason to wait for the next version.

 

Of course there will be a few Gruber's out there who always buy the latest, but the iPad Pro probably scratched that itch.

[TheAiGuy]

One thing I've been wondering about is the impact on iPad sales of not refreshing the iPad Air last fall. They had the iPad Pro come out, which helped, but it'll always be a more niche device than the 9.7 inch form factor. That can't have been good for sales. I wonder if we'll see some catch-up when the iPad Air 3 is released, especially if it has lots of cool stuff (3D Touch? Apple Pencil support? 4 speakers? Touch ID V2? the new accessory interconnect? Variable refresh rate screen?)

 

No. I've owned almost every generation of iPad and the delta between my iPad 2 and iPad Air 2 is not significant. They are just big pieces of glass. I use the iPad a lot so the small delta is worthwhile for me. But for most users, there is little need to upgrade and no reason to wait for the next version.

 

Of course there will be a few Gruber's out there who always buy the latest, but the iPad Pro probably scratched that itch.

 

I agree. What would you be able to do with a new iPad that you couldn't do with an old iPad? A lot of the improvements on the iPhone are way less useful on an iPad. (i.e. small decreases in friction matter a lot on the iPhone, things like improved camera, payments aren't as useful on an iPad).

[Liberty]

I disagree. I've owned the iPad 3, the iPad Air, and now the iPad Air 2, and I think each one has been a big improvement. The 3 was super slow and very RAM constrained, the first Air was much faster and thinner, and Touch ID made it a lot less annoying to constantly unlock, but it was just thick enough to be kind of annoying to use for long periods of time. The Air 2 just crosses that threshold of being light and thin enough to be useable for extended periods of time, and the extra RAM and multi-tasking in iOS 9 makes it a much more productive device.

 

I'm not saying everybody uses the device as heavily as I do - if you just watch a few youtube videos, you won't care - but every update is a new temptation to upgrade for a portion of the user base. Not upgrading it last fall lost them that crowd (some of them still on early models, just waiting for something to tempt them enough).

[Picasso]

Older iPads are basically unusable with new iOS versions.  So there's that to consider too. I wonder if it's pissing off customers towards surface tablets.

[Liberty]

Older iPads are basically unusable with new iOS versions.  So there's that to consider too. I wonder if it's pissing off customers towards surface tablets.

 

I always think it's funny when people think that this is done on purpose. "oh, the latest iOS is getting slow on my 4-5 years old device, they must do it on purpose."

 

http://cdn0.mos.techradar.futurecdn.net/art/mobile_phones/iPhone/iPhone%206S/Leaks/live-event-predictions/apple-live-event-iphone-6s-specs-420-90.jpg

 

(and that slide is just for the A8, the iPhone 6S is even faster with the A9)

 

GPUs have been improving even faster than mobile CPUs, and RAM and I/O (flash storage speeds) has also increased a fair amount.

 

It's pretty much a miracle that Apple supports old devices as long as they do -- Android certainly doesn't. You can't expect to run software targeted to a certain generation of hardware as fast on hardware that is an order of magnitude slower with a lot less RAM, and its resource-intensive to go back and test on old hardware and optimize for it.

 

If the Surface had been around as long as the iPad, I'm pretty sure that earlier models would struggle with the latest version of the OS and software too.

[Picasso]

I don't think they do it on purpose but it's pretty much guaranteed a 3 year old iPad on the latest iOS is a terrible experience. And you can't go back to the old iOS version once you upgrade. You can say thats pent up demand to some extent but I know it turns off a lot of iPad users.

[Liberty]

My point is just that it's a case of 'damned if you do, damned if you don't', so there's nothing more they can do, whether it turns some people off or not.

 

If you don't support older devices with new OSes, people will complain about "planned obsolescence" and about lack of support.

 

If you do support older devices that are orders of magnitude slower, people will complain about "planned obsolescence" because their devices don't provide as good an experience when trying to run modern software.

 

*shrug*

[Picasso]

Eh, I don't know if I'll give Apple that easy of a pass on this one.  It also highlights some of the growth assumptions here.

 

For one, Apple loves to announce how high of a percentage their devices run the latest version of iOS.  It'd be a pain for them to support older hardware (I get that) but there has to be some happy middle ground here.  Someone who has a perfectly fine iPad will update to the latest version and suddenly realize how badly their device now responds.  Guess what?  They can't downgrade to the previous version of iOS (unless it's the first week of the release I think).  There is literally no way to downgrade other than having some old backup somewhere.  Why not let customers use an older version of the OS? 

 

If the answer is because this is just part of the Apple homogenous ecosystem which functions so well for develops, Apple, customers, etc, well you can't expect there to be some massive market of people who are willing to have obsolete $500-800 computer surrogates every couple years when they already have obsolete phones and laptops and computers which cost enough as it is.  So Apple can keep that going and it's fine, they'll just be within that small band of slightly richer customers and you'll likely continue to see the kind of sales trends we see now. 

 

Unless Apple comes out with an iPad that is less iOS and more OSX.  But then it begs the question how people would feel if their iPad with some form of OSX was unable to run properly with a new version of OSX and be a slow POS.  It wouldn't be acceptable right?  So why is it acceptable with iOS?  Imagine the hell fire if people updated to a terrible Windows 10 and couldn't run Windows 7 anymore and were stuck with some crappy PC. 

 

I'm assuming we're wealthier people who are willing to troubleshoot that stuff and just suck it up because "it's new tech."  At the end of the day I don't think this affects Apple that much.  I was just highlighting that there's going to be a lot of crappy iPad's on the market in a year or two.  That's a positive for Apple but probably also a net positive for products like the Surface tablet.  Apple needs to win back those customers; I don't think it's a shoe in like with the phone.

[johnny]

With the possible semi-exception of iOS7, which added a great deal of computationally costly UI elements as part of the ~refresh~, most OS upgrades are well worth their weight in terms of improved functionality, etc.

 

I think a great deal (not all) of the reported negative experiences surrounding OS upgrades are a combination of misattribution and plain old imagination/placebo. I've heard people talk about how their battery life is much worse after -every- -single- upgrade. Of course, this sort of claim is very easy to test and it never seems to get verified. Not that you need data, since if every OS was systematically undermining power efficiency, we should expect to be able to clearly perceive that cumulative effect on even brand new devices with iOS 9 installed.

 

More likely they simply -notice- an accumulated year of gradual battery degradation once something major has been changed, in the same way somebody taking a new anti-psychotic medication all of a sudden notices the bumps on their arm they were previous oblivious to. Likewise, people seem to not realize that the applications they use change, over time, and you can generally assume that 90% of the time when an app update is installed, it has not substantially reduced the demands it is placing on the hardware. This is a guess but it's worth considering: how much more system resources do you think the 2016 vintage Netflix.app consumes compared to the 2012 vintage? The average user of course would assume it is exactly the same. The Facebook app for iOS is, for example, a complete monster that is doing 1,000 secret little things (20 of which are being A/B/C/D tested), even though the design team tries very hard to keep the Timeline experience as consistent as possible.

 

I'm playing around with an iPad 1 right now, that I updated to the highest allowed version of the os (5.1.1). It is unusable, of course, but I think that is an inevitable consequence of the chip progress (as Liberty says) rather than any decision one way or another on OS upgrade aggressiveness.

[petec]

I agree entirely.  The market gets Apple.  It's just not sure about growth.  And for an innovative tech company if you can't grow then the market will worry about the risk that someone else makes a better mousetrap.  So, you get a low multiple unless you either grow explosively or become a cash cow.  That's what puts me off: I think you have to have significant faith in the "people will always love the software" thesis.  I do have significant faith in that, but even at 10x there is long term downside if I am wrong. 

 

 

 

This is kind of foolish, though. I mean, I get the worry about another mousetrap but the growth concerns seem strange to me. If no one else builds something to take the place of the iPhone, then there is a healthy replacement cycle to the phones, slow growth opportunities as the rest of the world gets richer and further monetization of their existing customer base by selling watches, Apple music subscriptions, cases, larger phones, whatever. A lot of people buy whatever the default is, and for a lot of people, that's Apple.

 

I agree but you're talking two different classes of investors: tech investors who look for the next big thing or at least momentum, and consumer staples investors who are laser-focussed on the risk of a better mousetrap.  Currently I suspect Apple fails to convince either. 

[rkbabang]

For those of you who either own Apple products or know people who do, how strong if the loyalty ? So of ten users of Apple products how many would you say have complete loyalty?  Unless I'm missing something painfully obvious there's a large segment of the population that'll buy Apple products no matter what. 

 

My family has owned tons of ipods over the years my kids (who don't have smartphones) still use theirs daily and both want iPhones.  My  wife hasn't touched our desktop computers since she got her iPad Air (maybe 2 years ago).  As for me I was using my iPod Nano daily until I got my iPhone in September.  Now I use that for audiobooks/podcasts.  I've tried Android devices in the past and have not been impressed, although to be fair they were not high priced devices.  I think Apple has the right amount of functionality, user friendliness and style in their design.  I resisted getting a Mac for years until recently as well, just due to the price and I enjoyed building/upgrading my own machines and setting up Linux as well as Windows, etc.  I didn't like the fact that it wasn't as easy to upgrade a Macs hardware.  But the pace of change for desktop computers seems to have slowed, they now do everything I need them to, and I had no desire to upgrade my 4 year old windows machine. So I thought it was a good time to get an iMac.  I got the 27" i7 version with a 5K display, hoping that I can use it for 5-7+ years without thinking of upgrading.  I won't say that I am tied to Apple for life, but as long as they keep making the easiest to use products, that look the best*, perform among the best, have the most available apps, etc,  I don't see myself switching. 

 

*One advantage of the iMac over my old windows PC is that my wife stopped complaining about how ugly the computer in our study is.  When you walk in our front door you see the dining room to the right and the study to the left so it is literally one of the first things you see.  My wife has always hated "that ugly box on the floor" under the desk and "that eyesore of a black monitor" on the desk and those "wires everywhere".  These complaints got even worse when she stopped using the PC and only used her iPad.  She was constantly asking me if the PC could be moved somewhere else (like the basement), now she likes the way the iMac looks in the study (and the windows machine is now in the basement).  That is a large enough advantage right there to choose Apple.

 

[innerscorecard]

With the possible semi-exception of iOS7, which added a great deal of computationally costly UI elements as part of the ~refresh~, most OS upgrades are well worth their weight in terms of improved functionality, etc.

 

I think a great deal (not all) of the reported negative experiences surrounding OS upgrades are a combination of misattribution and plain old imagination/placebo. I've heard people talk about how their battery life is much worse after -every- -single- upgrade. Of course, this sort of claim is very easy to test and it never seems to get verified. Not that you need data, since if every OS was systematically undermining power efficiency, we should expect to be able to clearly perceive that cumulative effect on even brand new devices with iOS 9 installed.

 

More likely they simply -notice- an accumulated year of gradual battery degradation once something major has been changed, in the same way somebody taking a new anti-psychotic medication all of a sudden notices the bumps on their arm they were previous oblivious to. Likewise, people seem to not realize that the applications they use change, over time, and you can generally assume that 90% of the time when an app update is installed, it has not substantially reduced the demands it is placing on the hardware. This is a guess but it's worth considering: how much more system resources do you think the 2016 vintage Netflix.app consumes compared to the 2012 vintage? The average user of course would assume it is exactly the same. The Facebook app for iOS is, for example, a complete monster that is doing 1,000 secret little things (20 of which are being A/B/C/D tested), even though the design team tries very hard to keep the Timeline experience as consistent as possible.

 

I'm playing around with an iPad 1 right now, that I updated to the highest allowed version of the os (5.1.1). It is unusable, of course, but I think that is an inevitable consequence of the chip progress (as Liberty says) rather than any decision one way or another on OS upgrade aggressiveness.

 

Is IS true that there service availability is extremely confusing, and that was a feature of the more recent OSes. Giving 5 GB of cloud storage is almost worse than giving none - it's so confusing to the average user.

[TorontoRaptorsFan]

I'm a big Apple fan.

 

I don't churn my products as often as others do.

 

My macbook is now 8 years old and counting

My iPad Mini Retina 128g is 2-3 years old

I'm also using an iPhone 6 have no intention of upgrading to the 7 but the battery life is a killer after a year and a half...

[johnny]

Is IS true that there service availability is extremely confusing, and that was a feature of the more recent OSes. Giving 5 GB of cloud storage is almost worse than giving none - it's so confusing to the average user.

 

Agree completely. This and the two-years-running 16gb phone option are I think the biggest a blemishes on Apple's user-advocate record. No excuse for either, just a transparent grab at more revenue and higher overall margins. In fact, now that you've made me think of these things, it is perfectly understandable when average users don't give Apple the benefit of the doubt elsewhere.

[DCG]

Agreed that the fact that they're still selling a 16gb iPhone is ridiculous.

[petec]

Apologies if this has been answered a million times over but this is a long thread to check through!  Can someone explain why working capital is negative?

 

Also a sanity check: am I right that this thing is trading at 5.6x EV/trailing FCF?

 

(96-27)/12?

[Liberty]

Interesting take:

 

http://www.asymco.com/2016/02/16/priorities-in-a-time-of-plenty/

[TheAiGuy]

Apologies if this has been answered a million times over but this is a long thread to check through!  Can someone explain why working capital is negative?

 

Also a sanity check: am I right that this thing is trading at 5.6x EV/trailing FCF?

 

(96-27)/12?

 

Apple is a big buyer/supplier, so presumably it can negotiate faster payment from customers and slower payment to suppliers. Also, if you are considering "deferred revenue" in working capital, then the nature of the software business forces to defer a portion of the revenue Apple receives on a hardware sale b/c of warrantees and software updates.

 

The valuation is debatable -- I would say it depends a lot on how you think of foreign and domestic cash/cashflow. All of the foreign cash/cash flow is inaccessible without paying taxes on it (it can't be used for dividends, stock repurchases or debt repayment) and the domestic cash flow is substantially less than the total "free" cash flow (Domestic FCF is about 40%, or $20B). Apple's debt capacity is pretty high, so they can return a lot more cash to shareholders than Domestic FCF, but the international cash just sits their earning interests, so I'm not sure how "free" it is.

[giofranchi]

Carl Icahn cuts stake in Apple: Filing

 

http://www.cnbc.com/2016/02/16/carl-icahn-cut-stake-in-apple-filing.html

 

Both Icahn and Einhorn are long-term investors in AAPL, therefore it would be interesting to know why they have chosen to sell some.

 

Cheers,

 

Gio

[giofranchi]

Currently I suspect Apple fails to convince either.

 

I agree: Apple is failing to convince investors right now.

 

Still, one thing remains true: it earns 94% of the earnings of the smartphone industry. And mobile data traffic is expected to increase eight-fold over the next five years. Therefore, the smartphone industry as a whole is still growing very rapidly.

My idea is that, when you control practically all the earnings of a fast growing industry, you are in the position to make your products more and more valuable, steadily increasing the gap between you and your competitors. And you don't have to be a genius to do so (a Jobs might be needed to get you in the position where you control 94% of the earnings of a fast growing industry, while a Cook might be enough to use such an advantage wisely).

 

We will see if this is true, or if competition will start eroding AAPL’s profitability. The jury is still out!

 

Cheers,

 

Gio

 

[giofranchi]

Interesting take:

 

http://www.asymco.com/2016/02/16/priorities-in-a-time-of-plenty/

 

Yes, interesting indeed!

 

Thank you for posting,

 

Gio

[DCG]

http://www.apple.com/customer-letter/

 

 

[dabuff]

To be fair, Einhorn and Icahn still have fairly large positions in AAPL (as of 12-31 at least - perhaps they have trimmed their stakes further).

[fareastwarriors]

Race to the top: The Duel between Alphabet and Apple!

http://aswathdamodaran.blogspot.ca/2016/02/race-to-top-duel-between-alphabet-and.html

[DeepSouth]

Currently I suspect Apple fails to convince either.

 

I agree: Apple is failing to convince investors right now.

 

Still, one thing remains true: it earns 94% of the earnings of the smartphone industry. And mobile data traffic is expected to increase eight-fold over the next five years. Therefore, the smartphone industry as a whole is still growing very rapidly.

My idea is that, when you control practically all the earnings of a fast growing industry, you are in the position to make your products more and more valuable, steadily increasing the gap between you and your competitors. And you don't have to be a genius to do so (a Jobs might be needed to get you in the position where you control 94% of the earnings of a fast growing industry, while a Cook might be enough to use such an advantage wisely).

 

We will see if this is true, or if competition will start eroding AAPL’s profitability. The jury is still out!

 

Cheers,

 

Gio

 

" And mobile data traffic is expected to increase eight-fold over the next five years. Therefore, the smartphone industry as a whole is still growing very rapidly."

 

Smartphone units aren't growing anywhere near this level. Smartphone sales are effectively flat in developed countries and China.

 

"My idea is that, when you control practically all the earnings of a fast growing industry, you are in the position to make your products more and more valuable, steadily increasing the gap between you and your competitors."

 

To argue this is to argue that competitors can't access the capital at a reasonable cost needed to compete with Apple's retained earnings. For one, this idea totally breaks down when you shrink the industry down where a large cap could squash the current industry champion (your best argument is really a scale argument rather than profit pool control - they can spread fixed costs of high-end component development over more units). Secondly, apple is mostly competing with Chinese/Korean state sponsored electronics firms with near unlimited access to state subsidized capital.

 

I'd say generating a high ROIC and controlling the earnings in an industry net of a natural/government sanctioned monopoly is a material disadvantage as it will continually entice competitors.