AAPL - Apple Inc.

[Liberty]

The main reason why it makes sense for Apple to be looking at the car space right now is because the industry is at an inflection point because technology is about to turn the product into a general purpose computer rather than a specialized device (like pre and post 2007 phones), and because their expertise can make a difference (almost no car has truly great design and user experience and customer service, or is a good computing platform).

 

It's one of those rare times when the advantages of the incumbents are diminished, and can even be anchors, and when new things that they are not very good at will become crucial (software, cloud services, user experience, etc). All the expertise at making the hundreds of parts in gasoline engines and transmissions and stamping steel won't be worth as much on aluminum EVs, and all the billions sunk in old tech will hold many back (psychologically, if nothing else) from fully committing to the future techs.

 

I think there's a decent probability that Musk sticks around until the Model 3 is on sure footing and then sells the company to Apple or Google. Probably Apple, because Musk's plan was never to be CEO of Tesla for this long (he'll stay at SpaceX) and all he wants is for his dream of electric cars to live on -- Apple is proving to him with project Titan that they are serious about it, and Tesla and Apple share more DNA than Tesla and Google (Google has great engineering, but not so much the design and product focus that Tesla and Apple have, and Musk could never live with himself if Google bought Tesla and eventually made goofy Googly awkward EVs...).

 

In fact, I think there's a possible future where Apple's cars are all sold under the Tesla brand (kind of like Beats kept its branding). Tesla is such a valuable brand that they'd keep it for sure.

 

I'm sure that once the transition to EVs and autonomous cars is done, most of the industry will be low-margin, but if Apple can stay differentiated at the high end, I think it could make very nice margins more similar to BMW and Porsche (maybe even better since they'll be even more differentiated by the software ecosystem/integration with other products) than Hyundai and Ford... If it goes well, anyway.

 

Just speculation, of course. It could go many other ways.

[Picasso]

Completely agree with Liberty.  Tesla has laid out a road map that Apple could easily expand on. 

 

When I switch from my Model S to my wife's ICE, it's like going from the iPhone back to a flip phone.  It seriously sucks.  I feel way less safe, have to deal with a car that isn't nearly as responsive and just lurches around, less room to put stuff in the car, super noisy, etc.  I don't think the car business has to be as bad as investors make it out to be.  We're just used to seeing a crappy business model around a handful of entrenched players.

[Junto]

Completely agree with Liberty.  Tesla has laid out a road map that Apple could easily expand on. 

 

When I switch from my Model S to my wife's ICE, it's like going from the iPhone back to a flip phone.  It seriously sucks.  I feel way less safe, have to deal with a car that isn't nearly as responsive and just lurches around, less room to put stuff in the car, super noisy, etc.  I don't think the car business has to be as bad as investors make it out to be.  We're just used to seeing a crappy business model around a handful of entrenched players.

 

Agree with you both, there is opportunity here for $AAPL.

[arcube]

Don't know if it has been posted before but just saw this.

 

Apple Veteran Overseeing Electric-Car Project Leaving Company

 

http://www.wsj.com/articles/apple-veteran-overseeing-electric-car-project-leaving-company-1453505241

[Liberty]

https://www.apple.com/pr/library/2016/01/26Apple-Reports-Record-First-Quarter-Results.html

 

https://www.apple.com/pr/pdf/q1fy16datasum.pdf

 

This one shows the currency impact:

 

https://www.apple.com/pr/pdf/q1fy16supplementalmaterial.pdf

 

About 5 billion lower than would be because of FX. Revenue would be up 8% from the previous year's blockbuster quarter in constant currency... And that with a much weaker economy/macro picture than last year. Not too bad.

 

Some nice graphs here:

 

https://sixcolors.com/post/2016/01/apple-q1-2016-results-live/

 

Highest iPhone ASP ever (691) despite big negative FX impact. Impressive.

[Palantir]

iPad looks like it is dying.

[Liberty]

iPad looks like it is dying.

 

Cannibalized by larger phones, and longer replacement cycle. Apple still makes most of that money. Draw a straight line from launch to now, it would still be one of the fastest growing and biggest businesses in the world as a standalone. It kind of went gangbuster out of the gate with no competition and tiny phones. Hopefully it gets back to growth after maturing a bit and differentiating (more multitasking capabilities and accessories?) .

[Jurgis]

My Brier score just hit the dust: https://www.gjopen.com/questions/47-will-apple-sell-more-than-75-million-iphones-in-its-december-quarter  :'(  :'(  :'(  ;)

[TheAiGuy]

iPad looks like it is dying.

 

Pfft. No... Sales are falling of a cliff. Shitty quarter.

[Viking]

Here are some thoughts after listening to the conference call:

1.) currency is impacting results in a significant way; this is not new news and all multinationals are experiencing similar issues. The headwinds will likely continue the rest of this year.

2.) price increases (in countries with weak currencies) are also taking a bite out of unit sales.

3.) weak economies: I was surprised to hear Apple make such strong statements on global economic weakness... they sounded a little scared...

4.) lower iPhone unit sales are coming: last year the larger screen iPhone 6 and 6 plus was an abnormally good year for sales, largely due to pent up demand. I was thinking that Apple would be able to match last years number in unit sales; not anymore. Clearly sales of iPhone in fiscal 2016 are going to be lower than fiscal 2015. The next question then becomes what will happen to iPhone units in fiscal 2017 (is lower sales in 2016 the start of a trend)? I don't think so but I have been wrong before (just once! :-).

5.) iPad sales have not found a bottom yet

6.) other category and services is doing very well; they are just smaller segments right now

7.) interesting to see Apple talking about services segment; a little desperate or is this foreshadowing some new announcement (TV bundle etc).

 

It will be very interesting go see where the stock price goes from here. It is trading an an 11PE (under 9 net of cash); however, earnings estimates will likely come down to show flat or even falling earnings for fiscal 2016 (compared to fiscal 2015). Great, well managed company with wide moat. Lots to digest.

 

[giofranchi]

4.) lower iPhone unit sales are coming: last year the larger screen iPhone 6 and 6 plus was an abnormally good year for sales, largely due to pent up demand. I was thinking that Apple would be able to match last years number in unit sales; not anymore. Clearly sales of iPhone in fiscal 2016 are going to be lower than fiscal 2015. The next question then becomes what will happen to iPhone units in fiscal 2017 (is lower sales in 2016 the start of a trend)? I don't think so but I have been wrong before (just once! :-).

 

This is also the question I ask: is it a short term problem, or the smartphone industry has peaked? I tend to believe it is just short term: it is estimated that by 2020 34 billion devices will be online (http://uk.businessinsider.com/34-billion-devices-will-be-connected-to-the-internet-by-2020-2016-1)… It is difficult to think the smartphone industry is declining from here.

 

If the smartphone industry is not in a secular decline, AAPL will do fine: it controls 94% of the industry earnings, and to control practically all the earnings of the industry you compete in is the strongest competitive advantage there is.

 

Cheers,

 

Gio

 

[giofranchi]

Pfft. No... Sales are falling of a cliff. Shitty quarter.

 

We know you have lofty expectations for AAPL future business results (because you have said so). Could you share some details of your thesis with the board?

 

Thank you,

 

Gio

[ni-co]

3.) weak economies: I was surprised to hear Apple make such strong statements on global economic weakness... they sounded a little scared...

 

Yes, this is what I picked up, too. – Even in Cook's prepared remarks:

 

We're seeing extreme conditions—unlike anything we've experienced before—just about everywhere we look. Major markets including Brazil, Russia, Japan, Canada, southeast Asia, Australia, Turkey, and the Eurozone have been impacted by slowing economic growth, falling commodity prices, and weakening prices.

 

And later in reply to an analyst:

 

We're in an environment now that is dramatically different from a macroeconomic point of view than last Q2: from a currency point of view, from the level at which we've had to adjust pricing in several of these markets, and sort of the overall malaise in virtually every country in the world.

 

http://www.imore.com/tim-apples-ceo-q1-2016

[Palantir]

iPad looks like it is dying.

Cannibalized by larger phones, and longer replacement cycle.

 

But iPhone growth has also slowed. If it was simply cannibalization, then we'd see growth in iPhones mirror declines in iPad. Instead this is a substantial 25% YoY decline, despite the addition of a new, higher priced product (Pro).

[Liberty]

iPad looks like it is dying.

Cannibalized by larger phones, and longer replacement cycle.

 

But iPhone growth has also slowed. If it was simply cannibalization, then we'd see growth in iPhones mirror declines in iPad. Instead this is a substantial 25% YoY decline, despite the addition of a new, higher priced product (Pro).

 

Some people who bought a larger phone last year didn't buy/replace an iPad this year. But there's no doubt about it, the iPad business is definitely challenged. The question remains, is it readjusting after a first few years that were unnaturally strong, making the comparison look bad, but at some point it'll stabilize and start growing again, or is it some terminal decline that just won't stop. I doubt tablets are dying as a category, and within the category the iPad dominates the premium segment, so I think the decline will stop at some point.

[boilermaker75]

iPad looks like it is dying.

Cannibalized by larger phones, and longer replacement cycle.

 

But iPhone growth has also slowed. If it was simply cannibalization, then we'd see growth in iPhones mirror declines in iPad. Instead this is a substantial 25% YoY decline, despite the addition of a new, higher priced product (Pro).

 

Some people who bought a larger phone last year didn't buy/replace an iPad this year. But there's no doubt about it, the iPad business is definitely challenged. The question remains, is it readjusting after a first few years that were unnaturally strong, making the comparison look bad, but at some point it'll stabilize and start growing again, or is it some terminal decline that just won't stop. I doubt tablets are dying as a category, and within the category the iPad dominates the premium segment, so I think the decline will stop at some point.

 

I have had an iPad for several years. I use it as a presentation device when I teach. I will soon be getting a second iPad, the Pro. The only thing that has delayed me is getting a chance to try out the pencil first.

[DCG]

They still sold more iPads than Macs.

 

 

The iPhone is my main concern. How do you innovate if to the point where people will continue to upgrade every 2 years not that the screen size changes are maxed out? There are obviously improvements that can be made with things like battery life, but it will take more than that to keep people on a 2-year upgrade cycle.

[giofranchi]

I have had an iPad for several years. I use it as a presentation device when I teach. I will soon be getting a second iPad, the Pro. The only thing that has delayed me is getting a chance to try out the pencil first.

 

I think the iPad Pro is a very good teaching device. And AAPL has clearly gone a long way in that direction, which much further to go.

 

Cheers,

 

Gio

 

[giofranchi]

The iPhone is my main concern. How do you innovate if to the point where people will continue to upgrade every 2 years not that the screen size changes are maxed out? There are obviously improvements that can be made with things like battery life, but it will take more than that to keep people on a 2-year upgrade cycle.

 

Healthcare at least is a field in which there is still lots of room for improvement imo.

 

Cheers,

 

Gio

[DeepSouth]

 

 

If the smartphone industry is not in a secular decline, AAPL will do fine: it controls 94% of the industry earnings, and to control practically all the earnings of the industry you compete in is the strongest competitive advantage there is.

 

 

You keep saying this and I couldn't disagree more. There are competitive advantages so much stronger than earnings dominance in an industry. Local monopoly (or some other strong scale advantage), IP monopoly, or a strong network effect are all much better forms of competitive advantage. Hell, just within smartphones alone BBRY probably owned 80%+ of the industry's earnings just 10 years ago. Amazon didn't have too much of a huge problem destroying retailer after retailer who controlled the earnings of their retail niche.

[Picasso]

Apple shareholders are just unreasonable.  I saw someone on Seeking Alpha (oh god why did I have to read some of those comments *face palm*) saying that Apple "only" needs $471 billion of after-tax cash to repurchase all their stock over the next ten years.  Are you freaking kidding me?  Do you know how hard it is to earn that much cash after taxes?  There is so much of this with the shareholder base, a classic "this time is different."

 

This stock reminds me of DE or NOV.  A PE10 gave you some crazy 40x multiple even though it traded for 10x ttm.  DE even put out a repurchase program for 30% of all their shares outstanding.  A lot of good that has done....

 

And I hate all this ex-currency BS.  No one was ex'ing out the currency impact when it was working in Apple's favor.  These currency impacts also tell you what is going on with the rest of the world; half the world is in recession so taking out currency impact makes things look better than they are. 

 

History says that buying Apple here is buying at the wrong part of their cycle.  That said, haircut profits by 30% and add in repurchases and you're probably looking at 14-15x EPS in a worst case scenario over the next few years.  Hardly the end of the world but I don't see anyone approaching it that way.  Just a lot of investors upset this doesn't trade for market multiples.

[giofranchi]

This stock reminds me of DE or NOV. 

 

Imo the iPhone business is / has been the best business in the world. I would not compare it to neither NOV nor DE. Therefore the question I ask is not about AAPL stock multiple, but about the iPhone business: is it the best business out there still, or those days are gone forever? If you think the latter is true, why?

 

Cheers,

 

Gio

 

[Viking]

Apple owns the high end market segments in the following product categories: smartphones, tablets, lap tops, desktops, watch and tv. Their moat versus the competition is increasing.

 

The current challenge to their business is replacement cycle. Tablet sales are very weak year over year because people are holding on to them for much longer than anticipated; the replacement cycle is now likely 3 or 4 years. What happens with the smartphone replacement cycle will be key moving forward. If the iPhone replacement cycle lengthens (even by months) it will make top and bottom line growth a challenge for Apple in the near term. Unfortunately we will not have the answer for another 12 to 24 months.

 

Fortunately, with the shares trading at $95 the market looks like it is pricing in iPhone as a no growth business moving forward. Should shares decline below $90 then the market will be pricing in iPhone as a declining business moving forward. I think the market is too pessimistic, but that could be said for many companies tight now (i.e. large US banks). Interesting times.

[mals]

 

Imo the iPhone business is / has been the best business in the world. I would not compare it to neither NOV nor DE. Therefore the question I ask is not about AAPL stock multiple, but about the iPhone business: is it the best business out there still, or those days are gone forever? If you think the latter is true, why?

 

 

Agree. And as Viking points out - Apple owns the high end segments and its customers love the product and the service - not withstanding the high price. Perhaps many don't mind because it gives the buyers a status symbol as well.

 

Big question is whether the smartphone innovation has peaked. May be so and that would be a problem long term. But it does not appear to me that the smartphone has done better than DSLRs or professional movie cameras yet, its battery still does not last a whole day for many, it still does not talk to the car yet, Siri is still not good enough, health applications supported by suitable supporting devices can increase. I am sure I missed out a lot.

 

Can Apple stock price go down further in the next year - sure. And that perhaps makes,a bad stock for professional money managers who do not want to face the risk of another bad year is 2015 was not very good.

 

With that said:

 

Ask an iPhone user if they are willing to use another phone, and the answer is a vehement no. So they will upgrade - frequency may slow down.

Can that answer change in the future - sure. But I can tell you that entrenched Apple users will allow Apple to catch up if there is a smartphone innovation that Apple has not yet incorporated.

 

Will the international headwinds always be so - likely not. Apple leadership appears to show the willingness to suffer through the slow markets by continuing to invest in those market - India and China and perhaps others. Long term it should work out for Apple.

 

So for a patient owner of the business, I think it may not be bad outcome to own Apple.

- the best brand in the world that delivers on customer satisfaction,

- is investing heavily in R&D,

- focuses on design unlike competitors

- has retail outlets to help consumers adopt the product - I have seen 8 people sessions where consumers learn to use the Apple watch (can others even deliver that support?)

- has a good track record of at least incremental innovation

- and is reasonably valued - where the market expects revenue to fall (Certainly does not expect growth)

 

[johnny]

The replacement cycle AND cannibalization defenses on iPad don't actually do the explanatory work they need to do. Unless of course by "expanding replacement cycle" we mean that the replacement cycle is expanding at the pace of one year per year, which would be fully explanatory and also imply an endpoint of zero sales. But the iPad drop off is just too large to be seriously explained by either. And anybody who actually uses the iPad a lot should be able to come up with a qualitatively more satisfying explanation, I think.

 

Apple has so far tried to take a middle of the road path to iPad, mostly be chaining it to iOS with almost no feature differentiation. This has created a sort of Evil Goldilocks problem: the device is drastically overserving 80% of tablet customers (who only want to watch Netflix), and critically underserving a lot of potential tablet consumers who are still waiting on the sidelines because they know (or luckily guess) that they can't get done what they need to get done on the device.

 

The iPad Pro seems to be some mild acknowledgement of this, and in that sense it is a very disappointing product. They seem to get that people want a "better, more powerful" iPad, but they seem also to be oblivious to the fact that software is the bottleneck, not the clockspeed on the CPU cores.

 

I've been trying to think of an analogy to describe my Pro experience, and one just came to me: using the iPad Pro with a keyboard feels like you're running some c.2008 Cydia-obtained OS hack coded by a talented Norwegian 14-year-old. That is, you simultaneously think "This is how it should be," and "This is fucking terrible." It is like using multitasking hacks in iOS3. Except in the case of multitasking hacks, you knew why Apple didn't support it: the CPU efficiency and battery life simply weren't where they needed to be. There was a tradeoff, and you could see the case for their decision.

 

There are a lot of things in the power/ease-of-use debate over iOS that are indeed questions of values and tradeoffs. But they released a new iPad, pitching it as a productivity tool. They paired it with a special keyboard that they spent 20 minutes in a keynote gushing over. All of this suggests they've decided maybe keyboards on the iPad could be a good idea. And then you boot up the device and see that apparently one engineer spent thirty minutes making sure that iOS could barely recognize what the hell was going on when a keyboard connected, and then called it a day.

 

I don't mean to suggest that this is specifically why iPad is failing, I just think it is demonstrative of the fact that Apple doesn't quite have a handle on what the hell they're doing with it. Or they are just massively constrained. In this sense the iPad actually suffers for sharing the same OS as the iPhone. Anybody in the organization who has the technical ability to "improve the iPad" on the software side is going to be sucked into iPhone features that are rationally prioritized well above my keyboard complaints. Making the iPhone 1% better is more rational than making the iPad 100% better, especially if the majority of iPad users aren't anywhere near the device's limits yet.