Looking Beyond Apple's IPhone 'X' Hype To Services & The Ecosystem
Ahead of the US market open this Tuesday the stock was c.1% to the good in pre-market trading at around $162.84. It is nevertheless a healthy 52% up over the past one year from the $105 mark.
Apple Inc. iPhones and iPad tablet computers displayed for sale at an AT&T Inc. store in Newport Beach, California, U.S., August 10, 2017. (Photographer: Patrick T. Fallon/Bloomberg).
A High Price To Pay?
Could though the expectation that the new model will cost over $1,000 and a rumoured lack of new features dampen enthusiasm for new device?
On this score, Jordan Hiscott, Chief Trader at ayondo markets, said: “In my opinion, probably not, though it is worth noting that Apple now appears to be positioning itself in the high-end/premium market, breaking with the tradition of trying to compete with the mass market deals of Android.”
The importance of this device launch is “not just hardware sales”, but also what it means for customer loyalty and the Apple ecosystem according to Neil Wilson, Senior Markets analyst at brokerage ETX Capital in The City.
“We note a potential risk if the new devices are priced too highly for customers to upgrade,” he said. “If as anticipated it is priced around $1,000, the entry point is high and will make it more expensive than the MacBook Air. This will undoubtedly test some consumers’ willingness to upgrade.”
That said, Apple customers tend to be loyal and this price has been known to the market for several days, so should not come as a surprise to investors.
On this front Apple has form. It likes to set trends so the push for a more expensive, higher spec device as standard can be seen as the company once again setting the pace for the rest to follow.
As Wilson pointed out: “It might be a high price but Apple has worked out that its iPhones are now indispensable to their owners and they will upgrade whatever. This looks like classic Apple…create something with existing technology (e.g. the OLED screen) and set the pace elsewhere, (e.g. price/design/usability).”
Apple is not always first with the tech, but manages to package it into a design and UX (user experience) that consumers go for.
The analyst posited that it would seem likely that consumers will be “elastic to the price change”, although the British market may be a special case given the weakness of sterling inflating prices further.
New devices that had retailed for around $800 last year would have set UK consumers back around £500 pre the Brexit referendum vote. Now a device costing $1,000 today would set British consumers back c.£800. Clearly that is a significant price increase that may have implications for some retailers.
And arguably this is a device not aimed at mature US and European markets, but at Greater China, where Apple has suffered falling sales.
The London-based Scot ventured that: “The high spec, high price iPhone 8 should offer Apple a stronger, more differentiated position in this particular market. The market [Greater China] accounts for about one fifth of Apple’s revenues, but revenues decline 17% last year. A return to growth here is important and the new cycle offers a compelling argument for this to happen in FY2018.”
The design refresh is also important for Apple in shaping how it takes the iPhone over the next decade.
It should come as “no surprise” according to Wilson that expected changes to the hardware reflect changes happening elsewhere in consumer technology - for example with augmented reality (AR) and facial recognition technology. These in turn can help lift software/app sales; e.g. AR, gaming, financial services. Again though the ecosystem is where it really matters for ensuring sustainable growth.
In its latest trading update, Apple offered guidance for the fiscal fourth quarter (Q4) of revenues between $49 billion (bn) and $52bn, which would equate to a rise of between 5% and 11% over the corresponding quarter a year earlier.
“This indicates confidence that the upgrade cycle will be strong and there is yet nothing to dent this view,” Wilson stated. “The iPhone 7, which was not a full upgrade cycle, delivered stronger-than-expected sales which suggest a supportive consumer environment for the 8th generation, even if it does look a tad pricey for some.”
Services Crucial For Stock Price
The latest trading update revealed that Service revenues rose 22% to $7.3bn, which is a blockbuster number by any measure that makes this division the size of a Fortune 100 company all by itself - and bigger than Amazon Web Services.
Services delivered nearly half of all the $3bn year-on-year revenue growth for Apple during the last quarter. And, it is the rising level Services revenues that make Apple “ripe for a re-rating” according to ETX Capital’s Wilson.
At the present time it is trading as a hardware company, with a price to earnings (P-E) ratio in the region of 18x (trailing twelve months (ttm)) and compares with peers like Alphabet at 34x, Facebook 37x, Netflix at 222x and Amazon at an incredible 246x.
Higher earnings from Services ought to change this. These are more sustainable revenues and unlike iPhone sales, are neither dependent on delivering the next big product upgrade nor seasonal.
Services also help support new iPhone sales since they build loyalty in the Apple ecosystem. This is particularly important in the Greater China market, where the company is struggling relative to every other region. Furthermore it also boosts sales of other products as consumers stick to all things Apple, e.g. Macbook, Apple Watch.
Taken together, the various product improvements to be announced by Apple could not only “get hardware sales going again, but also further drive earnings in Services”, as some like Wilson contend.
In early trading at 10.37am in New York today, Apple’s stock was trading on Nasdaq down 0.41% (-$0.65) at $160.85.
">Apple Inc’s press conference being convened today at 6.00pm BST is the ‘hot ticket’ for investors, with the iPhone’s latest iteration being focussed on in the short-term. The market will give its verdict on the new devices on offer, but there are question marks over the anticipated $1,000 price tag and the risk that the entry point might prove too high.
It represents the biggest and most important regeneration since the iPhone 6 refresh. And, whilst there have been a few leakages and off-the-record Apple reports, there could yet be one or two surprises. There is even the potential ‘wow’ factor to consider when the actual products are demonstrated live versus seeing the leaked specs.
A range of new features are anticipated, which ought to be enough to compel customers to upgrade. There are also set to be improvements to the Apple Watch (cellular connection) and to the Apple TV product.
Apple has certainly witnessed expectation around its latest iPhone reach fever pitch ahead of today’s launch. As the company’s flagship product, the device is rumoured to be called the iPhone X (the X’ cited by some as referring to its exclusivity), and will be key to driving up its already huge cash pile and profitability. As such this makes the success of the launch key for investors.
In a decade or since the iPhone first launched, many of the innovative features, which it first brought to the market are no longer unique and several of those rumoured to be on the iPhone X are already in existence. Notably, for example, the device being water resistant or having facial recognition software.
The share price has retreated a touch in recent days as the details of the new devices emerged Whilst this suggests the market is not bowled over by the specs, the stock leapt 1.8% on Monday ahead of the press conference, a tad shy of its all-time peak just north of $164 a pop.
Ahead of the US market open this Tuesday the stock was c.1% to the good in pre-market trading at around $162.84. It is nevertheless a healthy 52% up over the past one year from the $105 mark.
Apple Inc. iPhones and iPad tablet computers displayed for sale at an AT&T Inc. store in Newport Beach, California, U.S., August 10, 2017. (Photographer: Patrick T. Fallon/Bloomberg).
A High Price To Pay?
Could though the expectation that the new model will cost over $1,000 and a rumoured lack of new features dampen enthusiasm for new device?
On this score, Jordan Hiscott, Chief Trader at ayondo markets, said: “In my opinion, probably not, though it is worth noting that Apple now appears to be positioning itself in the high-end/premium market, breaking with the tradition of trying to compete with the mass market deals of Android.”
The importance of this device launch is “not just hardware sales”, but also what it means for customer loyalty and the Apple ecosystem according to Neil Wilson, Senior Markets analyst at brokerage ETX Capital in The City.
“We note a potential risk if the new devices are priced too highly for customers to upgrade,” he said. “If as anticipated it is priced around $1,000, the entry point is high and will make it more expensive than the MacBook Air. This will undoubtedly test some consumers’ willingness to upgrade.”
That said, Apple customers tend to be loyal and this price has been known to the market for several days, so should not come as a surprise to investors.
On this front Apple has form. It likes to set trends so the push for a more expensive, higher spec device as standard can be seen as the company once again setting the pace for the rest to follow.
As Wilson pointed out: “It might be a high price but Apple has worked out that its iPhones are now indispensable to their owners and they will upgrade whatever. This looks like classic Apple…create something with existing technology (e.g. the OLED screen) and set the pace elsewhere, (e.g. price/design/usability).”
Apple is not always first with the tech, but manages to package it into a design and UX (user experience) that consumers go for.
The analyst posited that it would seem likely that consumers will be “elastic to the price change”, although the British market may be a special case given the weakness of sterling inflating prices further.
New devices that had retailed for around $800 last year would have set UK consumers back around £500 pre the Brexit referendum vote. Now a device costing $1,000 today would set British consumers back c.£800. Clearly that is a significant price increase that may have implications for some retailers.
And arguably this is a device not aimed at mature US and European markets, but at Greater China, where Apple has suffered falling sales.
The London-based Scot ventured that: “The high spec, high price iPhone 8 should offer Apple a stronger, more differentiated position in this particular market. The market [Greater China] accounts for about one fifth of Apple’s revenues, but revenues decline 17% last year. A return to growth here is important and the new cycle offers a compelling argument for this to happen in FY2018.”
The design refresh is also important for Apple in shaping how it takes the iPhone over the next decade.
It should come as “no surprise” according to Wilson that expected changes to the hardware reflect changes happening elsewhere in consumer technology - for example with augmented reality (AR) and facial recognition technology. These in turn can help lift software/app sales; e.g. AR, gaming, financial services. Again though the ecosystem is where it really matters for ensuring sustainable growth.
In its latest trading update, Apple offered guidance for the fiscal fourth quarter (Q4) of revenues between $49 billion (bn) and $52bn, which would equate to a rise of between 5% and 11% over the corresponding quarter a year earlier.
“This indicates confidence that the upgrade cycle will be strong and there is yet nothing to dent this view,” Wilson stated. “The iPhone 7, which was not a full upgrade cycle, delivered stronger-than-expected sales which suggest a supportive consumer environment for the 8th generation, even if it does look a tad pricey for some.”
Services Crucial For Stock Price
The latest trading update revealed that Service revenues rose 22% to $7.3bn, which is a blockbuster number by any measure that makes this division the size of a Fortune 100 company all by itself - and bigger than Amazon Web Services.
Services delivered nearly half of all the $3bn year-on-year revenue growth for Apple during the last quarter. And, it is the rising level Services revenues that make Apple “ripe for a re-rating” according to ETX Capital’s Wilson.
At the present time it is trading as a hardware company, with a price to earnings (P-E) ratio in the region of 18x (trailing twelve months (ttm)) and compares with peers like Alphabet at 34x, Facebook 37x, Netflix at 222x and Amazon at an incredible 246x.
Higher earnings from Services ought to change this. These are more sustainable revenues and unlike iPhone sales, are neither dependent on delivering the next big product upgrade nor seasonal.
Services also help support new iPhone sales since they build loyalty in the Apple ecosystem. This is particularly important in the Greater China market, where the company is struggling relative to every other region. Furthermore it also boosts sales of other products as consumers stick to all things Apple, e.g. Macbook, Apple Watch.
Taken together, the various product improvements to be announced by Apple could not only “get hardware sales going again, but also further drive earnings in Services”, as some like Wilson contend.
In early trading at 10.37am in New York today, Apple’s stock was trading on Nasdaq down 0.41% (-$0.65) at $160.85.
https://www.forbes.com/sites/rogeraitken/2017/09/12/looking-beyond-apples-iphone-x-hype-to-services-the-ecosystem/