AAPL - Apple Inc.

[dwy000]

$220bn of capital returned in 3.5 years.  Of which $180bn was generated during the period ($40bn off balance sheet).  And still $113bn of net cash. That is an astounding cash cow with shareholder friendly allocation. 

[Lemsip]

https://s22.q4cdn.com/396847794/files/doc_downloads/2019/04/Apple-Return-of-Capital-and-Net-Cash-Position-Q2'19.pdf

 

Apple resumed a more "normal" repurchase, buying $24 Billion worth of stock in the quarter.  Net Cash declined to $113 Billion.

 

$27.6 billion capital return in 3 months, plus a dividend raise, ought to satisfy uncle warren

 

Interesting that they detail the expense (money spent on stock purchases), but not the effect (shares purchased and retired). Usually, when companies frame it like this (indifferent to cost), you know they are not out to really maximize shareholder returns. 90% of all the companies doing buybacks seem to be like that.

 

This information is in the 10-Q ( under "Purchases of Equity Securities by the Issuer and Affiliated Purchasers") which should be released in a few days. In the last 10-Q it is on page 45 where the number of shares and price are shown for each month in the quarter.

 

 

[johnny]

What's good about the post, apart from it being negative, which I presume is aligned with your view? I don't see any substance, it's fluff, just a different kind.

 

I don't think my criticisms are fluff, but it may be because I'm not being rigorous enough in explicating them. I'm also concerned that my snide tone intended for Apple management leaked over into my posts -to- the thread, so I think I owe it to you to explain more explicitly where I'm coming from here. Sorry for the length (and possible redundancy).

 

The company earned 62bn of FCF TTM and hundreds of billions in cash on a shrinking number of shares, with high ROE and ROIC, it's increasingly monetizing its almost 1bn device installed base, and its dominance in premium (aka profitable) smartphones and computers is more established than it was a few years ago (when everybody thought Samsung or Google was going to take the lead any day now).

 

My argument is not that Apple is a financial disaster. My argument is that Apple is organizationally defective. Apple’s earnings were much stronger under John Sculley than Steve Jobs (for a while). America’s GDP is much higher with President Donald Trump than President Abraham Lincoln.

 

Again, at current valuations, the discussion of TTM FCF is not key. The company's price is only acceptable if you have opinions about what Apple's 2030 FCF looks like. Substantially all of Apple’s cashflow comes from one product family: iOS. The two people most responsible for the creation of this platform are, in rank order, dead and fired.

 

"People who are really serious about software should make their own hardware"

 

I think people misunderstand this quote greatly: they usually invoke it when celebrating Apple’s “integration” of hardware and software, but I think this repetitious deployment has impaired peoples’ understanding about what this claim actually is.

 

This is not a statement about the equality of hardware and software. It’s a statement about the preeminence of software. Hardware is not important because of its own intrinsic aesthetic value; its purpose is to serve as a delivery vessel for software. At least, this is the philosophy of Alan Key and Steve Jobs.

 

The ousting of Forstall was a very important moment for the company (took me half a decade to figure it out). It was much more than a lost political battle. The ramifications for the company were significant: Hardware subsumed Software, philosophically. The big “theme” of Apple’s subsequent software release (iOS 7) was that it was developed under Ive and had a bold new look. It very loudly abandoned certain software design concepts that Forstall championed and Ive despised (such as indicating buttons are buttons by having them resemble buttons).

 

There were two pretty common observations about iOS 7: The OS was visually striking and beautiful. Not an unexpected result since it was led by a man who is, essentially, a visual artist. The other was that the OS was far less intuitive and more difficult to navigate—especially for newcomers to the platform.

 

The Hardware Tail Wagging the Software Dog

 

Modern Apple’s product successes have exclusively been in areas where the software is either invisible (and not subject to aesthetic edicts from the White Room) or where physics greatly limits the freedom of action for software. (AirPods, Pencil, Watch). Even the Watch, as originally launched, was a bit of a whiff from a software perspective. The features that most clearly delighted Ive were complete failures (core contacts, heartbeat sharing, wrist-doodle-messaging). The software features that actually drive Watch adoption are those very core, basic, unembellished features corresponding to the Watch’s technical status as essentially a much smaller, less powerful, and therefore less feature-rich iPhone. And so while I think the Watch is a fantastic product, I credit a great deal of its success to both Steve and Scott, despite the fact that neither of them had any input on the device at all.

 

So that’s where Apple succeeds. How about where it fails? Well, ironically, they tend to fail where the inherent capabilities of the product/category/space are quite wide, allowing for much more software discretion and thus relying much more on software design/quality:

 

1. iPad Pro: Beautiful, incredibly powerful, and out-benchmarks probably half of the MacOS units they currently sell. In software terms, it remains a Big Phone. The big innovation is that you can put two phone apps side by side through an unbelievably inefficient and delicate series of completely unintuitive gestures. OK

 

2. Apple TV: They had the raw materials to do something huge here: instead it’s a usability nightmare. The awfulness of the remote design is practically Socratic. And more troubling than the fact that they launched that terrible remote is that they've spent 3.5 years refusing to redesign it. That strongly suggests there is an institutional problem: whoever made this garbage remote is strong enough organizationally to essentially refuse to acknowledge the failure and debase themselves by rushing out a slightly less defective product.

 

3. HomePod: Beautiful visual design, abysmal UX, buggy UI, unreliable garbage underlying service. This is like the Apple TV but worse: they had every reason to be first and best in this space. Instead they came in 3 years later, at twice the price, and with half the functionality. They had the chips, they had the speaker expertise, they had the music relationships, and they had been running Siri, a LIVE PRODUCT, for 7 years: and they got owned.

 

4. TouchBar: Another pretty, technically impressive thing that, depending on your finger length, ranges from usability disaster to waste of $300. I can think of no feature/product that more strongly hints that in modern Apple, it is hardware designers barking orders to software engineers, period.

 

Keep in mind this is only failure that I think corresponds to this one systemic issue. But even the other "types" of problems are sort of consistent with this model: the thermal management failures of the Mac/Book Pros are also consistent with the idea of hardware design supremacy: only supremacy of design over engineering as opposed to supremacy of HW over SW.

 

That said, I'm still long. But to be very clear about why I'm long, it is because I have always been of the opinion that the moat of iOS was much stronger than most people appreciated. But that's the key word: moat. We do not credit Kings for the moats their grandfathers had dug.

 

So, to sum up, I see a company whose entire success owes itself to the delivery of Fantastic Software. And I see a growing list of examples suggesting that this imperative is becoming less and less important to the organization. The botched products are one thing, but having Tim Cook parade around every few months and talk about how Apple is actually in the business of reselling magazine subscriptions and producing dramedies about blind immigrant women climbing the corporate ladder makes me think Tim Cook is the wrong guy to be in charge of the company.

[Liberty]

https://www.cnbc.com/2019/05/06/apple-buys-a-company-every-few-weeks-says-ceo-tim-cook.html

 

Apple buys a company every two to three weeks on average, CEO Tim Cook told CNBC.

 

In roughly the last six months alone, Cook said, Apple has bought approximately 20 to 25 companies. Apple often doesn’t announce these deals because the companies are small and Apple is “primarily looking for talent and intellectual property,”

[Liberty]

Good interview with Ken Kocienda, ex-engineer at Apple who joined in 2011 and worked on Safari and then on the iPhone:

 

https://a16z.com/2019/04/20/a16z-podcast-inside-apple-software-design/

[Liberty]

http://www.asymco.com/2019/05/16/the-pivot/

[Guest ajc]

 

 

What's good about the post, apart from it being negative, which I presume is aligned with your view? I don't see any substance, it's fluff, just a different kind.

 

I don't think my criticisms are fluff, but it may be because I'm not being rigorous enough in explicating them. I'm also concerned that my snide tone intended for Apple management leaked over into my posts -to- the thread, so I think I owe it to you to explain more explicitly where I'm coming from here. Sorry for the length (and possible redundancy).

 

The company earned 62bn of FCF TTM and hundreds of billions in cash on a shrinking number of shares, with high ROE and ROIC, it's increasingly monetizing its almost 1bn device installed base, and its dominance in premium (aka profitable) smartphones and computers is more established than it was a few years ago (when everybody thought Samsung or Google was going to take the lead any day now).

 

My argument is not that Apple is a financial disaster. My argument is that Apple is organizationally defective. Apple’s earnings were much stronger under John Sculley than Steve Jobs (for a while). America’s GDP is much higher with President Donald Trump than President Abraham Lincoln.

 

Again, at current valuations, the discussion of TTM FCF is not key. The company's price is only acceptable if you have opinions about what Apple's 2030 FCF looks like. Substantially all of Apple’s cashflow comes from one product family: iOS. The two people most responsible for the creation of this platform are, in rank order, dead and fired.

 

"People who are really serious about software should make their own hardware"

 

I think people misunderstand this quote greatly: they usually invoke it when celebrating Apple’s “integration” of hardware and software, but I think this repetitious deployment has impaired peoples’ understanding about what this claim actually is.

 

This is not a statement about the equality of hardware and software. It’s a statement about the preeminence of software. Hardware is not important because of its own intrinsic aesthetic value; its purpose is to serve as a delivery vessel for software. At least, this is the philosophy of Alan Key and Steve Jobs.

 

The ousting of Forstall was a very important moment for the company (took me half a decade to figure it out). It was much more than a lost political battle. The ramifications for the company were significant: Hardware subsumed Software, philosophically. The big “theme” of Apple’s subsequent software release (iOS 7) was that it was developed under Ive and had a bold new look. It very loudly abandoned certain software design concepts that Forstall championed and Ive despised (such as indicating buttons are buttons by having them resemble buttons).

 

There were two pretty common observations about iOS 7: The OS was visually striking and beautiful. Not an unexpected result since it was led by a man who is, essentially, a visual artist. The other was that the OS was far less intuitive and more difficult to navigate—especially for newcomers to the platform.

 

The Hardware Tail Wagging the Software Dog

 

Modern Apple’s product successes have exclusively been in areas where the software is either invisible (and not subject to aesthetic edicts from the White Room) or where physics greatly limits the freedom of action for software. (AirPods, Pencil, Watch). Even the Watch, as originally launched, was a bit of a whiff from a software perspective. The features that most clearly delighted Ive were complete failures (core contacts, heartbeat sharing, wrist-doodle-messaging). The software features that actually drive Watch adoption are those very core, basic, unembellished features corresponding to the Watch’s technical status as essentially a much smaller, less powerful, and therefore less feature-rich iPhone. And so while I think the Watch is a fantastic product, I credit a great deal of its success to both Steve and Scott, despite the fact that neither of them had any input on the device at all.

 

So that’s where Apple succeeds. How about where it fails? Well, ironically, they tend to fail where the inherent capabilities of the product/category/space are quite wide, allowing for much more software discretion and thus relying much more on software design/quality:

 

1. iPad Pro: Beautiful, incredibly powerful, and out-benchmarks probably half of the MacOS units they currently sell. In software terms, it remains a Big Phone. The big innovation is that you can put two phone apps side by side through an unbelievably inefficient and delicate series of completely unintuitive gestures. OK

 

2. Apple TV: They had the raw materials to do something huge here: instead it’s a usability nightmare. The awfulness of the remote design is practically Socratic. And more troubling than the fact that they launched that terrible remote is that they've spent 3.5 years refusing to redesign it. That strongly suggests there is an institutional problem: whoever made this garbage remote is strong enough organizationally to essentially refuse to acknowledge the failure and debase themselves by rushing out a slightly less defective product.

 

3. HomePod: Beautiful visual design, abysmal UX, buggy UI, unreliable garbage underlying service. This is like the Apple TV but worse: they had every reason to be first and best in this space. Instead they came in 3 years later, at twice the price, and with half the functionality. They had the chips, they had the speaker expertise, they had the music relationships, and they had been running Siri, a LIVE PRODUCT, for 7 years: and they got owned.

 

4. TouchBar: Another pretty, technically impressive thing that, depending on your finger length, ranges from usability disaster to waste of $300. I can think of no feature/product that more strongly hints that in modern Apple, it is hardware designers barking orders to software engineers, period.

 

Keep in mind this is only failure that I think corresponds to this one systemic issue. But even the other "types" of problems are sort of consistent with this model: the thermal management failures of the Mac/Book Pros are also consistent with the idea of hardware design supremacy: only supremacy of design over engineering as opposed to supremacy of HW over SW.

 

That said, I'm still long. But to be very clear about why I'm long, it is because I have always been of the opinion that the moat of iOS was much stronger than most people appreciated. But that's the key word: moat. We do not credit Kings for the moats their grandfathers had dug.

 

So, to sum up, I see a company whose entire success owes itself to the delivery of Fantastic Software. And I see a growing list of examples suggesting that this imperative is becoming less and less important to the organization. The botched products are one thing, but having Tim Cook parade around every few months and talk about how Apple is actually in the business of reselling magazine subscriptions and producing dramedies about blind immigrant women climbing the corporate ladder makes me think Tim Cook is the wrong guy to be in charge of the company.

 

 

 

 

Good post. I think it's becoming clearer there are real dangers here. I'd add how over the next 12 to 18 months, China and regulatory risk are likely to come into focus. Apple could easily be dead money or substantially worse, over that time frame.

 

According to Goldman, Apple gets 29% of its earnings from China. If the trade war continues to deepen, it wouldn't be a surprise to see Chinese consumers boycott Apple like they've previously done with Japanese and Korean products at times of international tension.

Furthermore, the televised Democratic debates are less than a month from starting and Elizabeth Warren has already called for the break up of Apple. If that message gets any traction this June, you can probably expect Bernie Sanders and other realistic nominees to start talking about Apple anti-trust too.

 

It seems like a really bad joke that anyone would consider either of these potential developments, which have been obvious for quite a while, to be in any way positive for the business or stock price.

I think the rosy idea painted by some in this thread that Apple is a safe and stable bet, is somewhere between naive and highly reckless on the risk management spectrum.

 

 

 

[Liberty]

Trade war impact on brand can't be good:

 

https://9to5mac.com/2019/05/22/iphone-in-china/

[Spekulatius]

I agree, Apple could become quite a poster child of a trade war victim, especially when their supply chain gets impacted by the trade war or tech/ IP debate. Other likely victims are semiconductor companies, semi equipment and perhaps Boeing.

The export oriented smaller economies in the orbit of China like Korea, Taiwan, Malaysia, Singapore will probably feel the impact more than China itself.

[Castanza]

I agree, Apple could become quite a poster child of a trade war victim, especially when their supply chain gets impacted by the trade war or tech/ IP debate. Other likely victims are semiconductor companies, semi equipment and perhaps Boeing.

The export oriented smaller economies in the orbit of China like Korea, Taiwan, Malaysia, Singapore will probably feel the impact more than China itself.

 

Not to take this off topic, and this may be a dumb question! But how does the trade war affect non-mainland Chinese ports? I know China has been on a "shopping spree" the past 5 years buying up ports all over the globe. They basically own Greece by sea at this point. You would think there might be some type of ripple affect to Chinese owned assets downstream. Just spitballing  :P

[rkbabang]

I agree, Apple could become quite a poster child of a trade war victim, especially when their supply chain gets impacted by the trade war or tech/ IP debate. Other likely victims are semiconductor companies, semi equipment and perhaps Boeing.

The export oriented smaller economies in the orbit of China like Korea, Taiwan, Malaysia, Singapore will probably feel the impact more than China itself.

 

The Huawei thing is already impacting semiconductors.  They are a significant customer of the company I work for and we've stopped all shipments to them because of this nonsense.  Trade wars are no good for anyone and sometimes lead to hot wars.  So stupid and unnecessary.  An American goods boycott by the Chinese people is a real possibility and that won't be good for Apple or a lot of other American companies.  And I'm not talking about an official government boycott, just Chinese consumers choosing to avoid buying American.  This is a good article on how this hurts our relationship with them, our economies, and stifles progress on both sides.

 

 

Tech Warfare Outbreak Hits China's AI

EE Times talks to Dieter Ernst

 

“The damage done by this outbreak of open technology warfare is likely to be much more serious and long-lasting than normally assumed in the media.”

 

"I just came back from field research in China’s AI industry that covered key players — the BATs (Baidu, Alibaba, Tencent), Huawei, some AI unicorns, AI chip companies, and leading AI research institutes. Without exception, all interviewees were very concerned whether secure access to core components and support services might be disrupted through a progressive “decoupling” of existing U.S.-China IT value chains. An equally important concern is the growing incidence of visa restrictions imposed on Chinese students, on the engineers and managers of these companies, and on members of Chinese research institutes. Most of our interview partners were visibly hurt by the aggressive language used in the U.S. policy announcements — much damage has already been done to America’s once seemingly invincible “soft power” image. This deep sense of disappointment was even more palpable among students when I gave talks at China’s leading universities."

 

[fareastwarriors]

Apple’s Chief Design Officer Jony Ive is leaving the company

 

 

https://www.ft.com/content/947e557a-98a8-11e9-8cfb-30c211dcd229?shareType=nongift

[Liberty]

Apple’s Chief Design Officer Jony Ive is leaving the company

 

 

https://www.ft.com/content/947e557a-98a8-11e9-8cfb-30c211dcd229?shareType=nongift

 

Wow

 

It's not like he wasn't working with huge teams and that he hasn't shaped the culture there to a large extent that will stay after he's gone, but this is a big announcement.

[SHDL]

Apple’s Chief Design Officer Jony Ive is leaving the company

 

 

https://www.ft.com/content/947e557a-98a8-11e9-8cfb-30c211dcd229?shareType=nongift

 

Wow

 

It's not like he wasn't working with huge teams and that he hasn't shaped the culture there to a large extent that will stay after he's gone, but this is a big announcement.

 

Wow indeed. It will be very interesting to see how they do without him...

[johnny]

Why does it matter? We are a services company now. Haven’t you been listening to the calls?

[Liberty]

Apple’s Chief Design Officer Jony Ive is leaving the company

 

 

https://www.ft.com/content/947e557a-98a8-11e9-8cfb-30c211dcd229?shareType=nongift

 

Wow

 

It's not like he wasn't working with huge teams and that he hasn't shaped the culture there to a large extent that will stay after he's gone, but this is a big announcement.

 

Wow indeed. It will be very interesting to see how they do without him...

 

To be fair, Johny had already semi-retired a few years ago when design responsibilities fell more on others and he spent a lot of time focusing mostly on Apple Park, but it's still turning a page of Apple history.

[Castanza]

Apple’s Chief Design Officer Jony Ive is leaving the company

 

 

https://www.ft.com/content/947e557a-98a8-11e9-8cfb-30c211dcd229?shareType=nongift

Wow

 

It's not like he wasn't working with huge teams and that he hasn't shaped the culture there to a large extent that will stay after he's gone, but this is a big announcement.

 

Wow indeed. It will be very interesting to see how they do without him...

 

To be fair, Johny had already semi-retired a few years ago when design responsibilities fell more on others and he spent a lot of time focusing mostly on Apple Park, but it's still turning a page of Apple history.

 

Is Apple's design that hard to mimic going forward? I mean once the iconic style is established it shouldn't be that hard for others to carry on. At least styling wise. I don't really picture apple shifting their style to something else (in a dramatic sense) anytime in the near future.

[Liberty]

A couple pieces on this:

 

https://daringfireball.net/2019/06/jony_ive_leaves_apple

 

https://stratechery.com/2019/jony-ive-leaves-apple-ives-legacy-the-post-ive-apple/

[Liberty]

Better late than never, I suppose (though hardware cycles are longer than people expect, not easy to turn on a dime...):

 

https://9to5mac.com/2019/07/04/kuo-new-keyboard-macbook-air-pro/

[Liberty]

https://newsroom.intel.com/news-releases/intel-smartphone-modem-business/#gs.s2b0t2

 

Apple to Acquire Majority of Intel’s Smartphone Modem Business (for $1bn)

[LC]

https://www.cnbc.com/2019/08/29/apple-to-provide-independent-repair-shops-with-iphone-parts.html

 

Apple reverses stance on iPhone repairs and will supply parts to independent shops for the first time

 

Interesting development. Perhaps finally feeling the pressure from cheaper phone suppliers?

[Liberty]

Ben Thompson free post today on Apple:

 

https://stratechery.com/2019/the-iphone-and-apples-services-strategy/

[Spekulatius]

Anybody else thinks that the Apple streaming TV offering is very underwhelming? $5/ month for a couple of unproven shows and no existing film library (if I see this correctly )? how is this attractive when I can get Netflix for $13/ month with a huge LIBRARY and to a if shows, or Amazon Video as a perk with Prime? Maybe they get some traction offering this for free with a device,  it who would buy this for full price? It funny that the low monthly cost seems to have pressured  Netflix stock, but ai can’t think that this is really competitive.

[johnny]

I think the consensus (and correct) view here is that the TV+ strategy is absolutely bizarre. Their "well I guess it'll just be free to the 100m people who buy something" non-pricing strategy is I think as close to an acknowledgement of that fact as you'll get.

 

At some big-picture level I can see the angle here. They're wagering a huge amount in absolute terms, but 1% of corporate value to sort of see what happens. It's certainly adjacent enough to their existing business lines that it makes sense for them to be participating. But as I think I've said before, if they were going to do this, they needed to be doing it five years ago instead of spending half a decade jerking around suspicious partners who undermined their platform because of the inconsistent telegraphing.

 

I think the sleeper here is Apple Arcade. Apple execs as a category are oblivious about gaming, but obviously somebody made some pitch that worked and Arcade has real potential to be not just profitable on its own terms (something I think no sane person is projecting for TV+) but carries very real platform lock-in potential over the long term.

 

The News+ product continues to be half-assed garbage, and I deeply resent the sort of garbage promotional synergies that Apple seems to be totally shameless about nowadays.

 

[Liberty]

It's not competition to Netflix. They're just starting out, they don't own an existing library like Disney.. it's a way to get more people inside the Apple TV app, where they can subscribe to other channels (like Amazon does), which can be a decently lucrative source of recurring revs, and a way to make the ecosystem a bit stickier. Over time they might build it into something more, but I think they doing it right by starting small and taking their time rather than try to do everything at once and having a ton of execution risk.