Friday, September 20, 2013

Apple continues to innovate

On Wednesday I joined millions of people in downloading Apple's new and greatly improved operating system for mobile devices, iOS 7. After playing with it for awhile, I can say I'm delighted. It's like having a brand new phone. And it's not just me; in just two days, a significant portion of Apple's installed base has upgraded to iOS 7. A much greater percentage of Apple phones are now running the newest software than is the case with Android-based phones. It is reasonable to expect that, as Apple claims, iOS 7 will be the most popular mobile software in the world before too long, because the vast majority of iPhones and iPads being used today are eligible for the upgrade, and it is relatively easy to do. The same is not true of Android phones, only a fraction of which can use the latest version of Android.

The new software represents a complete overhaul, adding hundreds of new features and capabilities, all with a fresh new look. One new feature, Activation Lock, means a stolen iPhone becomes useless; the phone cannot be reactivated without a user's Apple ID and password, and Apple requires all passwords to be relatively complex. The camera software is now easier to use, with added editing features. Font sizes can be increased or decreased. Developers now have 1,500 new APIs to play with, opening the door to even more innovation.

Meanwhile, Apple's new iPhone 5S comes with a 64-bit processor (a first for the smartphone market), and a fingerprint scanner, both of which will be hard for competitors to copy in a short time frame. Plus, a new camera sports a bigger aperture, larger pixels, a new dual flash, and software capabilities not found in any camera. Reviewers almost universally consider the 5S to be the best smartphone on the market. Initial reports suggest the iPhone 5S is selling like hotcakes. The cheaper 5C is likely to do very well in overseas markets.

Within the next month or so, Apple is likely to introduce a new generation of iPads, and Apple already dominates the tablet market. Tablets are replacing laptops and desktops all over the world.



Apple has over $100 billion in cash, equivalent to more than $110 per share, and it pays a 2.6% annual dividend—which represents only 10% of its current cash holdings. Backing out the cash, AAPL trades with a trailing PE of 9 and a forward PE of 9.2, which means that the market is pretty confident that Apple's best days are behind it, and there is little chance that earnings will continue to grow. That's a pretty pessimistic assessment of a company that has revolutionized and created entire industries (e.g., smartphones and tablets), and that continues to deliver high quality and innovative products to a global market with significant growth potential.

You don't have to be a wild-eyed optimist to like this stock.

Full disclosure: I am long AAPL at the time of this writing.

UPDATE: (based on my comments posted 9/23)

Just received my new iPhone 5S from Fedex. Took only a few minutes to set up, then about 30-45 minutes to load in all my settings and apps from iCloud. It's everything it was advertised to be, and the fingerprint ID works like a charm, obviating the need to swipe. I chose the "silver" model, which is identical in outward appearance to the "white" iPhone 5, except for the silver ring around the home button. It then took a few minutes to erase everything from my old phone, which is now in pristine condition and ready to be sold or transferred to another party. I'm somewhat surprised that Apple sold 9 million new phones over the weekend. I knew it would be a hit, just not this big of a hit. I tried the slo-mo video and it's great. I now look forward to seeing how much better the phone is in low light and with the new flash. As with the iPhone 5, the fit and finish on this new phone is simply fantastic, a work of industrial art.

I played around with the slo-mo video some more, and it's not just great, it's astoundingly great. High-def slo-mo video is now available to the masses, and it will be used and consumed. The quality is exceptional, and it's so easy to edit! Plus, photos taken in low light and with the flash are now orders of magnitude better than with the camera on the iPhone 5, and that was an order of magnitude better than the 4S. I'm astonished at how much better it is. The camera alone is more than enough reason to get the 5S.

The news of 9 million phones sold over the weekend was eclipsed by the news that more than 200 million iOS devices have upgraded to iOS 7 in the past 4-5 days, making it the fastest software upgrade in history. Apple users are extremely interested in how their devices function, and the vast majority will soon have the benefit of exciting new software features. Because of its extensive fragmentation (there are thousands of different models of Android phones out there), this will never be the case for users of Android devices.

14 comments:

Benjamin said...

Kudos to Scott Grannis on his Apple call. What a company.

At the risk of sounding schmalzy, I think there is a nice morality lesson in Apple too. Here was a company nearly left for dead, and laughed at 10 years ago.

Many,many companies go bankrupt. How many skirt bankruptcy, become the butt of jokes and sneers, but then become world-beaters again?

Maybe a lesson for all of us there.

BTW, another company doing great things, with far less fanfare, is Ford. They did not take the bailout, they make the world's best pick-up trucks and a luxury car (Lincoln) that gets 42 mpg.

Ford seems to have made continuously better engineering a part of their make-up. Whether this translates into the stock market I do not know.

Post-Steve Jobs I worry about Apple. But so far, they are doing fine.



William McKibbin said...

I am still confused about why Apple does not pay out bigger dividends...

NormanB said...

Don't get so schmaltzy over the cash and the earnings, you economist, you.

Their tax rate is about 25% whereas Exxon's is 48%. Basically the difference is that AAPL does not pay taxes on foreign earnings so they keep the earnings overseas, unusable for US (ie shareholder purposes).

They are beting like many others that the US will allow repatriation at zero to a nominal tax rate. The Congress did do this once and there was no economic benefit to the country so it's unlikely to be done again Futher, not shown on their balance sheet (econimists please note) is that tax liability.

Therefore, to make a relative comparison of AAPL to the general market you need to first give them a proper tax rate which would raise the P/E by 25% to 50% (figure it out yourself) and lower the 'cash' by the amount of the taxes not paid.

Couple the above with the fact that AAPL's margins have been extrordianarly high relative to their history for the last couple of years and +++are unsustainable.

As the old TV show said, "Be careful out there."

sgt.red.blue.red said...

Just got my two 5S's ordered this afternoon, the gold 16 gig for my wife, and black 32 gig for me.

BTW, the black phones have a MUCH earlier expected delivery time than the gold.
46tiya

Scott Grannis said...

Re: Apple's tax rate. My calculations took into account the tax that Apple would have to pay to repatriate foreign profits.

Scott Grannis said...

Re: Apple's new 5S phone. I look forward to receiving my 5S on Monday.

Effective Demand said...

btw, as a developer, ie those who will actullay define the market, aapl is on the losing end of the long game. Apple innovated the ui, no question, but after that they are fighting a losing battle, they are one app away from losing it all to android. Blackberry meet apple, apple meet blackberry, any questions.....?

Joseph Constable said...

Finger print scanner innovation means the NSA now will have all your finger prints. When they finally find a way to quantify what you are thinking, you'd better hope you are thinking what they approve for thinking.

Benjamin said...

Joseph Constable:

No worries. At the end of every phone call, or e-mail, just say or write, "I think the NSA deserves a much larger budget."

You'll do fine.

NormanB said...

RE:Scott Grannis:

You probably took the payable taxes out of the cash but did you reduce their earnings per year by that same amount? That's my point, their EPS are way overstated.

Bill Platteter said...

Not a scientific study but we purchased 3 android phones and 3 iphones at the same time. Guess what? Two of the androids have had problems and were replaced. Now one of these is having problems again. The 3 iphones have performed well - no problems. I think I know which ones I will buy next time. Apple sells quality products.

Scott Grannis said...

Just received my new iPhone 5S from Fedex. Took only a few minutes to set up, then about 30-45 minutes to load in all my settings and apps from iCloud. It's everything it was advertised to be, and the fingerprint ID works like a charm, obviating the need to swipe. I chose the "silver" model, which is identical in outward appearance to the "white" iPhone 5, except for the silver ring around the home button.

It then took a few minutes to erase everything from my old phone, which is now in pristine condition and ready to be sold or transferred to another party.

I'm somewhat surprised that Apple sold 9 million new phones over the weekend. I knew it would be a hit, just not this big of a hit.

I tried the slo-mo video and it's great. I now look forward to seeing how much better the phone is in low light and with the new flash.

As with the iPhone 5, the fit and finish on this new phone is simply fantastic, a work of industrial art.

Scott Grannis said...

The news of 9 million phones sold over the weekend was eclipsed by the news that more than 200 million iOS devices have upgraded to iOS 7 4-5 days, making it the fastest software upgrade in history. Apple users are extremely interested in how their devices function, and the vast majority will soon have the benefit of exciting new software features. Because of its extensive fragmentation (there are thousands of different models of Android phones out there), this will never be the case for users of Android devices.

The Geeks said...

Thanks for review, it was excellent and very informative.
thank you :)