Understanding Apple: Three Keys To Stock Price – 3. Looking Ahead

Apple  share price has been slammed recently, falling as low as $92.43 last Wednesday. The question for investors is whether this downward trend will continue, if the price will remain range bound as it has for over a year, or if share prices will reverse and continue to appreciate.

I have identified three key factors in the future value of Apple stock. The first article focused on iPhone sales which many see as leveling off in growth, or even declining in the current year. Since this product currently accounts for well over 60% of Apple’s income, this would clearly affect performance. Fears over this are what drove the price down.

The second post focused on how the Services and Other Products categories – particularly the new Apple Watch – will likely drive moderate growth.

In this post we will examine what may be the most important influence on Apple stock price:

  • Apple’s forward guidance for the March quarter

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Apple developers conference – the coming revolution


UPDATE

The WWDC has come and gone with no announcement of an updated Apple TV nor network streaming. Still, rumors continue that the Apple is waiting to seal deals for the streaming. With all that was announced, it is likely what I discuss here is merely posponed.
As for the Apple TV – Jonny Evans at ComputerWorld writes:

HomeKit support has been present in the Apple TV firmware since v7.0, though Apple hasn’t discussed it.

So this, at least, is going forward.


On June 8 Apple (AAPL) opens its World Wide Developers Conference, a week long event for developers of apps for both the Mac and iOS platforms. The schedule is full of workshops and sessions that instruct software engineers and designers on the technicalities of the trade – how to program Apple products.

No session is more anticipated than the opening keynote address (10 AM Pacific time). Here CEO Tim Cook and cohorts will present several important classes of information:

  1. Key updates and statistics on the various platforms and products,
  2. Introduction of new versions of iOS and Mac,
  3. Possible introduction of important product upgrades.

The first point will eye-popping figures of product sales, usage statistics for various features such as Apple Pay, the number of billions of dollars that have been earned by iOS app developers, and so on. Hopefully, there will be some update on Apple Watch sales, a topic of great interest.

Number two is a longer section which will detail all that is new in the upcoming versions of the two operating systems. There are rumors that new features will be few as Apple may have focused more on improving performance. This is what it did with the Snow Leopard release, one of its most successful. However, there will be new features added to each system, but that is not my focus here.

In this article I will focus on number three. While there might be an upgrade to the Apple Watch – most likely with a new, faster processor, there is another product that I believe will take center stage.

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Apple Pay – Superficial Critiques

I really do not like to get snarky, but sometimes I see blog posts that are so superficial that I cannot help but be a little testy.

Case in point Apple Pay Has Finally Arrived! Great – But Here Are 7 Reasons It Won’t Be A Slam-Dunk Success by Robert Hof, in Forbes.

First – I totally agree with Hof when he writes

it’s apparent that Apple Pay is far from a guaranteed success.

This definitely is true. No one can predict with surety two basic factors:

  1. Will it work properly?
  2. Will the public accept it?

Typically, Apple’s products and services work pretty well, but there have been some notable exceptions. The move from .mac to me.com was a tremendous mess, and the introduction of Maps seriously flawed. Any system failure even vaguely approaching those will be a disaster. This is people’s credit cards and payments, not simply directions to the nearest movie theater.

As for number two, Apple seems to have a really refined system, and if it works as effortlessly as in Apple’s demo, it will certainly be the easiest method of paying yet available. A simple swipe of your iPhone or Apple Watch by the NFC reader while holding the home button (on the iPhone) and you are done.

But none of this is guaranteed. That is the nature of any business, especially one that is creating a whole new product.

But Hof goes on to list seven important areas where Apple Pay is lacking.

1 –You can’t use Apple Pay unless you buy an iPhone 6 or 6 Plus

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The Definitive Debunking of Touch ID Fingerprint Hack

When Touch ID was announced at the iPhone 5s launch, it was immediately besieged by detractors.

One area in particular for detractors is that the Touch ID system is susceptible is via spoofing an owner’s fingerprint. If true, this would  pretty much leave the whole system open to an attacker, and now, with the iPhone 6 and Apple Pay, spoofing would easily expose the owner to fraudulent charges placed on the his credit cards.

The most convincing  exposition on this was by the German Chaos Club group which quickly posted online video of how to spoof the Touch ID sensor system.

With the advent of Apple Pay based on Touch ID, this issue becomes even more critical.

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Two facts are clear:

  1. it works,
  2. it is not all that difficult.

However, there is one clarification to point #2. It ought to read:

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Apple Watch: ASP at $510 or higher? [Updated]

There has been a lot of interest in Apple Watch since it was announced last week. The two big questions for investors are

  1. How many will Apple sell? and
  2. What will the average selling price be?

An article at Seeking Alpha by Stone Fox Capital make the argument that it will likely not move earnings significantly.

They note that, with revenue close to $200 billion next year, the Watch would need to sell $22 B in order to account for 10% of the total.

Additionally, they note that Citigroup estimated Apple will sell 14 million units next year. They then go on to calculate out at a price of $349.

If my calculations are accurate, Apple must sell roughly 55 million watches at the average low-end price of $349.

While the writer’s point is made, the price is obviously absurd. This is the base price and we all know that it will only go up from there.

So, I have made some projections of price points and percentage of sales in each range. I created what I see as reasonable ranges for low, middle, high and ultra-high ranges, and I believe the distribution curves are both rather reasonable. In each price range I have expected that the average price is closer to the bottom than the top.

First I do a conservative estimate using the 14 million units estimate.

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Apple Metal Explained

Pedal to the Metal

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In my post to Seeking Alpha I wrote:

  • The final sleeper feature with deep implications for Apple’s future is Metal.
  • Metal is a new technology for writing graphics programs, particularly animations and games. It allows programmers to write code at a much lower level than previously, and this produces a real, up to 10x performance improvement.

Clearly the newest Apple hardware (iPhone, iPad,a nd possibly Apple TV box) will be getting upgraded processors (system on a chip or SoC), the A8. I wrote in detail on the current A7 in this post, and I also presented my speculations on the A8. While Apple’s creative design keeps them a step ahead in the processor race, because they control both the operating system (iOS) and the processor technology

  • Apple is in a unique position to optimize system graphics performance

 

So what is it that they have done?

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