Apple Inc

Fundamentals

Written by Ophir Gottlieb, 10-26-2015
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Apple is set to report earnings on Tuesday, October 27th after the market closes and there is a lot of noise surrounding it. Some is meant to confuse you, the rest is an attempt to cut through clutter. I'm not here to tell you what everyone else is talking about, I'm here to shed light on the rest. And it's 'the rest,' friends, that are the drivers for Apple stock, not the noise. This is the most powerful technology company in the world and it's innovating faster than ever before.

What Everyone Else is Focusing On
Wall St. has been hyper focused on iPhone sales, taking bits and pieces of information from suppliers, retailers and Apple itself to try to piece together a cogent estimate. Given that more than 60% of Apple's revenue comes from iPhone, that makes sense, but it also totally misses what Apple is doing for the future.

Further, Wall St. has been equally myopically focused on China since fully 50% of all of Apple's revenue growth and 61% of the increase in operating income came from China in the company's current fiscal year.



What's Really Going On
When Steve Jobs passed away the entire world was left with an emptiness, but Apple shareholders and analysts in particular were left to wonder what was next. We have been waiting for Tim Cook to put his stamp on Apple's corporate (outward) culture and we just got it. Apple has become combative, competitive, aggressive, savvy and attacking massive growth in all areas with reckless abandon.

In the very short-term Apple's stock will gyrate rather significantly (maybe) based on the earnings report in a day and the earnings forecast for next quarter. If you're looking for a day trade in Apple, I can't help. If you're looking to the Colossus that is Apple and why it is potentially at its most innovative stage ever... Here. We. Go.

The main stream media simply doesn't have the vocabulary to understand breaking technology. It just doesn't. Get free news alerts (once a day) from us and you will be the expert in the room.

Apple Will Win
In the very near future (but not this quarter), Apple will be diversifying its revenue stream. We're talking about Apple Watch, Apple Pay, Apple Music, Apple TV, iOS9 and the Apple Car. I don't think there's a single product mentioned above that hasn't already been doomed to failure by the main stream media. But, it's long been a media hobby to question Apple. It's also long been a good way to be dead wrong. Let's remember these product reviews:



Here we go, step-by-step. This is why Apple is going to win, again.

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Don't Worry About China
Fully 50% of all of Apple's revenue growth and 61% of the increase in operating income came from China in the company's current fiscal year. There is a lot of angst surrounding China's stock market and economy and how it will impact sales of Apple’s iPhones. Here are the reasons not to worry in the long-term and to allow for short-term gyrations to be just that, short-term.

1. All three China wireless providers reported their August subscriber numbers. China Mobile had its largest 4G user growth ever following its previous third best month in July. China Telecom is maintaining a fairly steady pace and China Unicom has seen three months of very strong combined 3G and 4G subscriber growth (Source: Forbes written by Chuck Jones.

2. China's middle class stood at 47 million people in 2010. By 2020, that number is expected to hit 472 million. Yes, that's right, nearly half a billion more people in the middle class. Here's that image.



Wall Street simply doesn't have the vocabulary to understand breaking technology. It just doesn't. Get free news alerts (once a day) from us and you will be the expert in the room.

Don't Worry About iPhone
T-Mobile CEO John Legere tweeted on September 24th that Apple iPhone 6S pre-orders are up more than 30% from last year. And we already know what's going on in China. Friends, Apple is going to blow the roof off of the house again. And whether that gets realized in this quarter, or next quarter, or whatever quarter, the iPhone is nowhere near capacity.

Further, The Wall St. Journal's Miriam Gottfried reported on Sep. 10th, 2015 that Apple will begin financing iPhone sales directly to consumers with no carrier-affiliation requirement. All an iPhone user would have to do to switch carriers is get a new SIM card (Source: WSJ). This could mean more frequent upgrades for iPhone customers.

Yes, Apple is going to take over control of iPhone sales itself, including financing, and whether that affects this quarter or next is nothing but noise -- this is a huge move, and means more money to Apple. Period.

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Don't Worry About Innovation in the Future: Apple Music
We'll start small and get gigantic. On October 20th, 2015 Tim Cook revealed the early results of Apple Music. The service now has 6.5 million paid subscribers with another 8.5 million users who are still in their three-month free trial period. As a comparison, Spotify has 20 million subscribers (Source: Fortune).

Remember, when Apple enters an industry that exists it totally blows it up. Before Apple entered the smart phone realm, in the full year of 2006, worldwide smart phone deliveries totalled 64 million units (Source: https://www.canalys.com/). By 2014, 1.2 billion smart phones were sold (a 20-fold increase in total market size) (Source: TechCrunch). Further, Apple sold 74.6 million iPhones in one quarter last holiday season, larger than the entire worldwide smartphone industry in 2006.

Apple isn't looking for 20 million Music subscribers, it's looking for some massive multiplier and we have every reason to believe it will get it.

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Don't Worry About Innovation in the Future: Apple Pay
Let's go form tiny to absurdly large. The mobile payment segment of technology will be enormous. It already stands at an expected $8.7 billion for 2015 and is expected to grow to $27 billion by 2016.



The largest banks are not only aware, but in bold support of the shift to mobile payment. To the extent that a mobile platform like Apple's increases payment volumes, the banks are ecstatic. Almost every major bank in the world is now an explicit partner to Apple Pay and most have happily agreed to cut transaction costs. In fact, here's a snippet from Bank of America:



This is not a small adjunct, this is an entire business line. Apple Pay works with the iPhone, and yeah, there are a few iPhones out there.

Don't Worry About Innovation in the Future: Apple TV
Tim Cook also just reported that Apple will begin taking orders for the new Apple TV on October 26 and that it will start shipping the product later that week (Source: Fortune).

Barron's reported on Global Equities Research's Trip Chowdhry when he said that the Apple TV platform "provides strong indication" that Apple TV will come with its own software development kit and its own app store, i.e. its own Apple TV ecosystem. And there's the problem for Netflix, he argues, since in this ecosystem Netflix would be just another app, or a "second-class citizen." (Source: New Apple TV Platform Is Bad News For Netflix: Global Equities).

Yes, the Apple TV is real, and it has huge upside.

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Don't Worry About Innovation in the Future: iOS9
Before we get into the Apple Car and Apple Watch, let's get a little techy for the purpose of getting a lot smarter.

Tim Cook just made a stunning move that is a violent attack on the entire mobile advertising world and especially an attack on Google. This may be the biggest single change to Apple's vision since the introduction of the iPod over a decade ago. Google's mobile advertising is instantaneously in dire straits and further, Google search is now under attack. Here's a chart of Apple's revenue (in the blue bars) and net income (in the orange line) for the last 15+ years. That recent spike is from the iPhone 6 rage.



Here's what just happened:
Apple released iOS9 and in that operating system users can implement ad-blocking apps that prevent mobile advertisements from appearing in the Safari browser. We can say instantaneously that 20% of Google's advertising business is now in dire straits. Note that Facebook ads are driven inside the Facebook app, so this is a non-issue for them.

Ah, but there's more... Apple didn't just set out to kill Google's mobile revenue, it decided to go ahead and take it for itself. Check this out from Benzinga:



And yet one more piece. With websites and ads now living inside the iOS9 ecosystem, search will be done through the iOS search. Yes, Apple has now entered search as well.

Apple has instantly entered the advertising the world. A quarter ago, it didn't even have an advertising arm.

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Don't Worry About Innovation in the Future: Apple Car
September 21st the Wall St. Journal reported: "Apple Inc. is accelerating efforts to build an electric car, designating it internally as a "committed project" and setting a target ship date for 2019, according to people familiar with the matter" (Source: WSJ).

The self-driving car market will take a few years to materialize, but if you're looking for another "iPhone" size product, this is it, possibly several-fold over.

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Don't Worry About Innovation in the Future: Apple Watch
Apple has been pretty hush-hush about the Watch. In fact, Tim Cook openly said "We are not announcing the numbers," during a session at the Wall Street Journal Digital Live Conference (Source: International Business Times).

Estimates range from 2.5 million to 6 million (which is a wild range), but let us keep two things in mind. First, this from Mashable:



Expectations are that Apple sold one million watches in its first day. Keep in mind that long list of reviews I presented earlier. The iPhone and iPad were considered by many to be flopps, especially after the sales numbers came out. Remember that version one of Apple products are never the bet, it's the next versions that tend to show rip roaring growth.

Apple Watch is one of the few products that could have a substantial impact on Apple revenue and earnings this year and Wall St. has yet again, discounted it to essentially zero. Here's a headline for you. "Wall St. was wrong about the Apple Watch." That will be posted in about a year, and the publisher will be every major news service in the world.

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Conclusion
Wall St. wants you focused on the immediate-term. It wants you focused on this quarter, right now, with hyper focus and no vision. It does this because it does not have the vocabulary to understand technology, nor does main stream media.

For all those concerned about Apple's future heed the advice we shared two months ago, and don't focus on the day-to-day gyrations:



It takes more than click bait and a 140 characters to be an expert and journalists aren't trained with the vocabulary to understand breaking technology. Get free news alerts (once a day) from us and you will be the expert in the room. You will be powerful. Get Our (Free) News Alerts.

You can Become an Expert on any Company. Just Enter the Symbol Below. It's that Easy, Friends.