by Jean-Louis Gassée
After the early fast growth iPhone years, Apple appeared to stumble. Profit and revenue began to fall starting in 2013. Now, a bold bet, the iPhone X, covered by the iPhone 8, appears on the verge of paying off.
[A delayed Monday Note due to logistics trouble entirely of my own making…]
“Buy the Rumor, Sell the News” is an age-old Wall Street saying. It tells speculators to take chances on rumors: Did you hear that Company X will buy Company Y and thus will gain — or maybe lose — significant amounts of money? Place your bets and when the facts, or as we now have to say, the actual facts are known, rake in the chips or take the hit and move on to the next rumor.
I use speculators intentionally, as a way to set these risk-takers apart from the Buy and Hold type of investor. Warren Buffet, the Sage of Omaha , is the archetype of the calm investor who plays the long game. When his AAPL stock, purchased in early 2016 for about $1.1B, dipped to $888M, he made it clear that not only was he not about to sell a single share, he went on to quadruple his holdings in the Cupertino company by the end of the year.
In late 2016, Apple’s shares hovered around $110. The price climbed to about $172 this past Friday November 3rd, precisely a day after the company published its numbers for the final quarter of Fiscal 2017. Warren Buffett’s investment is doing well and — surprise! — speculators aren’t selling their shares, either.
Before we dive into the numbers, let’s look back at a decade of Apple’s Sales and Net Profit during the iPhone era:
2007 to 2013 were the go-go years, revenue and profit climbed at a speed never seen before, especially considering the suddenly massive size of the company. With sales of more than $100B in 2011, Apple still managed to grow 2012 revenue by 45% and profit by 61%. The once “beleaguered” PC company that had struggled to gain market share with its “non-standard” Macintosh was crushing Nokia and Blackberry in the mobile device space. In the eyes of many, Apple had become The iPhone Company.
Then, sales growth slowed down abruptly, 9% and 7% in 2013 and 2014 respectively. Profit dropped (-11%) in 2013 before recovering, modestly, in line with sales (+7%) in 2014. The misadventure was attributed to the emergence of the large screen Android “phablets” , particularly those from frenemy Samsung, a company that was both Apple’s competitor and supplier.
In late 2014 — just in time for the start of Fiscal Year 2015 — Apple introduced its own large screen phones, the iPhones 6 and 6 Plus . iPhone users who had been holding out for a larger screen bought the new models in large quantities, and new users joined in. After two years of disappointing growth, Apple’s numbers rebounded, +28% for sales and +35% for profits (technically called Net Income). It seemed that the gogo years were back.
The following year, 2016, sales were down 8% and profits did worse, -14%. In retrospect, the 2015 numbers didn’t belong on a continuous demand slope. The large screen iPhone 6 fulfilled a one-time, non-repeatable demand from iPhone users. Once satisfied, growth fell back to a slower pace…and the blogosphere responded with the Apple Is Doomed refrain, with much I Told You So sprinkled all over.
Then another surprise: In 2017 Apple returned to its 2013–2014 growth pattern. Modest good news, the giant is growing again, + 6% for a $220B company is a “mere” $12B in additional revenue, but misleading news nonetheless. The full 2017 year obscures what happened in the last September quarter:
First, the company grew by 12% in a quarter where customers tend to wait and see what the new iPhones will look like. There was just one week of iPhone 8 revenue in the period, not enough to sway number much.
Second, and more important, everything worked, from Macs to iPad to iPhones to Services (which grew by “only” 24% after a one-time down adjustment). In particular, the iPad now shows two consecutive quarters of more than 10% year-to-year growth, this after more than 3 years of declining shipments. Every category went up. This includes the Watch. No units/revenue numbers there, we just have company management statements: ‘ + 50% growth’ and ‘passing Rolex to become the #1 watch maker’. Horace Dediu comes to the rescue in a piece titled When Watch surpassed iPod . There, Horace digs into historic data and sees Watch revenue exceed $3B in (calendar) Q3 ’17 and approach $5B in this Xmas Q4:
These “all cylinders firing” growth indicators explain the now sunnier view of the company’s future.A side note, a misfire: Gartner, an historic Apple doubter, pegged Mac sales at 4.6M units for the quarter, -5.6% versus the prior year. The actual number turned out to be 5.38M units:
Moving to this Xmas quarter, we have the iPhone X’s contribution to the overall sentiment, to a view of Apple’s future growth. The most reliable estimate of the company’s short-term growth seems to come from Apple itself, whose guidance for the quarter immediately following the earnings release turns out to be traditionally reliable, by which I mean no sandbagging and no manipulative optimism:
The same quarter a year ago (14 weeks) generated $78.35B in revenue. Apple’s guidance would represent between 7% and 11% growth. I won’t get into adjustments for the number of weeks, I trust Luca Maestri, Apple’s mellifluous CFO to do the math when the time comes.
There is more.
My iPhone X arrived as I was writing this Note. I’ll wait for the mandatory Third Impression to set in before I brave a full review. Instead, we’ll turn to the justly celebrated iFixit teardown site for insights into Apple’s bold iPhone X bet, and how it covered it, in effect forking the iPhone line.
As the logic board pictures for the iPhones 6,7 and 8 attest, Apple’s development strategy has been one of careful increments. Most everything got improved year after year, processor, camera, radios, sensors… But the form factor stayed the same and so did the logic board layout. (Following pics all courtesy of iFixit.):
The iPhone X took a different route. Some parts, the processor as an example, were shared with the iPhone 8 but, in order to accommodate Face ID and a new OLED display, apple went for a different, non-derivative design.The logic board is a high-density sandwich design:
And the iPhone X now uses a dual-cell design:
And, in a change from established practice both iPhone 8 and iPhone X come out at the same time — almost.
What we see is Apple is doing what they do best: Taking chances. They made a risky bet with the iPhone X and covered it with the iPhone 8. The new and improved perception of Apple might come from the realization that both bets are winning, and that the iPhone X is a radically new, as opposed to a merely improved, breed of smartphone — and probably is the start of a new succession of carefully incremented future models.