AAPL - Apple Inc.

[krazeenyc]

Here's a question, well two questions and a comment:

 

What will drive further ipad/iphone sales from current users (i.e. current iphone/ipad owners)?

 

Is it important for an investment in Apple today that current users upgrade from their iphone 5/ipad 4 to the newest model, or is there a margin for error in this aspect due to opening up China/enterprise markets?

 

The reason I ask is this: I own the latest iphone and ipad. I think they are great. And I treat them well, as I would guess a good majority of customers do. So as a consumer, I simply don't know what else Apple has to offer that will compel me to upgrade to the iphone 6 or 7. Will the iphone 7 cook me dinner? At what point do they make a device that is so good that it just doesn't need to be upgraded if you take care of it? Barring me crushing it, or the battery dying (perhaps Tim Cook will engage in some planned obsolescence?), I just don't see as long of a runway as I did a few years ago.

 

Well in the United States with the subsidy model with regards to the iPhone there is almost no reason not to upgrade. For many people it's basically $0 out of pocket or even cash flow positive when they sell/trade in their old iphone.  The big reason outside of the subsidy to upgrade the iPhone is that newer versions of iOS will be too demanding for old iPhones making them run very slowly.  (As much success as the iPAD has had, I don't view it as nearly as compelling a product but the same OS issue probably applies). 

[Palantir]

I think they will try to boost sales of the iPad by starting to introduce different form factors to bring out different uses in addition to perhaps first party accessories eg Square. I expect a keyboard much like the surface. It's hard to type on an iPad, for example when you are....posting on a message board.  :)

[KCLarkin]

I think they will try to boost sales of the iPad by starting to introduce different form factors to bring out different uses in addition to perhaps first party accessories eg Square. I expect a keyboard much like the surface. It's hard to type on an iPad, for example when you are....posting on a message board.  :)

 

The IBM deal is starting to look much more strategic than I originally thought. On the call, Cook talked about taking iPad enterprise penetration from 20% to 60%. IBM is part of that but there are also pretty strong rumours about better multi-tasking and a larger iPad.

[Liberty]

I expect a keyboard much like the surface. It's hard to type on an iPad, for example when you are....posting on a message board.  :)

 

Here's what I'm typing on right now. Works perfectly:

 

http://goincase.com/shop/incase-origami-workstation-for-ipad-2

[KCLarkin]

What will drive further ipad/iphone sales from current users (i.e. current iphone/ipad owners)?

 

There are a few things that make iPhone a "hardware annuity" business:

- Physical damage

- Hardware obsolescence (e.g. batteries, limited memory)

- Software obsolescence (new features only supported on new devices)

- Ecosystem: New OS only supported on recent models. Software developers tend to only support recent OS, so eventually you are forced to upgrade to keep your current apps

- Subsidies and trade-in programs make it cost-effective

- Rapid hardware innovation (touch id, new sensors)

- Compelling cost/benefit: iPhone replaces your phone, camera, GPS, iPod, watch. There are few objects you can buy that provide so much value per dollar. Especially when you consider that most of the cost of your phone is the data plan, not the device.

- Status symbol

 

Eventually the upgrade cycle will lengthen but likely not significantly beyond 3 yrs.

 

The iPad is weaker on all of the above and I can see 5 year replacement cycles being common. iPad will benefit from higher enterprise and household penetration (e.g. my kids will get their own iPads rather than sharing mine).

 

The other major driver of growth will be software and services sold to the installed base. Software is now a significant chunk of revenue and growing rapidly. In the future, I could see this being 33% of revenue and 40% of profit (assuming saturation of H/W business).

[Palantir]

I think they will try to boost sales of the iPad by starting to introduce different form factors to bring out different uses in addition to perhaps first party accessories eg Square. I expect a keyboard much like the surface. It's hard to type on an iPad, for example when you are....posting on a message board.  :)

 

The IBM deal is starting to look much more strategic than I originally thought. On the call, Cook talked about taking iPad enterprise penetration from 20% to 60%. IBM is part of that but there are also pretty strong rumours about better multi-tasking and a larger iPad.

 

I think it could be a great trial run for an iPad Pro. I expect the iPad line to expand and replace Macs as primary computing devices. It's a great deal for Apple, I'm skeptical on IBM.

[Liberty]

Good article about the IBM-Apple deal, and makes a good argument for why this is a very good deal for IBM:

 

http://stratechery.com/2014/big-blue-apples-soul/

[Guest hellsten]

Good article about the IBM-Apple deal, and makes a good argument for why this is a very good deal for IBM:

http://stratechery.com/2014/big-blue-apples-soul/

 

Really great quote from Jobs' biography:

The company starts valuing the great salesmen, because they’re the ones who can move the needle on revenues, not the product engineers and designers. So the salespeople end up running the company. John Akers at IBM was a smart, eloquent, fantastic salesperson, but he didn’t know anything about product. The same thing happened at Xerox. When the sales guys run the company, the product guys don’t matter as much, and a lot of them just turn off. It happened at Apple when Sculley came in, which was my fault, and it happened when [steve] Ballmer took over at Microsoft. Apple was lucky and it rebounded, but I don’t think anything will change at Microsoft as long as Ballmer is running it.

 

To me this deal is a tiny sign of Apple losing its focus on creating the best possible products.

[KCLarkin]

To me this deal is a tiny sign of Apple losing its focus on creating the best possible products.

 

Thanks for the quote. But it seems opposite to your conclusion though. Presumably if AAPL hadn't partnered with IBM, the best alternative would have been to build an enterprise sales force. This deal allows AAPL to focus on creating products. IBM focuses on selling to enterprise.

[Liberty]

To me this deal is a tiny sign of Apple losing its focus on creating the best possible products.

 

Thanks for the quote. But it seems opposite to your conclusion though. Presumably if AAPL hadn't partnered with IBM, the best alternative would have been to build an enterprise sales force. This deal allows AAPL to focus on creating products. IBM focuses on selling to enterprise.

 

Agreed. Apple cleverly avoided having to build a big enterprise sales organization, which is very different from a consumer organization because you need to customize everything for every big client and give them a different kind of support. They're keeping focus on the products and letting IBM do that other stuff.

[Guest hellsten]

To me this deal is a tiny sign of Apple losing its focus on creating the best possible products.

 

Thanks for the quote. But it seems opposite to your conclusion though. Presumably if AAPL hadn't partnered with IBM, the best alternative would have been to build an enterprise sales force. This deal allows AAPL to focus on creating products. IBM focuses on selling to enterprise.

 

Agreed. Apple cleverly avoided having to build a big enterprise sales organization, which is very different from a consumer organization because you need to customize everything for every big client and give them a different kind of support. They're keeping focus on the products and letting IBM do that other stuff.

 

Yes, I agree that the deal sounds good on paper (after removing all the bullshit from the press release). However, I think we must not automatically assume this deal is good (second-level thinking). Why does Apple need to go after the enterprise market? Maybe Tim Cook is acknowledging that Apple needs less demanding customers who buy regardless of product quality.

 

I guess I'm just disappointed that Tim Cook is no Steve Jobs. Steve obsessed over every detail of Apple's products. Tim Cook obsesses over every detail of Apple's operations. It feels like Steve put the company on autopilot and Tim Cook is simply keeping the passengers happy until the airplane runs out of fuel. Steve Ballmer and many other tech executives have showed us this can work well for years, until it doesn't... Anyway, Apple will most likely do just fine in the (near) future.

[Viking]

I am very happy with the results Apple posted; moving forward, the stock will now be driven by the new product cycle and the timing of when new products are released.

 

Regarding the earnings report:

- iPhone sales: it is impressive to me that Apple was able to show solid growth given the iPhone 6 launch is just around the corner. Apple said on the conference call that rumours regarding the iPhone 6 did impact sales. And the guidance they provided for the current quarter was quite good given the number of people who will delay purchasing a new phone until the iPhone 6 is launched. This really sets oct-dec to be a very strong quarter for Apple.

- iPad: yes, sales were lower than expected. The reason to me is pretty obvious: I think the upgrade cycle is longer than people realize (3 to 4 years). The good news is Apple continues to own the premium segment of the category. Sales may go sideways until Apple offers up a new form factor or some new innovation. I am fine with that.

 

The most important takeaway is Apple continues to own the premium segment of mobile (smartphones and tablets) and they look poised to increase their lead over the next 6 months. Mobile is the category where all the growth is.

 

- Mac: crazy good quarter, especially given all the industry 'experts' were calling for Apple to under perform the PC category this quarter. The key will be if they can continue double digit growth moving forward.

 

When I weave it all together I love where Apple is today and i am looking forward with great anticipation to see what the launch this fall: 4.7 & 5.5" iPhones, larger ipad, wearables, improved TV/gaming puck, payments. Will they make Safire and liquid metal breakthroughs? Who knows. Lots of exciting potential.

 

My challenge right now is trying to come up with a fair valuation for the company. Back when the stock was trading below $450 it was pretty obvious that the stock was cheap. With it now trading close to $700 ($100 split adjusted) it is not nearly as cheap. However, 'the story' has also gotten much better for Apple over the past 16 months: GM has stabilized, earnings are once again growing, new categories are coming and Samsung has under performed. I do not think the stock is expensive at current levels. I think the story will continue to get better in the coming months; there is a good chance we could see another 30% upside in the shares even from current levels (over the next 12 months). Interesting times.

 

 

 

[Liberty]

Yes, I agree that the deal sounds good on paper (after removing all the bullshit from the press release). However, I think we must not automatically assume this deal is good (second-level thinking). Why does Apple need to go after the enterprise market?

 

So you're asking, why do they need to make more money?

 

Because money is nice?

 

They're already in the enterprise very broadly, but not as deep as they could be. This should help them go deeper and sell a lot more devices and make services revenues. Not sure how this can be spun as being bad, especially since they're not taking their eye off the ball but partnering with someone who's already good at that stuff.

 

Maybe Tim Cook is acknowledging that Apple needs less demanding customers who buy regardless of product quality.

 

This doesn't even make enough sense to be worth answering.

 

I guess I'm just disappointed that Tim Cook is no Steve Jobs. Steve obsessed over every detail of Apple's products. Tim Cook obsesses over every detail of Apple's operations. It feels like Steve put the company on autopilot and Tim Cook is simply keeping the passengers happy until the airplane runs out of fuel. Steve Ballmer and many other tech executives have showed us this can work well for years, until it doesn't... Anyway, Apple will most likely do just fine in the (near) future.

 

I totally disagree with all this. Steve Jobs was a great editor and a genius, but he didn't do any of it single-handedly, and some of Apple's biggest successes were despite Steve Jobs (he didn't want to put iTunes on Windows, which would've made the iPod stillborn and there probably would never have been an iPhone without that early success...).

 

Tim Cook doesn't pretend that he's a designer. Jony Ive (Steve Jobs' soulmate and the guy who actually designed the stuff that Steve Jobs then critiqued) is still there and has more power than ever within the company, along with his team of designers. Most of the engineering team is still there and they can attract top notch talent. But most importantly, they have kept a strong culture that is focused on the right things - a better than ever in many ways, as we've seen at the last WWDC that blew ever geek's mind by doing more at the same time than ever before - and their products are better than ever (what is worse than early versions?).

 

Are you one of those people who thinks Steve Jobs constantly came out with revolutionary new product categories all the time? Because the iMac was late 90s, the iPod early 2000s, then the iPhone was 2007, and iPad 2010. We're not even late by the old schedule when it comes to entering new categories.

[Guest hellsten]

So you're asking, why do they need to make more money?

 

Sorry, I was thinking out loud. I was questioning the deal (IBM + Apple = enterprise success). I will continue to do so as an exercise in second-level thinking.

 

Are you one of those people who thinks Steve Jobs constantly came out with revolutionary new product categories all the time? Because the iMac was late 90s, the iPod early 2000s, then the iPhone was 2007, and iPad 2010. We're not even late by the old schedule when it comes to entering new categories.

 

No, I'm one of those women who thinks Steve was irreplaceable. RIP.

[Liberty]

Sorry, I was thinking out loud. I was questioning the deal (IBM + Apple = enterprise success). I will continue to do so as an exercise in second-level thinking.

 

I think I just don't understand what it is that you're questioning, so maybe you can elaborate a little bit on what you're thinking?

 

The way I see it, the enterprise is a huge, huge market. It's not Apple's traditional market, and they're not set up to target it. But even without trying too much, their consumer devices are so desirable that people in the enterprise want them; problem is, most big companies want a "solution" package with devices, support, customized software that connects into their various processes, auditing needs, security needs, certifications, etc, and this requires a very different set up than what Apple has. By joining forces with IBM, they get all the pieces that they were missing for free and suddenly their devices now meet the expectations of the enterprise market for a lot more things than they did thus far.

 

When Tim Cook talks about penetration, he means that even if iPhones and iPads are in 98% of the fortune 500, there's huge growth available if you go from 20% of employees using these devices to 60% or whatever.

 

No, I'm one of those women who thinks Steve was irreplaceable. RIP.

 

I do agree with that. There won't be another Steve Jobs. But i don't think it means that Apple can't be great. In fact, it's not because Steve was the perfect guy for when Apple was the scrappy underdog that he would be great to lead Apple as what it is today (being arrogant when you are small isn't perceived the same as when you are gigantic).

 

Steve Jobs can't be replaced, but thankfully he wasn't doing it all at Apple and the people who surrounded him are still there. Also, part of his genius was designing the company itself, and it's culture. That can survive him. Maybe not eternally, but so far I think the company has gotten better in many ways.

 

I think people underestimate Tim Cook tremendously. The "he's Apple's Steve Ballmer" meme that everybody repeats is way off base, IMO. Go listen to the interview he did last year at the All Things D conference and tell me that's what Ballmer is like..

 

It's a bit like Buffett will never be replaced, but part of his genius is finding talent, teaching others, and designing Berkshire so that it can keep going without him, at least for the foreseeable future.

[ni-co]

No, I'm one of those women who thinks Steve was irreplaceable. RIP.

 

I do agree with that. There won't be another Steve Jobs. But i don't think it means that Apple can't be great. In fact, it's not because Steve was the perfect guy for when Apple was the scrappy underdog that he would be great to lead Apple as what it is today (being arrogant when you are small isn't the perceived the same as when you are gigantic).

 

Steve Jobs can't be replaced, but thankfully he wasn't doing it all at Apple and the people who surrounded him are still there. Also, part of his genius was designing the company itself, and it's culture. That can survive him. Maybe not eternally, but so far I think the company has gotten better in many ways.

 

I think people underestimate Tim Cook tremendously. The "he's Apple's Steve Ballmer" meme that everybody repeats is way off base, IMO. Go listen to the interview he did last year at the All Things D conference and tell me that's what Ballmer is like..

 

I agree. What AAPL has lost is a visionary. However, what most people (especially analysts) don't get is that it doesn't need one to continue succeeding. There is always this implication that AAPL needs to have more great innovations leaps ("next big things") to stay on top. AAPL doesn't need to create "next big things" to prosper. What do people want? That this company grows to the moon? There are tons of hugely successful companies out there which never even created one "big thing", but are very good at executing by improving or innovating in small steps. This is the only thing AAPL really needs to do: execute. In other words: focusing on its customers and creating very good products for them. In the consumer tech products space, AAPL is already by far the best at this and there is no doubt in my mind that they can continue executing under Tim Cook and Jony Ive.

 

Look at the Mac for example. The Mac has gained market share for 31 out of the last 32 quarters – this is not because of innovation leaps, this is only execution. Tim Cook is an executor par excellence – he was when he was COO and he still is today. And that's exactly why Steve Jobs chose him to be his successor.

[ragu]

I think people underestimate Tim Cook tremendously.

 

FWIW, I think this is likely true. 

 

Here's a guy that Jobs says "is not a product person" (from the Isaacson bio). Yet, he thought he was the right man to be the next CEO of Apple.

 

After the Sculley disaster, it says a lot about Cook that Jobs picked him inspite of that limitation.

 

Best,

Ragu

[rmitz]

I think it could be a great trial run for an iPad Pro. I expect the iPad line to expand and replace Macs as primary computing devices. It's a great deal for Apple, I'm skeptical on IBM.

 

One thing that I’m not sure people talk about very much is with these options, I find it much harder to figure out which one I would want to buy, based on the different sizes and so forth, which makes it easier to defer upgrades for a longer period of time...

[Palantir]

^Buy more than one of them.  8)

[Liberty]

I think people underestimate Tim Cook tremendously.

 

FWIW, I think this is likely true. 

 

Here's a guy that Jobs says "is not a product person" (from the Isaacson bio). Yet, he thought he was the right man to be the next CEO of Apple.

 

After the Sculley disaster, it says a lot about Cook that Jobs picked him inspite of that limitation.

 

That's why Jony Ive was given so much power within the company. It's a bit like how Buffett wants his role to be split between different people after he's gone. Except that in this case, Ive was already there doing much of the work in cooperation with Jobs, so we already know how good he is.

 

I recommend the recent biography of Ive for those interested about him. He doesn't reveal a ton about himself and is kind of media shy, so it's a good place to learn more about how he operates and where he's coming from (early career, approach to design).

[Viking]

The enterprise segment is usually very slow to change. Tim Cook has talked about Apple's presence in enterprise many times. He is now admitting that they need to improve their penetration. The deal with IBM will help sell more iPhones, iPads and Macs. A secondary benefit is as you invest and make inroads into enterprise the business is more like an annuity as customers will stay with Apple products. As Apple grows in enterprise this should increase Apple's market PE multiple (and share price).

 

One of the big reasons that Apple sells at a below market PE multiple is their business is largely consumer focused and the view is this segment is fickle and may dump Apple products overnight should something else come along that catches their fancy more. I think the Apple ecosystem is much stickier than analysts realize, and it is getting more sticky every year.

 

Here is what Ben Thompson has to say about the IBM deal: http://stratechery.com

[rmitz]

The iPad is weaker on all of the above and I can see 5 year replacement cycles being common. iPad will benefit from higher enterprise and household penetration (e.g. my kids will get their own iPads rather than sharing mine).

 

The other major driver of growth will be software and services sold to the installed base. Software is now a significant chunk of revenue and growing rapidly. In the future, I could see this being 33% of revenue and 40% of profit (assuming saturation of H/W business).

 

5 years seems excessively high.  CPU is still very rapidly evolving on the tablets, with applications rushing to take advantage.  Anecdotally, I plan on replacing my iPad 3 (Only released 2.5 years ago!) with whatever comes out in the fall.

 

I haven’t upgraded thus far because it hasn’t been compelling, but the CPU is showing its age these days.  I had upgraded immediately from the ipad2 to the 3 due to the retina display, but I consider that to be unusual going forward.

 

That said, these devices still have usability for certain things over time.  My old iphone 3GS is used as a white noise generator for the toddler, and it also still works great with netflix and youtube.  It would drive me bonkers as a primary device due to speed (and other features), though.  I also know many people who have repurposed their original iPads into niche fixed uses, like mounting to a wall to provide a custom interface to home automation stuff, etc.

[rkbabang]

The iPad is weaker on all of the above and I can see 5 year replacement cycles being common. iPad will benefit from higher enterprise and household penetration (e.g. my kids will get their own iPads rather than sharing mine).

 

The other major driver of growth will be software and services sold to the installed base. Software is now a significant chunk of revenue and growing rapidly. In the future, I could see this being 33% of revenue and 40% of profit (assuming saturation of H/W business).

 

5 years seems excessively high.  CPU is still very rapidly evolving on the tablets, with applications rushing to take advantage.  Anecdotally, I plan on replacing my iPad 3 (Only released 2.5 years ago!) with whatever comes out in the fall.

 

I haven’t upgraded thus far because it hasn’t been compelling, but the CPU is showing its age these days.  I had upgraded immediately from the ipad2 to the 3 due to the retina display, but I consider that to be unusual going forward.

 

That said, these devices still have usability for certain things over time.  My old iphone 3GS is used as a white noise generator for the toddler, and it also still works great with netflix and youtube.  It would drive me bonkers as a primary device due to speed (and other features), though.  I also know many people who have repurposed their original iPads into niche fixed uses, like mounting to a wall to provide a custom interface to home automation stuff, etc.

 

I have an iPad 3 as well.  It was my first tablet.  I will not be upgrading with whatever comes out this fall however.  I only use my iPad for email/websurfing/viewing pictures/videos/etc.  the iPad 3 does all of those sufficiently and the retina screen is good enough as well.  I don't see a reason to upgrade.  Then again, my wife has been using my iPad a lot, so I have to admit the thought of just giving it to her and buying myself another one has crossed my mind. That might not mean I upgrade to the new one this fall however, because if the new one comes out and the current iPad Air is still available at a reduced price it will be tempting to pickup an older model or even search craigslist for a used iPad 3/4/Air from people like you who are upgrading.  In short, I don't see what I would need a faster processor for in an iPad yet.  If I was using it for a computer replacement it wouldn't be sufficient (and the new one this fall surely won't be either), but to surf the web it is fine as it is.

 

[Liberty]

My first iPad was the 3 (first retina model), and I upgraded to the Air when it came out. It totally changed how I use it. If you guys with 3s haven't tried the Air yet, I suggest you give it a try (or the next one will be even better, I'm sure). Reading the specs on paper doesn't do it justice. My 3 was really useful, but it always felt kind of like a secondary computing device. The Air is so much lighter and faster, that makes it a lot more useful and it's now a primary computing device for me. I got an Origami keyboard support thingy for it with an Apple wireless keyboard and the combo has replaced my laptop and it's the only thing I use when not at my Mac Pro workstation (I'm writing this on the iPad Air right now).

 

I use the iPad so much now (reading ebooks, 10K/Qs, web stuff, CC transcripts, listening to audio of calls, RSS feeds, Twitter, email, podcasts, writing notes in investing journal, listening to streaming radio (mostly New Orleans Jazz public radio, if you're curious), etc) that I'm thinking about upgrading this year too, since a faster CPU and more RAM would improve the experience further, and any improvement to something you spend hours on every day is worth a lot. Any new features on top of that (fingerprint sensor, etc) would just be a bonus.

[gfp]

Liberty - you listen to WWOZ?