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Technology Stocks : Apple Inc. -- Ignore unavailable to you. Want to Upgrade?

To: Ryan Bartholomew who wrote (165317)	2/4/2014 12:55:04 PM
From: puborectalis	Read Replies (2) \| Respond to of 213177

Shares of Apple ( AAPL) are up $7.67, or 1.5%, at $509.20, after Morgan Stanley’s Katy Huberty today pounds the table on the company, reiterating an Overweight rating, and a $630 price target, writing that investors should “invest now for new product categories.” Huberty notes that Apple’s R&D has been growing 30% per annum the last three years, which she thinks is correlated to the stock’s outperformance in prior periods: We analyzed Y/Y R&D growth and AAPL share performance, and found that on a next 12 months view, stock performance tends to improve after periods of R&D growth as the company invests in new product categories. We saw this trend play out with iPod in 2000-01, iPhone in 2005-06 and iPad in 2008-09. Interestingly, Apple kept R&D growth at over 30% Y/Y during 2010- 13, the only multi-year stretch of consistent double-digit growth in the past 15 years. We believe some of these investments produced new services and expanded existing product families, such as iCloud and Siri in 2011, iPad Mini and Apple Maps in 2012, and iPhone 5c and even Touch ID (fingerprint sensor) in 2013. However, significant investments were likely made in new product categories too, such as mobile payments and wearables, in our view. Apple is stepping up R&D investments, even after a period of prolonged R&D growth. Management guided Mar Q R&D ahead of expectations, and CEO Tim Cook confirmed that there will be new product categories from Apple in CY14 on the most recent earnings call. Specifically, Apple guided operating expenses down less than 1% Q/Q at the mid-point vs. an average of -4% in Mar Qs since the iPhone introduction in 2007. Apple pointed to R&D investments in products and services, including unannounced products, as the reason for the upside. Wearable tech is probably the most immediate outcome of a slew of acquisitions by Apple, including WiFiSlam, Passif Semiconductor, and PrimeSense, opines Huberty, as “Apple is looking to extend its platform to a wider array of devices.” “As a result, we view the new product category CEO Tim Cook referenced on the F1Q14 earnings call as most likely a wearable product, like an iWatch.” Huberty thinks investors are “muted” in their expectations for wearable tech, but given that each new product category from Apple has grown at a faster clip than the last, she thinks “wearables could contribute up to $17.5 billion of revenue in the first twelve months,” topping the iPad’s growth rate: Assuming an ASP of $299 and Apple customer base penetration rate similar to the iPad, we see up to $17.5B of revenue in the first 12 months compared to $12B for the iPad and $2.5B for the iPhone. If there are supply bottlenecks in the first year, we see a more conservative revenue range from $10B (assuming iPhone penetration curve) to $14B (average of iPhone and iPad penetration curves). This translates into six to 10 points of revenue growth for Apple from iWatch in CY15. Here’s her chart for potential from iWatch versus other product launches (click for larger image): Huberty also notes that gross margin could be stronger for Apple going forward as it reverses the amounts it retains for hardware warranty coverage: Separately, Apple’s Dec Q 10-Q, published this week, indicates warranty accruals as a percentage of hardware revenue decreased slightly from 4.3% in the Sep Q to 4.0% in the Dec Q. But historical trends suggest there is further room for improvement, which will boost gross margins going forward along with component cost reductions and less impact from deferred revenue. In recent iPhone cycles, warranty accruals as a percentage of hardware revenue has declined as much as 80-90 bps from peak to trough. The trend in 2013 was slightly different as Apple increased warranty terms in China. China

To: Ryan Bartholomew who wrote (165317)	2/4/2014 1:55:12 PM
From: pyslent	Respond to of 213177

If they press harder on pricing and their own lowered revenue forecast (which included Japan/China) is indicative, wouldn't your concern be that the modest sales growth coupled with lower margins wouldn't achieve $43/share? Apple has shown that their high end sales are pretty much immune from their low end sales, so I'm confident they can safely move downmarket without cannibalizing sales at the high end. Pressing harder on price in certain markets in particular would only generate incremental sales, and while they may be at a lower margin and therefore reduce the blended margin percentage, they would increase absolute margin. If you look at the past year in global mobile OS market share, Android has really started to run away with the lead. For Apple to counter this, do you think that mild price decreases will do the trick, given that many of the Android devices responsible for the market share shift are priced substantially lower and yet are still in the same "high end" category? Apple's made it clear it is not their intent to counter Android's unit share lead. That said, I hope they realize it would be strategically advantageous and hugely profitable to address the premium low end segment beyond recycling 3 year old phones. I'm curious why you think Android's market share gains are coming from midtier phones that are functionally similar to high end phones. My impression is that the Android market is pretty barbell shaped-- lots of high end high priced phones (S4, Note 3 etc) and a lot of phones in Asian and prepaid markets who's main appeal is that they are cheap. Of the class of affordable, high end, I don't believe any of them sell in high numbers (eg Nexus 5, MotoX, last gen S3, phones of that ilk). Do you have different impression? Are there any successful midtier phones eating away at the high end market? Do you foresee a shrinking high end market as a consequence? I would agree that the atmospherics in the US is favoring handset price transparency, and therefore, it's reasonable to speculate that a $400 phone might be more appealing than a $650 phone, but I'm not sure the numbers bear that out yet. As for new product categories, I don't believe investors are pricing that in. With brand and ecosystem (lockin) as leverage, I believe Apple has a great probability of success whenever they launch any new product, be it watch, TV, or mobile payments), but the earnings potential of any of those products pales in comparison to the iPhone. Making some extra pocket money is fine, but I hope Apple keeps their eye on their cash cow.

To: Ryan Bartholomew who wrote (165317)	2/4/2014 2:51:38 PM
From: slacker711	Respond to of 213177

wouldn't your concern be that the modest sales growth coupled with lower margins wouldn't achieve $43/share? If you look at the past year in global mobile OS market share, Android has really started to run away with the lead. For Apple to counter this, do you think that mild price decreases will do the trick, given that many of the Android devices responsible for the market share shift are priced substantially lower and yet are still in the same "high end" category? The results of the 5C launch have made me less worried about cannibalization. iPhone customers have shown that they continue to be willing to spend extra to get the latest and greatest. There is an opportunity there for Apple to create tiers to attract new customers. Moreover, price cuts in India/China/Brazil are going to have little impact on the rest of the world (as shown previously). This is one positive of the fact that LTE bands are balkanized. A China Mobile LTE handset isnt worth much to a Verizon customer. Apple should be able to generate additional profits even if overall gross margins decline. Now they'll have to convince people that what they used to tout as an advantage is no longer, and that consumers who want a big screen should buy the iPhone instead of the many very refined and yet cheaper alternatives already on the market. In other words, if someone is going to upgrade to a bigger phone, they'll need a convincing reason to pay more for an iPhone when they can easily jump ship. I dont understand your logic here at all. Apple isnt creating a new market, nor are cheaper alternatives a new thing. The alternative larger screen handsets are already available for a range of prices. They are currently grabbing potential iPhone customers with Galaxy sales in the range of 20 million per quarter at prices similar to the iPhone. The addition of a 4.7" and/or a 5.5" iPhone is simply going to allow Apple to compete for those customers as well as increasing the likelihood of current iPhone owners to upgrade. As I am significantly more optimistic about the potential for a large screen iPhone, I dont see the absolute "need" for the iWatch to be a significant revenue generator for FY2015. Subsequently, I do expect a decline in their earnings absent new products. Apple under Jobs had shown an ability to enter new markets but we'll have to wait and see whether Apple can do that under Ive/Cook. I do tend to believe that Apple's strengths (user interface/design/brand) play well to entering new markets though. Slacker

To: Ryan Bartholomew who wrote (165317)	2/4/2014 2:58:32 PM
From: slacker711	Read Replies (2) \| Respond to of 213177

Backing out $90 or so in post-tax cash per share How do you get anywhere near that low? The $135 per share figure I used put a 30% haircut on the $124 billion that they have stashed overseas and added back the remaining $34 billion. They have already paid some foreign taxes on the overseas cash so they are not going to be paying the full statutory rate if they repatriate the money. Slacker

To: Ryan Bartholomew who wrote (165317)	2/4/2014 3:20:56 PM
From: pyslent	Read Replies (1) \| Respond to of 213177

Under that scenario, Apple would throw in the towel on trying to combat their dwindling global share and they would hunker down and focus on maintaining profits from their loyal base (which is willing to keep paying the premium). This is already what they are doing now, the strategy I called "business as usual," when the 5C was announced. They can try to expand their addressible market, but they haven't yet, and what we've seen is that the current addressible market has nearly flatlined outside of carrier launches. But flatlined does not mean declined. What makes you think that selling into Apple's addressible market can't generate 150m in annual unit sales indefinitely? With your $15/sh projection, you are saying that the "loyal base" represents only a small fraction of Apple's current base (about a 3rd)? I agree that the premium market could shrink as a fraction of the whole handset market; I couldn't put a number on how much, but I wouldn't guess by more than half in the foreseeable future.