By FundamentalSpeculation.IO on SeekingAlpha.com

Summary

  • I see signs of history repeating itself – the new behemoth in tech is becoming more and more like the old behemoth in tech.
  • The bull case for apple is the strong moat around its best selling product – the iPhone. Based on this year’s WWDC, if anything, this moat is only getting bigger.
  • The bear case is that it is a single product company. They just can’t seem to be able to expand meaningfully into other categories that can rival the iPhone.
  • Is the new Apple with its iPhone a lot like the old Microsoft with its windows/office?
  • We consult our relative value model to see what may be considered fair value for Apple in today’s market.

I am a geek at heart. I like the flexibility of customizing my tools exactly to my liking. I am biased to prefer Linux over macOS/Windows and an android based phone over an iPhone (though I own both). This leads me to not be a big fan of Apple (NASDAQ:AAPL products. I am however also in the minority. I appreciate the fact that most people are looking to see how computers/tablets/smartphones can help them in what they regularly do in their lives and prefer an intuitive interface over the customization I crave for. I have experienced this firsthand. I have tried to get my mom to use various laptops, tablets and phones over the years in the end the only devices she likes to use are the iPhone and the iPad. There is definitely tremendous value in the user experience and ecosystem apple has built.

The bear case for apple on the other hand is that it is a single product company at this point and at today’s valuation as the most valuable company ever in history, any misstep here can lead to a significant correction. I watched Apple’s WWDC keynote from earlier this month and I believe this only reinforces the beliefs of both parties. I will go over what I believe this means for the future of apple. Let’s start off with the good stuff from WWDC.

WWDC: The good stuff

Apple has been working tirelessly to make incremental improvements to the iPhone/iPad, its services and the ecosystem in general. I am a fan of Apple Pay and the introduction of P2P payments through Apple Pay has a very good chance of making mobile payments more mainstream in the US. As a developer, I’m also very interested in ARKit. What a lot of people do not realize is that one of the biggest hurdles in building such AR applications is the heavy lifting you need to do to build an infrastructure to support an AR platform before you can actually design your product.

The fact that ARKit does most of the heavy lifting is a big deal. While I would never consider hiring a team of developers to help me build such an AR platform for my one app, I would be much more willing to devote some of my time to building a useful product on top of ARKit. There were also a bunch of other feature additions. While I cringed at the number of times the speakers tried to weave the phrase “machine learning” into their talks, I expect users will find value in a lot of the feature additions.

WWDC: The bad stuff

Steve jobs very famously simplified Apple’s product line when he was brought back to save the company. His “four quadrant” product grid is now legendary. Fast forward twenty years and now how many variations of apple products do we have again?

I understand apple is trying to squeeze the last few dollars from its customer base by trying to cater to some very specific needs a subset of the users may have, but some of the variations they are looking to launch are just silly. Case in point the new iMac Pro.

After what can only be considered a failed launch of the Mac Pro and a very rare admission of guilt, apple seems to be taking a second stab at the pro user. Let me be clear, if I am looking to buy a workstation as a professional user, my single biggest consideration is a modular, expandable design. I do not care one bit about aesthetics in this case! (It also took a lot of restraint for me to not use more colorful language). What I am looking to make sure is that my large investment will not go obsolete within the next few years requiring me to fork out several thousand dollars again to buy the new version of the same product. I fail to see who the target audience is for this device. It also looks like Apple realized this would be a concern and included language in their press release to assure customers that they are still working on a Mac Pro with a modular design. That being the case, it still does not excuse apple from creating useless product lines. This is the exact opposite of what Steve Jobs did to turnaround the company.

“In addition to the new iMac Pro, Apple is working on a completely redesigned, next-generation Mac Pro architected for pro customers who need the highest-end, high-throughput system in a modular design, as well as a new high-end pro display.”

The new Apple is like the old Microsoft

This brings me to how I believe this will play out for apple. Microsoft (NASDAQ:MSFT famously experienced a “lost decade” where the company was tremendously profitable but the stock languished with no one believing Microsoft could build anything successful beyond windows/office. It continued to generate massive profits through this period but the multiples just contracted. It was only recently when Satya Nadella took over the reigns and refocused the company as cloud-first and mobile-first that the stock has taken off. I see a similar case with Apple. I believe the iPhone will continue to be a very successful product. Revenues from services related to this ecosystem will also continue to grow in the near-mid term. However despite the recent run up in the stock, I do not see much room for any significant multiple expansion. Let’s take a look at what our Relative Value Model has to say about Apple.

To add some color to the chart shown above, the “Cohort Fair Value” is the Fair value determined by our Relative Value Model based on comparables with similar business fundamentals (Such as Growth, Operating Leverage, Profitability etc). The “Fair Value” factors in a premium the market is currently paying for technology companies. If you agree with me that Apple will go through a phase similar to Microsoft in the 2000s, then the cohort fair value is the level to look for. Earlier this year, I would have recommended buying Apple and it reached our cohort fair value before falling back again in the recent tech sell-off. If at any point it starts to become clear that Apple can be more than just an iPhone company, I will get a lot more bullish and look for moves towards our sector adjusted “Fair Value” levels.

At the end of the day if you are bullish on the overall market at today’s levels or just want to stay invested, I consider Apple a good buy as long as it is below our cohort fair value. Start trimming your positions whenever it exceeds this level. Good luck with your investments!

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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