Revenue: $37.6 billion (AAPL guidance: high end of $34-37 billion range/Consensus: $36.8 billion)
Product Unit Sales and CommentaryMacs: 4.4 million (10% yoy decline)
iPod: 3.7 million (30% yoy decline)iPhone: 34.4 million (28% yoy growth)
Slo-Mo - iPhone 5s
I’ve been using my new gold iPhone 5s for a few days. Here are my initial impressions:
Size: I like the 5s, not sure I would enjoy a bigger phone. Upgrading from the 4S, it took a little bit of time to get use to the slightly farther thumb reaches required to touch the upper left corner of the 5s. Even though the extra screen real estate is a positive, I have doubts that I would want a bigger screen than the 5s. I often find myself in one-handed use situations and I simply would not be able to use a bigger screen. If Apple is to go bigger with iPhone 6 (seems like its more than a 50/50 probability at this point), I suspect Apple will also maintain the current iPhone size, which would be noteworthy in that Apple would be maintaining and updating two different iPhone sizes. It may just finally be that time though as the smartphone market continues to mature.
Slo-Mo: This year’s Siri. The new slow motion camera mode will be the feature everyone is demoing at the Thanksgiving table or holiday party, just like how Siri was so much fun to show friends and family. I have taken at least 15-20 slo-mo videos so far and still can’t get enough. Of course, this fascination may very well die off in a few weeks, but by then it wouldn’t matter much since everyone I know would have seen the feature.
Color: White is the new Black. Up to now, it felt that the black iPhone was the unofficial default iPhone, the color you get to be like everyone else, while the white iPhone was the designated color to stand out from the crowd. I think the 5s changes that dynamic and white (sliver and gold) will become the default color, while the space grey is the color to stand out from the crowd (even though it doesn’t stand out as much as white did in previous years). Of course, I am not taking into account case usage, which may make this a moot point, but nevertheless I think there will be quite a few gold and silver iPhones in the wild in coming months and momentum will only build.
Touch ID: Awkward at first, but still cool. It took me two days to get use to Touch ID, or should I say, break my habit of simply pressing the home button and then typing my passcode. My issue dealt with pressing the home button and not leaving my finger on the button long enough for the fingerprint scanner to do its job. I also tried to show the feature to another 4S user and they had to be walked through the installation steps and even then they had trouble, so clearly Touch ID is not the easiest feature to demo to normal non-tech users, but nevertheless it’s pretty cool.
Weight: Wow. After a few days of using iPhone 5s, my iPhone 4S feels like a brick. It’s remarkable and incredible. Not sure much more has to be said.
Battery: An improvement. I’m able to get through a day of pretty constant 5s use (a few tasks per hour, all day) without a trip to find the power cord. I wouldn’t be able to say the same with my iPhone 4S.
Speed: Hard to see a difference with LTE; iOS 7 feels faster with 5s. LTE was one of those features Android fans mocked the 4S for not supporting. I don’t see the big deal. I often find myself on Wi-Fi with fast enough speeds to make any differences with LTE negligible. I do see a difference in terms of iOS 7, especially animations. Even though my 4S was feeling a tad sluggish with iOS 7, I don’t find myself complaining with 5s.
Free iPhoto & iMovie: Useful and fun. A few seconds after launch I was asked if I wanted to download a slew of free Apple apps, including iWork, iPhoto, and iMovie. While many users may just play around with these apps here and there, I think they are plenty capable and will put a dent in third-party paid photo and video editing apps.
Big Picture: Refinement is king with 5s. When I upgraded to 4S from 3GS, the speed blew me away. Not only was the phone’s improved performance noticeable, but Siri was a pretty darn cool feature. The 5s doesn’t have that same wow factor surrounding speed improvement, but instead the subtle refinements in terms of battery, camera, apps, and color, add up. I would have a difficult time moving back to the 4S, which is the easiest way to know that the 5s is a winner and another step forward in Apple’s iPhone refinement journey.
Twitter is going public. If you are an employee, investor, or simply a tech IPO lover, this is a very exciting time. While there is much to like about Twitter, I’m noticing a trend that is somewhat concerning; Twitter isn’t connecting with mainstream users.
Twitter had 215 million monthly active users (MAUs) as of June 30, 2013, a 44% increase from 2012. In today’s mobile world, an ecosystem with 215 million users is a very respectable number, but a 44% user growth rate isn’t superb. In the U.S., Twitter saw only 32% year-over-year user growth to 49 million MAUs, adding just 1 million users in the second quarter. For a well established ecosystem, these numbers aren’t exactly thrilling.
Earlier this week, one of my Facebook “friends” posted a question on her timeline, “What’s the deal with Twitter? Should I do it?” Within one hour, five people answered - all with a “no”. Surveying my non-tech social circle, Twitter usage is abysmal. A quick check with my high school teacher acquaintance led to an expected answer, no one at school talks about or uses Twitter. At a recent state fair that saw upwards of 160,000 visitors on a Saturday, tweets mentioning the event numbered in the dozens. The list of anecdotal data points showing Twitter’s lack of connection with mainstream users goes on and on.
While Twitter is proving valuable to a select group of users, the platform is not exactly hitting mainstream usage similar to how Facebook (1.1 billion users) conquered the world, or even messaging apps such as WhatsApp (300 million users) are trending.
What is going on? I suspect Twitter is not appealing to the masses in a world where Facebook made it socially acceptable to share and more intimate social apps, like Snapchat, are using their “coolness” and “ease” to flourish. Many are confused with the concept of Twitter since the company really isn’t a classic social network, but instead an information aggregator. When a user joins, they are bombarded with suggested follows. If a user bypasses the suggested follows page, it is somewhat unclear what is the next step, especially if their current social circle is not well represented on Twitter. It takes time to find interesting channels (people, companies, concepts) worth following. Rather than being a social network where people use Twitter to update friends with actions and ideas (that’s more for Instagram and Snapchat), I think of Twitter more like an improved form of television, where a user creates a list of channels to watch or follow. Corporations, brands, and news organizations desperately want a Twitter presence to reach potential customers, further highlighting the television metaphor. The big question is if such a concept can appeal to mainstream users.
Heading into Twitter’s IPO, I suspect user growth will remain a key topic and concern among investors. While management will be judged on revenue and profit growth, including user utilization rates, I think the company faces an uphill battle with user growth as competing services continue to fight for mindshare in the maturing mobile computing era. I see the value in Twitter, but I’m concerned that mainstream users will never give the service a chance.
Apple’s Marketing Missile - iPhone 5c
I like getting reactions from normal people about technology. On Tuesday evening, after the Apple keynote, the first reaction I received was “I like these color iPhones. They come with the cases right?” After a bit of prodding, I discovered iPhone 5c cases were actually receiving more positive reactions than I initially assumed.
I suspect iPhone 5c colors and cases are serving as a marketing missile aimed at the few price layers situated below the iPhone 5s. While it may be easy to assume that colorful iPhones appeal to specific demographics, I think it is appropriate to take a step back to get a clearer picture.
In a few months it will be much easier to see iPhones in the wild thanks to these hard to miss 5c colors. Throw in wacky 5c cases and the phones will be impossible to ignore. Up to now, many iPhones were covered by generic cases that made them largely indistinguishable from Android phones. The iPhone 5c, and corresponding cases, may be a very elaborate, yet subtle, marketing campaign aimed at the subconscious. Seeing everyone use a particular phone may go a long way in helping to sway one’s purchase towards that product.
Add in this evening’s announcement of Apple partnering with Burberry for the iPhone 5s and I suspect we may be on the verge of a revamped iPhone marketing strategy focused on positioning iPhone as the premier phone brand, worthy of aspirational goals.
I felt Apple did a good job today. For the first time Apple will be selling two brand new phones, including one for under $100 in the U.S. A brand new iPhone for under $100. I wouldn’t underestimate the impact of such a feat.
While there were some interesting technologies introduced, including a fingerprint scanner and a motion coprocessor, I have learned to control my long-term predictions on what such technologies may mean for Apple’s product line. Time will tell if such innovations become major cornerstones in future Apple products.
The most controversial aspect of today’s event was iPhone pricing. I see a schism developing among the tech punditry. On one hand, there is the belief that market share is king and Apple must address the bottom of the market because developers will begin to focus on Android’s sheer numbers instead of iOS. On the other side, where I stand, market share is not created equal. It is okay if Apple doesn’t address the lower end of the market since five consumers who don’t buy mobile apps or content is not equal to one who does. Looking at today’s events, I think Apple is doing the right thing gradually moving down market (iPhone 4 and 4S have not been discontinued). This strategy will only expand in coming years. With approximately 400M-500M (and growing) active iOS users with credit cards, I view the iOS ecosystem as now self-sustaining, capable of app innovation as long as the hardware and software back developers up. If I changed sides and instead only looked at market share, I’m sure I would have been championing Symbian, then Blackberry, and now Android. Market share is not everything.
Moving to more minor topics, Apple is still addicted to case money, now selling iPhone 5s and 5c cases. Selling cases is a good and easy business decision and judging from the popularity of iPhone cases, Apple will make a decent amount of profit (and margin) from going down that road. Apple also announced it will give away $40 of software with new iPhone and iPad purchases. While I am not a big user of Apple’s mobile productivity apps, quite a few people are and I suspect there will be many happy iOS users.
There are still plenty of questions remaining about Apple and strategy.
Did Apple’s keynote contain a bit too much of tech jargon? Maybe.
Will mainstream consumers accept iOS 7 without any major complaints? Maybe.
Will Apple’s margin actually benefit from the new iPhone line? Maybe.
Nevertheless, with a new flagship phone that has enough differentiation to stand out from competitors, a more value-oriented option for consumers with slightly different priorities, and the desire to maintain older iPhone models in order to address the mid-tier phone market, I like where Apple is sitting and the outlook for the iPhone business over the next 6-12 months.
Apple’s 2013 iPhone event is here. At the end of the day, everything comes down to expectations. If reality is unable to meet expectations, disappointment is not far behind. If expectations are kept measured, reality may still be able to deliver a positive surprise. Taking into account weeks of rumor, speculation, discussion, and simply “educated” guessing, here are my expectations:
Subsidy Land (Countries where phones are subsidized by mobile carriers)
$199 – iPhone 5S with a 128GB option, “gold” color option, fingerprint scanner, improved camera, faster processor. (95% confidence)
$99 - iPhone 5C available in various colors. (75% confidence)
$0 - iPhone 4S (51% confidence)
Non-Subsidy Land (Countries where phones are not subsidized by mobile carriers. Pre-paid option in subsidy land. For simplicity, I’m not considering various taxes/international fees.)
$650 – iPhone 5S with a 128GB option, “gold” color option, fingerprint scanner, improved camera, faster processor. (95% confidence)
$499 – iPhone 5C available in various colors. (75% confidence)
$399 - iPhone 4S (51% confidence)
$349 – iPhone 4 (50.1% confidence)
1) The “cheap” iPhone won’t be cheap. Consensus seems to have settled around the $399-$499 range, therefore I suspect $499 is the floor. For the first time, Apple will be selling a brand new iPhone for under $100 in the U.S.
2) I think the iPhone 4S and 4 will stick around (in somewhat limited capacity). I have received the most push-back on this point, but I still see a large market need being met by the 4S and 4 (having an iPhone at a sub-$400 price point is important).
3) The iPhone 5 will see end-of-life, to be replaced by the very capable iPhone 5C.
4) Notice the subtle differences in subsidy and non-subsidy wholesale pricing. Apple may be willing to sacrifice $50 or so in non-subsidy land for more aggressive iPhone 5C pricing (coinciding with China Mobile launch).
5) I think an iPhone 5S fingerprint scanner could be a pretty big talking point during the keynote (think this year’s Siri). Expect very limited functionality, but a ton on security and privacy.
6) Other topics such as a refreshed Apple TV (not a TV set), updated iPods, and a few more new iOS 7 features are probably more likely than not at this point.
Other Random Musings
As usual with Apple keynotes, the safe bet is to collect all rumors and divide by half to get closer to reality. There will likely be disappointment around iPhone 5C pricing and chatter that the iPhone 5S isn’t different enough from previous models. Let’s not even begin to discuss iOS 7 reactions.
The first half of 2013 felt weird. Even though plenty of phones and tablets were sold, as well as several laptops, the excitement level seemed less inflated compared to last year. Consumers are content with their gadgets and remain busy uploading personal information to a dozen or so social and messaging networks. Nevertheless, there were some stories in the first half of 2013 primed for riveting Twitter debates. To sum up my stance on these issues, I came up with an easy to remember platform, akin to a politician. I am pro-iWatch, pro-expensive cheap iPhone, anti-Glass, and pro-Schiller.
Pro-iWatch. Wearable gadgets interest me and I think there is something there. Back in February, former Apple designer Bruce Tognazzini began what turned into a multi-month parade of chatter related to Apple developing its own smartwatch. I still think Bruce’s piece is the best words on the device and I have a feeling that a few years from now most of his post will have become reality. My conspiracy theory is that Bruce was frustrated with iWatch progress and released some of the work Apple had already done as a bribe to get Apple to finally decide to give the project the green light. In reality, Apple probably has been working on a gadget for the wrist for years (yes, that would make it a Steve project) and there was enough chatter floating around for Bruce to collect into a post.
I suspect Apple did give the iWatch a green light as seen by numerous talent acquisitions and other signs including industry and management chatter. I think consensus is unsurprisingly naive, if not downright clueless, when it comes to thinking of how an iWatch would look and function. People need to stop picturing a classic watch when rethinking the watch. I am not a fan of today’s smartwatch as the genre fails to answer many questions that the 21st century has placed on the classic watch; primarily purpose and functionality. The current smartwatch market isn’t seeing massive adoption and the industry lacks a cash-rich leader. Samsung and other giants are quickly rushing to market with their own smartwatch, but I am not optimistic that much will come from these early efforts. Instead, I would look more towards Nike’s Fuelband for signs of reinventing the watch. Add in device independency and fashion conscientiousness, and we start to peel the skin to iWatch’s core.
Pro-Expensive Cheap iPhone. Apple continued to show healthy iPhone sales last quarter with 20% unit growth. Average selling price (ASP) fell as consumers continued to buy the discounted iPhone 4 and iPhone 4S. It seems fairly certain that Apple will release two new iPhone models next month; a “5S”, or the latest iteration to the iPhone 5, and a less expensive iPhone (think iPhone 5 only with a plastic casing and I suspect lacking the ability to support iOS 7 features exclusive to the iPhone 5S). Price points remain a controversial topic, boiling down to two schools of thought; the cheap iPhone will be priced closer to $200 in order to gain traction in emerging markets where phone subsidies don’t exist versus priced closer to $399-$499 as Apple continues to gradually move downmarket, attempting to create demand in the $399-$499 no-man’s land of new phone pricing. Even though Apple may be able to manufacture a phone for $200 and still make an “ok” profit, I suspect Apple’s larger strategy is to make sure that all profit layers are captured as the iPhone moves downmarket. If the strategy backfires, Apple can discount the one-year old iPhone 5C for $299 next year and give it another try.
I also think a new $399-$499 iPhone fits well within a possible pro-forma iPhone lineup of iPhone 5S for $650, iPhone 5C in various colors for $450, and iPhone 4S for $350. Such a line-up could be sold across the world, including subsidy land. While a $450 “cheap” iPhone does not address the army of Android phones selling for $99, I wonder if that target is something Apple needs to even shoot for in the near-term.
Anti-Glass. I summed up my Google Glass angst in a prior AAPL Orchard post, largely questioning the product on poor industrial design. Having a product on my face, during both usage and non-usage, strikes me as terribly inefficient and ineffective, not to mention obtrusive. Regardless of design, I also suspect the widespread popularity of contact lenses represent a strong case that glasses aren’t exactly a desirable body modifier. Sure, Google Glass represents something new, but new is not the same as good. Many pundits are hedging bets with assertions that Google Glass may find its niche audience. In retrospective, such a statement can be said about any new product as long as the company making that product remains committed to funding the project. Instead, I think Google Glass will largely be ignored once wrist devices flood the market.
Pro-Schiller. This is the pro-freedom part of my platform, the idea that probably isn’t too controversial yet often goes unnoticed. I consider Apple SVP of Marketing, Phil Schiller, as the embodiment of Apple’s culture. Yes, Jony is Apple’s soul, but Schiller represents the hard work that occurs at Apple HQ, along with the fun, jokes, and general love for the journey taken. Any quick YouTube search would reveal plenty of clips showing wacky Schiller during Apple keynotes. Earlier this year, Schiller made headlines for pumping a bit of Apple PR before Samsung’s keynote unveiling the latest version of its flagship phone. In retrospective, Schiller didn’t need to say anything as Samsung relied on racist and sexist undertones to unveil a phone that didn’t live up to Apple-like expectations. Looking ahead, Schiller’s input on product pricing placement and marketing will continue to take the spotlight.
Revenue: $41.1 billion (AAPL guidance: $41-43 billion/Consensus: $42.5 billion)
GM: 38.1% (AAPL guidance: 37.5-38.5%/Consensus: 38.5%)
EPS: $9.55 (Consensus: $10.07)
Product Unit Sales and Commentary
Macs: 3.7 million (8% yoy decline)
iPad: 15.5 million (31% yoy growth)
iPod: 6.1 million (20% yoy decline)
iPhone: 36.5 million (4% yoy growth)
Unless earnings estimates come down drastically in the coming days, I expect Apple to miss consensus EPS on Tuesday.
In terms of 3Q13 guidance, I am expecting revenues of approximately $30-32 billion and 38-39% margins (which would equate to EPS of approximately $6.20-$6.40, or a 30% decline from 2012). The prospect of no new product launches until CY3Q13 (i.e. after June 30) will pressure iPad and iPhone sales.
Apple is currently in somewhat of a financial funk as the company battles Wall Street’s expectations game. The high-end smartphone market is becoming saturated, while the booming success of the tablet market is resulting in difficult yoy unit sale numbers. Heading into 1Q13 earnings, I thought the market was already expecting bad news, including weak guidance. I was wrong. Heading into 2Q13 earnings, consensus is for an EPS decline, but I am not convinced the Street is being realistic with 3Q13 and 4Q13 expectations as consensus numbers still look aggressive.
Quick Note on Capital Management
Some observers are predicting Apple management may try to shift attention away from weak guidance on Tuesday by announcing its latest thoughts on capital management. While anything is possible, I’m not convinced of that tactic’s effectiveness. Instead, Apple may be better suited to let the dust settle from the current earnings cycle before acting on its updated capital plan. At the current trajectory, Apple may be in a position to announce a multi-year share buyback authorization representing up to 20% of outstanding shares. More importantly, management will probably have to address its $94 billion of offshore cash as Apple has “only” $43 billion of cash currently available for capital management. A growing number of industry observers think raising debt is part of Apple’s solution to its offshore cash “problem”. While there may be financial merit in raising debt in the current environment, such an action would mark a significant new chapter in Apple’s history.
Google continues to expand its public R&D effort for Project Glass, recently announcing a call for developers to become part of the early program. While many tech adopters are becoming downright giddy towards Google Glass, I have a number of reservations about the product, but more importantly the larger implications of how technology evolution will impact society.
In a Google+ post advertising the Glass developer program, Google wrote, "[w]e’re developing new technology that is designed to be unobtrusive and liberating, and so far we’ve only scratched the surface of the true potential of Glass.”
On its surface, that brief description sounds promising. Who wouldn’t want to be liberated by additional technology, all the while still feeling secure and in a weird way; human? Of course, in its current form, Google Glass doesn’t come close to those accolades as wearing a computer on one’s face doesn’t exactly seem like an advancement for less obtrusive technology.
As smartphone and tablet proliferation continues, the limitations surrounding tech gadgets is becoming clear. With iPhone in hand, potential is unlimited as the ability to capture the surrounding world, all the while harnessing the web through curated user interfaces (apps), proves to be quite an attractive proposition. However, once a user is away from their phone (or tablet), the gadget’s usefulness is hard to measure. The preceding situation demonstrates a major inefficiency in hardware; physical dependency, which time will eventually dissolve as society moves towards a gadgetless world (don’t worry there’s still time to enjoy phones and tablets).
There are tangible signs that the world is already entering a new phase of mobile computing; wearable technology. At what may come as a surprise, Nike (via Nike+ FuelBand) and Disney (via MagicBand) seem to be leading the wearable technology army having announced inexpensive (or in Disney’s situation, free) wearable computing products. Of course, one could argue that such focused applications don’t go beyond niche needs or uses, but for that matter, wearable technology, like any disruptive force, will begin with niche uses. Add in Google Glass, and circulating iWatch/iBand rumors, and it becomes clear that the mobile computing industry may be ready to move.
In its current concept, Google Glass represents the key risk to the next phase of computing; letting technology control society while reducing user optionality. While the ability to take a picture or video of anything, at any time, through a camera near my eye may sound appealing, society can do exactly that now with a phone, which could then be easily put away and ignored. If the resulting argument is “just take off the Google Glasses then”, the added benefit of having such a device is then questioned. Early supporters of the device reiterate that Project Glass is just getting started and the possibilities are endless. While that statement may be true, it lacks the justification for why the initial product should deserve endless praise simply for being introduced. I’m sure other companies could release products that seem cool for a few hours only to discover major conceptual concerns.
Google isn’t shy in portraying Google Glass as a way to improve one’s quality of life through access to information. Having to wear a computer on one’s face doesn’t ring as some kind of industrial design breakthrough, especially compared to a simple bracelet or watch which could serve many functions by just being casually worn; hidden away under clothing. Technology can then truly melt away into the background. Having an endless amount of information at one’s disposable is not guaranteed to be a benefit and if handled incorrectly, which many companies are doing now, negative consequences are born.
Where is Project Glass headed? Judging from Google’s videos, the Project Glass team will initially try to find niche uses for Google Glass, including recreational airplane pilots, skydiving schools, taxi drivers, and circus acts. Of course, each one of those niches raises serious concerns if glasses would even be practical (and safe) in those scenarios, but that’s besides the point. Google has plenty of talent dedicated to Project Glass, which may very well open future doors for the initiative. Criticisms surrounding price and practicality for visually impaired users are somewhat misplaced as those two criteria could probably be solved somewhat easily and quickly. More importantly, Project Glass will give Google data about mobile and wearable computing; data that Nike has already been collecting, and which Disney will soon be. (It’s debatable how valuable such data is to a company. Wall Street loves it, but that’s hardly a ringing endorsement.)
While some are in a rush to applaud Google for publicly airing its R&D and introducing new products for the sake of introducing new products, it’s important to remember that tech companies don’t just sell products, but also values. For wearable computing to become a formidable force, a company’s values and beliefs will prove to be more important than the device itself. Technology has the ability to ruin society through excess noise and information. While some companies hold that fear close to heart, others seem content to usher in that doomsday scenario.
Apple’s 1Q13 results were largely in-line with my expectations.
While I was pleased with the quarter, my estimates were considered somewhat bearish compared to the crowd; so needless to say, there were more disappointed faces than smiles. Apple reported healthy growth metrics for iPhone and iPad, while iPhone ASP remained strong and iPad ASP declined due to the iPad mini.
Management altered the way guidance is presented. While the reasoning was not disclosed, I don’t think its much of a stretch to assume its management’s way of ending analysts’ nasty habit of severely overestimating guidance. When Apple’s earnings report was initially released, the stock was trading in the $490-$495 range. Guidance seemed to be of Apple’s conservative nature - in that case, guidance was O.K. When Apple clarified that it would no longer give EPS guidance, but instead release ranges (including upper limits) for several line-items used to reach EPS, the stock quickly fell to the $460-$465 range as guidance was considered NOT O.K. (it can be debated what management meant by guidance ranges, but I am assuming Apple’s actual results will fall within these ranges).
I didn’t find Apple’s 2Q13 guidance (with the new ranges) to be overly concerning. Going into the quarter, I knew 2Q13 was going to be tough due to difficult year-over-year comparisons to 2Q12. Judging from the stock’s decline, I guess I was in the minority.
Did Anything Actually Change?
Taking a step back from all of the earnings noise, I didn’t learn much new about Apple. Both iPhone and iPad unit growth is slowing, margin remains pressured due to newer products, and EPS growth will be difficult to achieve in 2013. Minor details such as the iPhone 4 remaining supply-constrained (most likely due to limited resources and parts allocated to iPhone 4 production), iPad mini coming into supply/demand balance by the end of this quarter, and the mix between new and old iPhones remaining constant weren’t exactly market-moving data points.
It is interesting to read the differing opinions on Apple’s quarter between the Valley’s reaction and that of Wall Street. In the Valley’s eyes, Apple did great and is firing on all cylinders, but according to Wall Street, AAPL stock is broken as growth is slowing. I think reality is somewhere in the middle of those two extremes.
AAPL has now been in a 4-month tailspin, including widespread shareholder rotation (meaning many of Apple’s shareholders as of the end of September are selling and being replaced by new shareholders). Such a rotation is often quite volatile, resulting in lower stock prices as the new shareholder base has different priorities and expectations for Apple (often of a lesser nature).
Back in January 2012, the consensus view on Apple was that EPS from iPhone and iPad would plateau around $60. An additional premium for Apple optionality (i.e. new products) may push EPS to $70. P/E multiple and dividend payout ratios were then calculated accordingly. Things certainly have changed. The consensus view is now of Apple EPS topping out around $40. It’s tough for a stock labeled as *the* momentum tech growth story to keep its luster when EPS expectations are cut by 30%. Of course, investors and traders love to panic and overreact, so not only is Apple’s EPS problematic, but Apple’s business model is apparently broken, management is clueless, and the company is the new Microsoft. It is what it is and I don’t see a reason to fight it.
Investors buying AAPL today (or for that matter - the past year) should not be buying it on iPhone and iPad predictions, but rather Apple’s ability to disrupt itself and introduce new product categories. Not surprisingly, when things are good and AAPL is up, everyone assumes Apple is in great shape. When AAPL is down, management is assumed to be inept; unable to innovate and remain relevant.
Looking ahead, I think it will be difficult for Apple to report EPS growth in 2Q13 and 3Q13, due to tough year-over-year comparisons related to margins. Modest growth should come back in 4Q13 and moving into 2014. I am assuming anyone with an earnings model is well aware of these trends, but judging from today’s stock price action, I may be too generous in my assumptions. Catalysts such as China Mobile selling the iPhone (not in my model) or new products are most likely not being contemplated by Wall Street and one can argue even if catalysts come to fruition, many will simply brush them off as a non-event. Just as funds had to own AAPL last year to beat certain performance benchmarks, many funds now have to sell AAPL because the stock is down.
Many are trying to find rational answers with AAPL’s price action, but since the following statements are often true, I’m not sure how many answers are actually out there:
A stock often goes up because it has been going up.
A stock often goes down because it has been going down.
A stock’s valuation matters only when valuations start to matter.
Fundamentals are important only when fundamentals become important.
Revenue: $53.1 billion (AAPL guidance: $52.0 billion/Consensus: $54.5 billion)
GM: 37.9% (AAPL guidance: 36.0%/Consensus: 38.4%)
EPS: $12.75 (AAPL guidance: $11.75/Consensus: $13.33)
Product Unit Sales and Commentary
Macs: 5.2 million (flat yoy growth)
iPad: 22.4 million (56% yoy growth - when adjusted for 1Q12)
iPod: 12.0 million (16% yoy decline)
iPhone: 47.8 million (39% yoy growth)
Apple has missed Wall Street consensus EPS for the past two quarters, and unless estimates come down in the following weeks, a third miss isn’t out of the question. While it is hard to point to any one factor as driving a fundamental change in Apple’s operating performance, Apple’s prior two quarters have contained a few concerning metrics, including contracting margins and declining iPad and iPhone growth. Did the weak global economy finally catch up to Apple? Were product release cycles continuing to wreck havoc with consumer demand?
The bear argument would label Apple’s two-year stretch from 2010-2011 as an outlier, when two new products (iPhone and iPad) produced a perfect storm for EPS explosion. Going forward, bears would argue margins will decline further, effectively limiting EPS growth. Future products would then lack the size to move the EPS needle.
The bull argument would focus on iPhone and iPad as product leaders in its respective industries, while a temporary margin drop is indicative of product updates and not a fundamental change in the operating landscape. Apple’s future product plans would also occupy a spot in the conversation.
Will 1Q13 represent an AAPL inflection point? I don’t think one quarter is capable of shedding enough light to figure out where Apple stands in its long, storied history. With iPhone now entering its 6th year (iPod recently celebrated its 11th birthday), the days of 100% revenue growth may be over for the product line, but should that statement even be considered controversial? There is also evidence suggesting Apple may be looking to smooth out demand cycles by updating products more frequently, a move that may bring long-term benefits, but at short-term costs.
While much of the recent AAPL discussion has been focused on slowing growth and falling margins, it is easy to overlook fundamentals that would be considered very strong for any Apple competitor:
A few AAPL loyalists have recently declared another “bad” Apple quarter (where bad is judged merely by EPS) will signal a new Apple, an Apple not deserving of their attention and instead lumped in with the rest of the tech crowd. I disagree. One quarter, especially in the midst of an obvious change in business performance (product updates and management reshuffling), is not enough to conclude the long-term Apple story has changed. If an investor wanted to run away from Apple for near-term volatility, that decision could have been made a few months ago. Continued margin volatility may produce a scenario where EPS growth can accelerate throughout the year and 2014, even with slowing product sales growth.
AAPL’s next 3-5 years will depend on management’s ability to introduce new product categories into an ecosystem that values a set of beliefs, including two that I tried to put into words following my first days with an iPad:
That technology is too powerful of a force to enjoy without acquired perception and natural intelligence.
That product design has the power to momentarily satisfy the never-ending search for order and reason.
This past Friday, Walmart announced on its Facebook page that it was rolling back its iPhone and iPad pricing for a limited time. Within minutes, the announcement flew around tech blog circles, quickly reaching mainstream publications such as ABC and CNN.
The discussion soon took a new direction as bloggers began to wonder if Walmart’s discounted pricing actually meant Apple was imploding; unable to sell supply due to lackluster demand. One blogger summed up that attitude well, writing:
"Apple has finally thrown in the towel on pretending there is a supply shortage and admitted there is simply not enough demand at the given price point, by proceeding to sell the margin flagship iPhone 5 at a third off the original price, at the bargain basement commodity expert Wal-Mart of all places….And just like that, the “niche premium” magic of the once uber-cool gizmo is gone, not to mention AAPL’s profit margins, very much as the stock price has been sensing over the past two months…”
The blog known as Reuters added additional fuel and mystery to the Apple bear argument, in their usual naive style:
"Apple has focused on high-priced, premium gadgets for many years and has strictly enforced its prices with retailers and other distributors. However, a Wal-Mart spokeswoman said on Friday that the discounts were arranged with Apple.
'We worked together with them on this,' the spokeswoman, Sarah Spencer, said. 'They are a great partner.'
Why is Walmart Discounting Apple Products?
Third-party retailer discounts are nothing new. Best Buy and RadioShack routinely sell entry-level iPhone 5 units for less than $199 (Best Buy is currently selling the 16 GB iPhone 5 for $149.99). Apple’s wholesale pricing and margins remain intact as these third-party retailers eat the discount (ignoring differences between wholesale and retail prices). Similar campaigns are seen with iTunes gift card promotions, where retailers offer free iTunes gift cards when purchasing Apple products. Best Buy is also well known for promotions similar to “Buy $100 of iTunes gift cards for $75” - where Best Buy (not Apple) is responsible for the discount.
Diving into Walmart’s latest iPhone and iPad price discount campaign sheds additional light.
1) The promotion is only valid in-store. For brick and mortar retailers, store traffic and same-store sales metrics are important. One of Walmart’s ultimate goals in discounting iPhones and iPads is having customers travel to a Walmart and make their way through the store before finally reaching the iPhones and iPads (conveniently not located near the store entrance). Walmart feels confident that it will be able to sell additional items to these customers, similar to placing milk and eggs at the back of a supermarket so that a customer has to walk through the entire store just to buy a few essentials. In addition, many consumers will narrow their holiday shopping destinations to a few stores over the next week and Walmart wouldn’t mind making that exclusive list - using discounted iPhones and iPads as the carrot for getting people into the stores.
2) The promotion is only good while supplies last. Many consumers have flocked to Walmart’s Facebook wall to point out that quite a few Walmart locations don’t have iPhones or iPads in stock. Walmart receives good press coverage from discounting popular items, while not losing much money as product supply limits sales; sneaky, but efficient.
3) Brand awareness. By advertising discounted iPhones and iPads, Walmart is using the promotion as a marketing campaign to strengthen consumer’s association between Walmart and Apple. Many consumers don’t think of Walmart as the first place to visit for iPhones and iPads. I can only imagine how many people now have Walmart at the top of their destination list in search of that perfect Apple gift for the holidays.
What about that little gem from Reuters indicating Apple was working with Walmart on this discount? On the surface, it sounds somewhat damning for Apple, but in reality, it doesn’t mean much; only that Apple is okay with Walmart eating iPhone and iPad price discounts. Sounds like an iPhone and iPad boom to me.
Everyone wants to create a story for why Apple’s stock dropped more than 6% today. While daily stock fluctuations are hardly worth mentioning, a 6% drop on seemingly no news does stand out as an outlier.
I have difficulty believing that a stock moves up or down on a specific news item because I am unable to verify why everyone is selling (and buying) a particular stock. Those selling shares at 9:30 AM may have a completely different motive compared to those selling at 3:59 PM. The same philosophy applies for a stock on the rise.
As Apple’s stock collapsed throughout the day, news sites were fumbling over each other trying to guess what could possibly cause Apple shares to fall. Several reasons floated around the web included:
1) A DigiTimes Article. I assume this article talked about all iPhone production coming to a halt, because I have a hard time thinking of any other topic that can cut $30 billion of Apple market cap in a few hours.
2) Tax Selling. This one just won’t die. Are investors selling their Apple shares today (25% off the high) only to avoid paying 5% more taxes on dividends and maybe 5-10% more for long-term capital gains?
3) China Mobile Approves a Nokia Phone. So Apple loses $30 billion of market cap in a few hours because China Mobile announces it will sell a Windows Phone made by Nokia? Really?
4) Samsung is Crushing Apple. Let me guess. Teens are ditching their iPhones and iPads and switching to Samsung phones because they are just that cool. Surely that would cause Apple to lose $30 billion of market cap in a few hours.
5) Some rumor about retail margin requirements being increased for only one stock; Apple. At first glance, this one at least sounds somewhat plausible, until one realizes most individual investors highly levered with margin already faced tough times a few weeks ago when the stock crashed to $505. Even if this rumor was true, individual investors would be unable to account for $30 billion of Apple value vanishing in a day.
6) Apple Maps. If all else fails, blame Apple Maps (ok…maybe I was the one to tweet this one as an excuse for Apple’s drop).
All of these possible explanations for today’s stock drop are nothing more than attempts of adding context to mystery; creating a story out of the unknown. Unfortunately, many are missing the big picture.
There are very few news items that are even capable of moving Apple’s stock price by 6% in a day (the worst daily decline in years). Such a move is typically left for monumental events such as a CEO departure or natural disaster impacting production or distribution, and even then those events would often be met with a rush of buyers willing to support the stock.
Is there anything we know for sure about today’s price action? Yes.
For every trade, the marketplace needs a buyer and seller. A stock price is the equilibrium where a buyer and seller are willing to exchange a share. Today, sellers were outnumbering buyers at $569 (Apple’s stock price at 9:31 AM), so the marketplace had to lower the price until sellers and buyers were in equilibrium. At 3:59 PM, the equilibrium for Apple’s shares was down to $538. Selling pressure remained elevated for most of the day, and as the share price declined further, additional selling pressure came in, forcing the shares to fall even more. Apple shares haven’t seen this type of price action in years (the typical retracement was only around 15%, which would take a few weeks to occur). Buyers would typical come in and support the stock (the Flash Crash of 2010 stands out as another notable exception).
The next question is what caused all of this selling? Unfortunately, we are forced to think of possible reasons for the selling to create a story because we hate the unknown. I could end this post right here and call it a day, but what’s the fun in that? Sometimes even I need a story or two.
I’m skeptical that any rumored (or even factual) news story was capable of causing the world’s most valuable company to drop 6% in a few hours. Instead, I think the intense selling pressure was caused by several mid-sized hedge funds forced to sell Apple positions because their computer models were programmed to sell Apple. In an effort to remove emotion from trading, some funds program models to buy and sell stock given certain market conditions (most likely momentum characteristics). By removing the human from the equation, one is unable to avoid selling a stock on no news (in many ways, for the model to be successful, all decisions have to be followed). I think a rather large fund (or a few) were forced to liquidate or reduce their Apple positions simply because the stock was in collapse mode. Add in differing degrees of leverage (money borrowing) and you can see how things can snowball out of control very quickly. I also believe a similar thing happened last month when Apple shares fell 8% in only two days. The harder Apple fell, the faster the models said sell. Meanwhile, buyers were simply unable to outnumber the sellers, causing the equilibrium price to remain under pressure. Of course, I’m sure there were plenty of retail investors selling Apple shares for completely different reasons, which supports my skepticism for labeling specific news items as stock price drivers.
Looking at the long-term, Apple is facing several headwinds that may give buyers pause. I have a difficult time modeling much in the way of EPS growth in 2013 given tough year-over-year margin comparisons. In addition, recent Apple management changes have not been tested in the marketplace. I’m sure one can also come up with a few other things that would elicit fear about Apple’s future, but at a certain price and after a set amount of time, these fears are fully realized and digested by the market. I suppose one can also come up with good scenarios for Apple, but what’s the fun in that? When Apple’s stock plunges on heavy volume, skepticism should take hold, helping to usher in clear thoughts. Short-term stock trading is a fool’s game and I would love to be proven wrong.
Changing of the Guard.
There is a lot to like about this photo.