Apple 2020: deeply undervalued
Beware the “President of the Internet”
Ace fund manager Terry Smith, now settled in balm of the Maldives, famously said that there are only 75 companies in the world worth owning.
There are probably fewer companies today. When we look around now, which companies would we want to buy on the assumption that we might never sell?
And isn’t it important to make a distinction between buying shares and becoming part owners in a company? The former is about about pricing a company’s shares — focusing on quarterly results and imminent product launches.
And the latter is about valuing the company — about sustainable growth.
I’ve been thinking about this in recent weeks. And looking head to 2020, I would suggest that a company worth part owning would need to match these four criteria…
- A Captivating Narrative
- Stronger Cash Flows
- A Compelling Tech Strategy
- Platform Adjacency (or at least plans to invade several industries)
And, you know what, they’re most likely going to be from among the tech superstars -– Apple, Alphabet, Microsoft, Amazon, Facebook, Tencent, Alibaba, Softbank, and yes, Samsung.
After all, though it’s still not quite taken on board, we are entering a neo-classical age of network effects resulting from the rapid formation of gigantic user bases and datasets, math house prowess and exascale private computer capacities.
It’s the age when global business across many sectors is dominated by a relative handful of elastic enterprises. And it is no fluke that the world’s five most valuable companies are tech companies.
Indeed, there is a wide recognition that the methods of these Tech Titans have triumphed, and that every company needs to adapt.
It’s a fact of the matter that every company is or has to be a tech company at its core, and will have no excuse not to be as we all pay for access to cloud-based computer power, storage and machine learning services.
Just look at how things are done in London’s ECIV. Their servers are in the cloud. They just need smart phones, the internet and the cloud.
At the other end of the scale, I don’t think Lloyd Blankfein was being arch when he said recently that Goldman Sachs is “a tech power rather than a grey-haired investment bank.”
Just look at its investment in AI, its investigation of blockchains, and at the sophistication of its IT platform.
But then they have to be proprietary, given where ‘open source’, cloud-based Fintech is taking banking and financial services.
What we can learn from Apple
So let’s look at Apple – the world’s valuable company – from the perspective of my “Stronger by 2020” criterion.
A bit of history.
In 2001 Jobs totally disrupted the music industry by putting 1000 tunes in our pockets with the iPod.
He then followed it up by cannibalising the iPod by putting the tunes in the App Store in 2008 for the iPhone.
There were 500 apps in the Store then. There are now hundreds of thousands which have been downloaded tens of billions of times.
This is the big narrative that we should focus on with Apple: it’s pipeline of superbly designed products.
Right now, the big hot distracting topic in tech is Augmented Reality.
Microsoft‘s HoloLens as likely to go fully ‘live’ in 2018 and the controversial Magic Leap’s light field mixed reality headset is likely to see the light of day.
Facebook used its F8 developers’ conference to announce its ambitions to dominate this field by developing a new kind of telekinetic computing.
Apple is in no hurry to enter the Augmented Reality fray.
And there really is no hurry. This is a long game requiring further advances in integrated technologies — miniaturised cameras, low power processors, batteries, wi-fi.
Apple will not consider introducing clunky headsets powered by external batteries that have to be carried in our pockets. Its controversial introduction of Airpods last year showed the way it’s going — wireless through and through — light, fast, precise.
Instead Apple will plough ahead with these in-house projects, investing heavily in R&D, using their hardware and design expertise to develop the next generation of cash generating blockbusters.
Apple’s launch pad
In fact, I think one of Steve Job’s greatest decisions was for Apple to design its own core processors for its mobile devices.
He found that Intel, Qualcomm and the rest among the merchant manufacturers simply couldn’t come up with processors that carried sufficient bang per watt — vital with mobiles — and they weren’t prepared to try.
So he set up a captive operation and the resulting A Series Apple processors, based on ARM <now owned by Softbank> foundations are far better than the merchant suppliers can provide.
A key consequence of the A Series — and there’s a more advanced Apple SoC coming down the pike — is that Apple’s iOS software is much more tightly integrated with the core silicon innards of Apple devices than applies in the cases of its less proprietary Android competitors — Samsung, Huawei, Google, Microsoft or Xiaomi.
Apple’s captive chip operation is by any measure one of the top chip shops in the world. Some asset.
With this Tech Intensity baked in…Apple can launch attacks on several fronts…
An Attack on Detroit
Shortly before he died, Jobs told John Markof of the New York Times that had he more energy he’d have liked to have disrupted Detroit.
So was born “Project Titan”.
But a chequered history followed. One minute Project Titan was getting huge amounts of air time, then its leadership changed, key staff joined Tesla and Uber. It seemed to be in limbo.
Last month to almost everybody’s surprise Apple applied for the appropriate license to start publicly test-driving self-drive vehicles on California’s roads. It’s already doing so using a suitably enabled Lexus.
And it’s taken out a patent on how a car can be controlled by an iPhone.
Apple co-founder Steve Wozniak, who may not be in the ‘know’ however, said recently that he hopes any Apple car will dispense with a steering wheel.
It’s now looking as though Apple has a lot more in mind than driving the expansion of its Apple CarPlay in-car ecosystem and systems for charging stations.
At Apple, more than anywhere, they can imagine the car as a smartphone that fits into the millennial lifestyle.
There is also the intriguing prospect of something major brewing between Apple and China’s Didi Chuxing <China’s Uber> in which Apple has invested $1 billion with a lot more available.
Whatever Apple does in cars, it has the firepower with its $250 billion cash reserve, to terraform the landscape.
An Attack on Finance, Healthcare
So Apple should not be valued by its next two launches or sets of quarterly results but the fact that its services business is now, on its own, nearly the size of a Fortune 100 company.
Indeed its fast growing quarterly run rate is nearly equal to Facebook’s total revenues. By 2020, Tim Cook sees the services business at twice the size.
Apple Pay, Apple Care and Apple CarPlay are examples of Apple subscriber only applications that will change peoples’ lives.
We’ve discussed Apple CarPlay.
ApplePay will form the basis for building a full service bank around you on a mobile platform, as can now be done in China via WeChat and Alibaba fintech services.
AppleCar promises to be a comprehensive part of the self-monitoring individual’s armoury and relationship with doctors and hospitals.
I suspect that Apple will become huge in health. It has very impressive but virtually medical research going on (more on that in a forthcoming briefing).
Base Case: in the battle of the ecosystems Apple is years ahead and there’s no reason to believe it will stall. Definitely a company to own in 2020 and far beyond.
Over 165 million paid subscribers love to be part of the Apple club and have no intention to leave. Google, Samsung, Microsoft, Huawei just aren’t there in terms of ecosystem richness and ease of access and navigation.
The ever growing, sprawling ecosystems of software and services allows the consumer to do more with the Apple hardware. Once she invests in the ecosystem’s ever harder to switch out of it and resist Apple upgrades and new products.
Facebook – The Data Megalith
I can’t pass over Facebook without comment. To be honest, I didn’t really care too much about Facebook’s quarterlies yesterday.
It is clearly a data superpower with enormous scope to monetise that data chiefly by packaging it for advertisers to precision target its 1.7 billion active users.
Along with Google it dominates the global digital ad market forecast to grow from nearly $200 billion last year to over $300 billion by 2020.
I can’t see Twitter or Snap scaling up sufficiently to be sustainable against this megalithic power.
If I have a concern it’s Zuckerberg’s somewhat ‘presidential behaviour’ with his current tour of US swing states talking politics and social issues on the stump.
But then he is already the ‘president of the internet’.
For now his attention is still very much needed at Facebook.
…a word on Unstoppable Amazon
And I can’t sign off this letter without mentioning Amazon following its impressive quarterlies.
Amazon can’t hide its profitability as it expands like crazy, prices at cost when necessary to crush the competition, and according to Fast Company magazine is now the world’s ‘most innovative company.’
Moreover, it’s not in the hands of Wall Street analysts.
I worked with Steve Jobs’s Svengali, Regis McKenna for several years and have kept in touch with him since.
Regis was a Jobs confidante and adviser right up until Jobs’s death.
Regis has told me that Jobs would have admired the way Bezos eschews Wall Street and its ways, just ploughs ahead and lets the devil take the hindmost.
He told me how angry Jobs got at shareholder meetings when he was under pressure to pay a dividend and give back to shareholders. According to Regis Jobs used to call those protesters “brain dead” or something a lot ruder.
Jobs would not have been pleased with Tim Cook’s capitulation to Jobs would not have been pleased with Tim Cook’s capitulation to David Einhorn and Carl Icahn in 2013 to start huge buy-backs of Apple shares and lavish dividend payments.