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There's a lot of if's either way. I wouldn't say it's possible and wouldn't say it's impossible, I just wouldn't predicate a position on it. While on one end a medical breakthrough and 100B in sales is theoretically possible, I think Apple's healthcare unit trading for more than twice the valuation of Pfizer is a bit of a stretch...

 

You're right, of course. But a similar argument could have been made 10 years ago: AWS trading for more than twice the valuation of IBM is a bit of a stretch...

 

My point is only that healthcare/wearables is probably the only industry where Apple could get a hit big enough to replace the iPhone. This is a $3.5T industry in the U.S. The odds are low, but you aren't really paying anything for this optionality at current prices.

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Some issues with Apple as I see it.

 

Everyone wants to point to the services business like it's a wonderful separate business growing at 30% but it's the same business as the iPhone. It's like when investors were saying Sears has a nice auto or warranty business. Those businesses aren't worth much if there aren't any stores left. And if the services business for Apple is that amazing then why the heck are they pushing on pricing for the devices. You'd want as many customers on your devices while you collect 30% of the revenue flowing through their app purchases. You don't have to give the phones away but you don't need 90% of the industry hardware profits either. It'd be one thing if they needed to plow all that profit margin back into making the best phones ever to constantly stay ahead of their competition but based on current revenue levels that's totally unnecessary. It doesn't take much as a percent of revenue to stay ahead of the competition.

 

Then there's the whole people get a lot of utility out of their phones so they should be able to charge more. Well I get a lot of utility out of a $5 book but that doesn't mean I want to pay $1000 for the privilege of reading it. It's just a psychological thing. Walking around town with a $2-3k device made of glass that can shatter at any time isn't a good feeling. Much less replacing that every year or two. And phones are at the point where you can just swap out the battery for $50 and it feels brand new. Put on a new case and screen protector for $30. Boom, you have a fresh new phone. Versus spending another $1000 on some marginal improvements.

 

Investors were excited about pricing power and services and Buffett when it was $220 so a lot of that has been priced out of the stock as reality sets back in.  It's such a Mr. Market stock where investors pencil out DCF models as if the iPhone is dying each time the stock dives 40%, and when it's doing well no one thinks we'll get back to the point where people will pull out a declining iPhone DCF model. Which all leads to the biggest issue with Apple, its investor base. It goes from a 10x EPS the iPhone is dying narrative to 18-20x rosy things are great Buffett is buying woohoo cycle every few years. I don't think the business is fluctuating that much.

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Very smart post as usual Picasso.

 

This is probably one of the dumbest things I have heard Buffett talk about to justify his Apple investment:

 

"Then there's the whole people get a lot of utility out of their phones so they should be able to charge more. Well I get a lot of utility out of a $5 book but that doesn't mean I want to pay $1000 for the privilege of reading it."

 

I spend a lot more time in my bed that on my IPhone and would not pay any price for it.

 

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Which all leads to the biggest issue with Apple, its investor base. It goes from a 10x EPS the iPhone is dying narrative to 18-20x rosy things are great Buffett is buying woohoo cycle every few years. I don't think the business is fluctuating that much.

 

Right, although I prefer to see that as a source of opportunity rather than an issue…

 

Good to see you posting again BTW.

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There's a lot of if's either way. I wouldn't say it's possible and wouldn't say it's impossible, I just wouldn't predicate a position on it. While on one end a medical breakthrough and 100B in sales is theoretically possible, I think Apple's healthcare unit trading for more than twice the valuation of Pfizer is a bit of a stretch...

 

You're right, of course. But a similar argument could have been made 10 years ago: AWS trading for more than twice the valuation of IBM is a bit of a stretch...

 

My point is only that healthcare/wearables is probably the only industry where Apple could get a hit big enough to replace the iPhone. This is a $3.5T industry in the U.S. The odds are low, but you aren't really paying anything for this optionality at current prices.

 

But you aren't going to hit big in the healthcare/wearables with hardware. It will be due to some software advancement (likely with AI) if something big happens, and some hardware will simply be a sensor device. And Apple hasn't shown any strength or evidence in that regard.

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Which all leads to the biggest issue with Apple, its investor base. It goes from a 10x EPS the iPhone is dying narrative to 18-20x rosy things are great Buffett is buying woohoo cycle every few years. I don't think the business is fluctuating that much.

 

Right, although I prefer to see that as a source of opportunity rather than an issue…

 

 

It creates the opportunities but it also limits Tim Cook to do things like 'pull an Adobe' or focus on the longer term. He has to manage his shareholder base far more than any of the other $700B public companies. The last time the share price declined 40% there were reports that the board was considering getting rid of Tim Cook if it kept that trajectory. What other competitor puts out a long post on why they missed quarterly expectations. It makes me less optimistic about the long-term position of Apple but I think it also means he'll be a good steward of the short-term and be even more aggressive with share repurchases to maintain EPS or grow it.

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It creates the opportunities but it also limits Tim Cook to do things like 'pull an Adobe' or focus on the longer term. He has to manage his shareholder base far more than any of the other $700B public companies. The last time the share price declined 40% there were reports that the board was considering getting rid of Tim Cook if it kept that trajectory. What other competitor puts out a long post on why they missed quarterly expectations. It makes me less optimistic about the long-term position of Apple but I think it also means he'll be a good steward of the short-term and be even more aggressive with share repurchases to maintain EPS or grow it.

 

You probably have a point there.  I’ve always thought that this could be a very good acquisition for Berkshire for similar reasons.  Unfortunately it’s likely too big for that, but I can actually see it happening if the stock price were to go down enough. 

 

That being said, I do find it reassuring that they’ve managed to maintain their extreme secrecy about their product pipeline despite its (IMO) negative impact on their stock valuation.  That gives me some confidence about their long term focus.

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... What other competitor puts out a long post on why they missed quarterly expectations. ...

 

The shareholder friendly ones. And this one was timely - two ordinary working days into the quarterly business wheel, when it became evident internally.

 

If a huge company like Apple starts to miss it’s numbers, a significant amount of insiders (managers, supply chain specialists, customers, suppliers etc) will know what’s going on and the news will perspire into common knowledge, giving some people an information advantage over others. This likely has already occurred over the last few weeks and it is better to get the facts out to minimize the unfair information advantage. Silicon Valley companies are famously leaky traditionally, but Apple much less so than most others. I hope they keep it that way.

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The bull and bear case in a nutshell:

 

https://www.recode.net/2019/1/6/18171035/apple-samsung-tv-service-strategy

 

Apple is going to sell its Apple TV service on Samsung TVs, because Apple wants to be a service company

Tim Cook can’t just rely on Apple customers anymore — he needs to sell things to people who don’t buy Apple products.

 

 

This reminds me of when iTunes only worked on the mac, then they released a Windows version.  Why not release a Samsung version?  Apple fans will still buy the AppleTV, but people for whom the Samsung smart TV built-in OS is sufficient can still buy stuff from Apple.

 

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Nice tweetstorm here from Steven Sinofsky.

https://twitter.com/stevesi/status/1080972697239277569

 

Thanks. That pretty much matches my opinion. Interesting to compare it to Windows/Office, especially considering Microsoft's recent "renaissance".

 

+1. 

 

The thing to note here is that Apple probably could — if they really wanted to — transition to a different pricing model where they sell their devices at much lower prices and at the same time offer software/service subscription plans that are needed to unlock certain features/functionalities that are particularly useful/desirable.  Now they may or may not do so, but the fact that they have the option to do so suggests to me that one of the better known bear cases — that people will start holding on to their iPhones for much longer and that will eventually kill Apple — is not as strong as it might seem.

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This reminds me of when iTunes only worked on the mac, then they released a Windows version.  Why not release a Samsung version?  Apple fans will still buy the AppleTV, but people for whom the Samsung smart TV built-in OS is sufficient can still buy stuff from Apple.

 

The problem with the compare is that what is -really- going on here is that Apple is harboring some delusional fantasy about being Netflix--they're insisting on dumping billions of dollars into a sub-scale me-too TV content strategy that, for all I can see, is mostly about satisfying the egos of a handful of 60 year old megadorks who are using the "net cash" as a pretext to ~discuss business opportunities~ with Jessica Alba.

 

That's what is troubling about the story, not making content accessible cross-platform. When they made iTunes available on Windows, they did so from a position of strength. It was about expanding the size of a market they were dominating. In this case, they've already lost the fucking game, and now they're desperately trying to salvage something that resembles a defensible position. The problem with their Apple TV strategy is the Apple TV (and the HomePod), and making sure everybody on Earth is able to watch Last App Standing starring Fifty Cent from Google Chromecast will provide zero value to users and zero value to the company.

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This reminds me of when iTunes only worked on the mac, then they released a Windows version.  Why not release a Samsung version?  Apple fans will still buy the AppleTV, but people for whom the Samsung smart TV built-in OS is sufficient can still buy stuff from Apple.

 

The problem with the compare is that what is -really- going on here is that Apple is harboring some delusional fantasy about being Netflix--they're insisting on dumping billions of dollars into a sub-scale me-too TV content strategy that, for all I can see, is mostly about satisfying the egos of a handful of 60 year old megadorks who are using the "net cash" as a pretext to ~discuss business opportunities~ with Jessica Alba.

 

That's what is troubling about the story, not making content accessible cross-platform. When they made iTunes available on Windows, they did so from a position of strength. It was about expanding the size of a market they were dominating. In this case, they've already lost the fucking game, and now they're desperately trying to salvage something that resembles a defensible position. The problem with their Apple TV strategy is the Apple TV (and the HomePod), and making sure everybody on Earth is able to watch Last App Standing starring Fifty Cent from Google Chromecast will provide zero value to users and zero value to the company.

 

Ding, ding, ding. We have a winner.

 

If this was any other company, I think it would be clearer for many to see. Apple is not acting from a position of strength, and they aren't really innovating anymore. Many of the fanboys continue to believe they have a "secret" draw full of ideas and products that are going to be revealed in time; but I don't. This company has done zero to demonstrate they can innovate without Jobs. I mean they wasted god knows how much money, and even with stealing half of Teslas employees, got nowhere with the car. The TV IMO didn't move any needles. Yet people just think "it's Apple, they will innovate"... Yea. Apply that to any other company and you'd be labelled crazy. And what I think is the case now, and has been for a while, is that without Jobs, Apple is basically any other company with a really enviable cash hoard and head start in terms of market share.

 

To their credit, the Airbuds or whatever were classic Apple. A cool little ear piece, that is wildly overpriced, and deviously designed so that the average person likely loses them 2-3 times a year and has to buy more....

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The question of innovation is complicated.

 

They have a few really good products: Watch and AirPods are great. HomePod and TV are terrible. I think longs lean too much into Watch and AirPods as falsification of the innovator's dilemma argument. To me they clearly are inconclusive, because all of these products are accessories to the iPhone, in function if not by form, and so clearly fit the "serving the best current customers" bias that we fear Apple is falling prey to.

 

This is even clear in the way they rhetorically position their results and wave away the reduced reporting: don't worry about ASPs or Units. Worry about ecosystem and services. The street may love this shit, but it falls right into the Christensen trap: let's start thinking about the future of the company in terms of how many Apple Customers there are -right now-, and how we can figure out more and more ways of extracting a few hundred bucks a year from them. We're three years into flat unit sales with very respectable revenue/EPS growth. How is this happening? Easy: they realized that I, Johnny, would pay $1,200 for an iPhone and $1,500 for an iPad. I'm not sure how many RSUs we should be awarding to the geniuses that figured that out, but it's not a long-term path to growth (or even survival) for the company.

 

The most potentially disruptive products are the ones they have a great lead in: Watch and AirPods. It'll be interesting to see over the next 5 years how Watch develops. The bearish expectation Christensen would have is probably something like this: Apple is going to become increasingly organizationally blind (or hostile) to potential Watch developments that buff up the Watch's abilities so much that they have the potential to reduce the "annual Apple spend" of those 200m-or-so "core" Apple customers (think people with like 3+ daily-used Apple products). This is in some sense what is already happening.

 

Again, we can't see what's happening internally, we can only make crude inferences from the very slight observable behavior that exists. Raising prices by ~25% between the 3rd and 4th gen Watch isn't a great sign.

 

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Just note that that last statement about attempting to infer their broader strategic vision from relatively limited observable behavior (basically just pricing and marketing); there are a few other things consistent with this.

 

First, they did the same thing with the 4K generation bump on the Apple TV. Rather than following their own standard pricing practice (new generation at same price, older generation at new reduced price), they created a new higher pricing tier for the 4K.

 

This is actually a lot more powerful than the Watch story, because it's a lot less debatable what's going on here: the Apple TV is not an expensive product to make, and the 4K capability of the new generation didn't burden the device with significant extra costs. This was a pure exercise in elasticity analysis and profit maximization.

 

In the mean-time, while Cupertino were sitting around a spreadsheet trying to figure out where the demand curve intersects the MSRP curve on every secondary product they design, Amazon zerg-rushed 100m Alexa-capable devices into peoples homes. That's because Amazon is -actually- a service company, and not a device company doing a drag performance every three months.

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This reminds me of when iTunes only worked on the mac, then they released a Windows version.  Why not release a Samsung version?  Apple fans will still buy the AppleTV, but people for whom the Samsung smart TV built-in OS is sufficient can still buy stuff from Apple.

 

The problem with the compare is that what is -really- going on here is that Apple is harboring some delusional fantasy about being Netflix--they're insisting on dumping billions of dollars into a sub-scale me-too TV content strategy that, for all I can see, is mostly about satisfying the egos of a handful of 60 year old megadorks who are using the "net cash" as a pretext to ~discuss business opportunities~ with Jessica Alba.

 

That's what is troubling about the story, not making content accessible cross-platform. When they made iTunes available on Windows, they did so from a position of strength. It was about expanding the size of a market they were dominating. In this case, they've already lost the fucking game, and now they're desperately trying to salvage something that resembles a defensible position. The problem with their Apple TV strategy is the Apple TV (and the HomePod), and making sure everybody on Earth is able to watch Last App Standing starring Fifty Cent from Google Chromecast will provide zero value to users and zero value to the company.

 

Ding, ding, ding. We have a winner.

 

If this was any other company, I think it would be clearer for many to see. Apple is not acting from a position of strength, and they aren't really innovating anymore. Many of the fanboys continue to believe they have a "secret" draw full of ideas and products that are going to be revealed in time; but I don't. This company has done zero to demonstrate they can innovate without Jobs. I mean they wasted god knows how much money, and even with stealing half of Teslas employees, got nowhere with the car. The TV IMO didn't move any needles. Yet people just think "it's Apple, they will innovate"... Yea. Apply that to any other company and you'd be labelled crazy. And what I think is the case now, and has been for a while, is that without Jobs, Apple is basically any other company with a really enviable cash hoard and head start in terms of market share.

 

To their credit, the Airbuds or whatever were classic Apple. A cool little ear piece, that is wildly overpriced, and deviously designed so that the average person likely loses them 2-3 times a year and has to buy more....

 

I'm more negative than positive on Apple but AppleTV on Samsung is a small but meaningful market.  The main business is getting commissions when people by streaming apps on your tv and adverts you can charge before an episode starts or when the streamer has no inventory.  Roku has around 20 million users.  ARPU at

$20 a user and is growing platform revenue at almost 100%.  Currently Roku tv is in 25% of smart TVs shipped.  Samsung by itself controls 33% of the Smart TV market.  For a company that's worth more than half a trillion, this may be small fry, but with a large TAM this could be worth some 10 or 20 billion to Apple in addition to expanding the apple ecosystem. I mean one of the problems the executives at apple have to deal with are even though there are plenty good ideas, they are so big, few will move the needle. 

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