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

Apple developers conference – the coming revolution

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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.

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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.

Interesting iPhone Ad in China

A friend pasted on Facebook this very interesting/cute video of kids in a “China has talent” type of show. (Anyone out there who can correct me on the details, please do.)

All is fine with the little dribblers, until we get to the 39 second mark, when one of the judges pulls out…

I guess iPhone IS really big in China. Looks like he has the gold model. I can’t believe that this went unnoticed.

By the way – the kids are awesome!

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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.

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:

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.

Most Amazing Thing about Apple Watch

I know that most people miss it. They don’t think about it much.

If you ask several people what they think is the most extraordinary feature or aspect of the newly announced Apple Watch, they will give you many answers:

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?

Apple – Absurd Report Attacks Tim Cook

Preliminary post

In my article for Seeking Alpha, I outline all the fallacies of a recent report by Global Equities that called for the firing of Apple CEO Tim Cook. Virtually every point they made was at best forced, and at worst totally false.

One point that I make is that is is extremely contrived for them to take Apple’s Sept. 2012 high of $702 as the starting point for all analysis. Here I present several charts that illustrate my point. (I feel that these would encumber the SA article that had several other points to make.)

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This is Global Equity’s chart showing 23% fall from 2012 high. But there are several other starting points that make just as much sense. It is very contrived to insist on this as the only one from which to calculate Cook’s “destruction of shareholder value.” According to the report, Cook and Oppenheimer solely responsible responsible for the decline. (I address other issues in my SA article.)

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Cook’s first day

One very reasonable date to select as a starting point would be the day Cook officially took office as CEO. From Sept. 12, 2011, Apple’s performance shows a different picture. While it still lags the NASDAQ and the S&P, a 40% rise is not so bad. One could make a good argument that this is indeed a much better judge of his performance.

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Or how about the last twelve months? This is a common time frame.

Here, up 23%, Apple has not performed that badly at all. It still lags the NASDAQ, but beats the S&P.

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Competitors

Here we see it against some competitors over past 12 months. Not particularly good, but should an investor complain about a 23% rise, especially with a large dividend?

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Recent low

In this final chart we look at performance from the low point on June 27, 2013. Since then, Apple has actually led the whole pack, beating even Google with about 38% rise in value!

And why not pick the low point? You may argue that this price is contrived, but is it any more contrived than Global Equity’s picking the high point?

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Caveat Emptor!

My point is simply this.

Charts are very helpful to illustrate a point, and there is nothing inherently wrong in selecting a particular chart to illustrate your point. That is what they are for.

The reader, however, needs to look at a chart and decide for him- or herself 

• if that chart is a valid representation of reality, or
• if it is selected solely on the basis of fitting the argument.

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Your comments are appreciated!

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Mac sales: Response to Asymco

In Response to Asymco’s excellent post:

When will tablets outsell traditional PCs?

One quantitative  assumption that  you make is the growth rate for Macs to continue at 25%. I believe this is a big sleeper and the rate will increase significantly.

While some of that will come from China, that growth will be partially balanced by lowering growth in the more mature USA and Western Europe consumer markets. However, what is not being factored in here is the growth in the enterprise which was recently reported at 40%. Now, since enterprise was such a small percentage of overall Mac shipments, this growth did little to effect the overall growth. But, if it continues at 40% or higher while the consumer market is leveling, then it will eventually become a significant driver of the Mac growth rate. (Note I am talking here not of sales but of the growth rate of sales.)

I think that this year will be the year in which the Mac really turns the corner in the enterprise. I can see it eventually moving to 40% market share of desktop/laptop computers sold. That would be enormous. Recent Forrester research reports had some extremely telling points. (See below)

The 40% enterprise market share  (i.e. of new sales) I see coming in about 6 years in the US in 8-10 years world wide. The ramp up will be an S curve – gradual for the next two years then much more noticeable (maybe 7%, 12%, 18%, 26%, 34%, 40% share). There really is a sea change happening.

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Links:

Hell freezes over: Forrester urges IT to support the Mac – Apple 2.0 …

Apple Infiltrates The Enterprise: 1/5 Of Global Info Workers Use Apple Products For Work!

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New York Times on Apple Job Growth

The New York Times has published a rather silly article in which they claim that Apple has never contributed any jobs to the economy.

Well – they do not put it exactly that way – but their article practically says it outright.

I will agree with the quote:

… said Gary P. Pisano, a professor of business administration at Harvard Business School. “It’s hard to say the exact size.”

I agree as well that the methods used by the company they hired could be the subject of legitimate debate (as long as that statement is NOT interpreted as an innuendo that someone was dishonest.)

However, the following quote is a bit odd:

David Autor, an economics professor at the Massachusetts Institute of Technology, said via e-mail that the “entire business of claiming ‘direct and indirect’ job creation is disreputable” because most of the workers Apple is taking credit for would have been employed elsewhere in the company’s absence.

They go on to note:

Mr. Cappelli said. “If you say, ‘If there had been no Apple, those people would not have jobs,’ that’s not true.”

Of course it is not true that every single one of those individuals would be jobless, but if there were no Apple and engineer X took a job at HP then there would be some other engineer who would not have a job.

According to the logic provided, then no business anywhere creates any jobs at all. Everybody else would have been working somewhere else. This is – of course – utter foolishness.

I will admit that they do conclude with the statement:

Apple is, however, an innovative company that created a market for tablets and radically increased demand for smartphones.

In reality – the smartphones existing before the iPhone are not today considered smartphone. Additionally, the app business was relatively nonexistent prior to the iPhone, so perhaps they should be credited with ALL the apps developers (snicker).

As for people buying alternative products if Apple did not exist… sure they would be buying Asus and Lenovo computer that are totally designed, engineered, and built in China in factories with absolutely NO oversight at all. And…

They would be running DOS 12.1. (What a pleasant thought.)

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