Why we’re nonplussed on Apple even if the iPhone X is Awesome

Why we’re nonplussed on Apple even if the iPhone X is Awesome

While we too are interested in what Apple (AAPL) will be unveiling tomorrow, we’re not in the camp that expects the company to deliver a “shock and awe” presentation as it showcases its latest and potentially greatest iPhone model. Make no mistake, Apple’s iPhone business is impressive given its market share, margins, and cash flow generation, and it’s a device that many of us, including us here at Tematica, could not live without. The issue is the iPhone appears to be an increasingly iterative one in a market that is plagued by slowing growth and reliant on the upgrade cycle.

The reality is that while Apple will likely continue to enhance the iPhone, and pick up incremental share along the way, it’s no longer the disruptive device that redefined the company and the category. Rather, given the size of the iPhone business, relative to Apple’s revenue, profits, and cash flow, it’s one that it needs to fight and keep up with product upgrades, even as it has ratcheted up its R&D spending in 2016 and 2017. When we’ve seen such activity at Apple in the past, it has often led to new products and new product categories, which keeps us hopeful for the long-term. That said, Apple isn’t the only one that is ramping its R&D spending as our Connected Society theme continues to disrupt existing business models. We’d point to Amazon (AMZN) as the innovator to watch.

 

What We Can Expect to Hear from Apple

The excitement and rumor mongering over the last few months will soon be over tomorrow, September 12, as Apple will unveil it latest iPhone model or potentially models. Also, if the internet chatter is to be believed, upgrades for its Apple TV and Apple Watch products will be on presented as well.

Recent software leaks suggest the unveiling of several iPhone models, with at least one of them including new features in the device itself — things such as Face ID and augmented reality as well as an organic light emitting diode display (OLED). Aside from the hardware, there will be a bevy of new features associated with the latest version of the iPhone operating system, iOS 11. Candidly we’re not all that sure about the “Animoji” feature that uses the 3D face sensors to create custom 3D animated emoji based on the expressions you make into the camera. Our thinking is this feature could be like steroids for the selfie market. Rather than digress, we are very excited about the productivity features inside iOS 11 and what they mean for the iPad. We’ve been beta testers of the iOS 11 on our own iPads, and the improved split screen capabilities alongside true drag and drop, at least in our view, are going to make the iPad what many hoped it would be several years ago — a perfect device for working while on the go.

As great as the new iOS and other new products are likely to be — like the purported Apple Watch with built in LTE connectivity —, the big kahuna at the event will be the iPhone, and it is expected to come along with just as big of a price tag. While there have been many headlines discussing the potential $1,000 price tag for Apple’s new high-end smartphone, let’s remember there are a variety of financing mechanisms from mobile carriers like AT&T and Verizon Communications as well as Apple’s own iPhone financing program.

Yes, some will balk at upgrading to the iPhone X because of its price or lack of a “wow-factor”, but we also know there is a cohort of consumers that see owning the latest Apple device as the latest status symbol for our Affordable Luxury investing theme. We also expect Apple will once again under-produce relative to initial demand, magically once again leading to the latest and potentially greatest iPhone being sold out. Make no mistake, we here at Tematica love all the Apple products we have, and we have plenty of them, but there is no easier way to stock out a new product than to restrict its initial supply. Of course, this only adds to the allure of being an early adopter, much the way until fairly recently spotting a pair of  Apple’s Air Pods has been akin to seeing a unicorn.

We are not surprised to see Apple potentially bringing multiple models to market as it looks to target share gains with the rising middle class in markets such as India and China as well as other more price-sensitive emerging economies. With the iPhone, likely the first internet connected device to be had by a person in these geographies, the device is a beachhead in which Apple can leverage its sticky ecosystem of products and services, in particular, its Apple Pay feature. If Apple is as successful as it has been in the U.S. and other developed markets, it’s a large opportunity for the company as well as shareholders.

The issue with Apple’s global expansion plans for the iPhone is that larger adoption of products and services takes time, and this means that if Apple is successful with these new iPhone models it will continue to be a trapped by its own success. By this we mean consumers flocking to the latest model in droves during the first six months of its release, only to see sales fade as potential buyers wait for the next new model to be had. If this cycle remains, it likely means Apple remains a seasonal business tied to the annual introduction of iPhone models… at least until it introduces either a new product category or an existing business segment delivers a new breakout product that turns the business mix on its head. Given the size of the annual iPhone business relative to the sizes of the Mac, iPad, Services and Other Products business segments, the latter is a daunting task to expect.

Perhaps the greatest risk to the new iPhone is the possibility that between Apple iOS beta software program and the annual rumor mongering, not to mention a disgruntled employee or two, much of what’s been slated to be shared for the new model has already been leaked. This could lead to a meh reception of what has been touted as a “make or break product for Apple.”  In other words, without an unexpected new, new thing to further implant Apple in our Connected Society investing theme, Apple shares could fall victim to “buy the rumor, sell the news” following tomorrow’s special event.

Cocktail Investing Ep. 24: As Amazon becomes the Death Star of retail, the Fed still looks for inflation in a deflationary world

Cocktail Investing Ep. 24: As Amazon becomes the Death Star of retail, the Fed still looks for inflation in a deflationary world

In this week’s program, Tematica’s investing mixologists, Chris Versace and Lenore Hawkins discuss the week’s economic data, relevant political happenings and share where they have spotted a few of the latest Thematic Signals. A few highlights include:

 

  • While most Wall Street economists are still forecasting Q2 GDP to be around 3 percent, the NY Fed’s Nowcast and the Atlanta Fed’s GDPNow are below 2 percent, with an even lower forecast for Q3. We point out what they are likely seeing that the usual Wall Street suspects are missing and why this could be problematic for 2Q 2017 earnings season.
  • With the first half of 2017 almost over, only one other year going all the way back to 1928 has had a smaller maximum drawdown in equity indices during the first half. Find out what tends to happen in years where the first half sees such a steady move up.
  • The yield curve is giving us a very different message from the major equity indices. We discuss what and why this is important for investors.
  • We talk about what is happening in oil, on the demand as well as supply side, and what it means for the economy, geopolitics and earnings expectations for not only oil companies, but the entire S&P 500.
  • We wrap up our discussion with a focus on Amazon (AMZN) on its whirlwind of recent announcements from its acquisition of Whole Foods (WFM) to Nike (NKE) now selling some of it products directly to the online giant. We also explain why Amazon is THE poster child for thematic investing.
  • Finally, as if retail isn’t suffering enough from the retailing Death Star of Amazon, we discuss why a new report on retail and the food & beverage industries is a positive for our Safety & Security investing theme.

 

And be sure to tune into next week’s podcast when Lenore and Chris talk with Security-as-a-Service provider Alert Logic about the evolving world of cybersecurity. All that plus what to focus on next week and of course all the usual Cocktail Investing Podcast goodness.

Companies mentioned on the Podcast
  • Amazon (AMZN)
  • Amplify Snack Brands (BETR)
  • Apple (AAPL)
  • Bonobos
  • BP (BP)
  • Chevron (CVX)
  • Dick’s Sporting Goods (DKS)
  • Finish Line (FINL)
  • Foot Locker (FL)
  • Kroger (KR)
  • Marathon Oil (MRO)
  • Nike (NKE)
  • Sprouts Farmers Market (SFM)
  • Safeway Inc.
  • United Natural Foods (UNFI)
  • Wal-Mart (WMT)
  • Yum Brands (YUM)

 

Resources for this podcast:
Chris Versace Tematica Research Founder and Chief Investment Officer
Lenore Hawkins Tematica Research Chief Macro Strategist
Is a Safer, More Entertaining and Eventually Autonomous Car Near?

Is a Safer, More Entertaining and Eventually Autonomous Car Near?

It seems every day we hear about the inevitability of the autonomous car, a member of our Disruptive Technology investing theme, with many hoping that it will usher in a new area of safety.  According to the Association for Safe International Road Travel, 3,287 people die, on average, every day in road crashes. That translates into 1.3 million deaths annually with an additional 20-50 million injured or disabled. Globally, road crashes are the 9th leading cause of death.

Clearly, there is room for improvement and Apple’s (AAPL) CEO Tim Cook agrees, citing the auto industry as ripe for a major disruption in a recent interview on Bloomberg Television. According to Cook, there are three vectors of change intersecting: autonomous driving, electrification of the auto and ride-sharing. From our thematic investing lens, this is where Disruptive Technologies meet the Connected Society.

Cook revealed that his company is focusing on autonomous systems, referring to it as a very important core technology that is probably one of the most difficult AI (Artificial Intelligence) projects to work on. Apple has hired over 1,000 engineers to work on the technology and just this April secured a permit from the California DMV to test three self-driving sports-utility vehicles. The company is clearly also focused on the ride-sharing vector of change, as last year Apple invested $1 billion — pretty much chump change for the company these days — in Didi Chuxing, the biggest ride-hailing service in China. As for electrification, it remains to be seen if Apple will develop their own electric vehicles or partner and sell their technology.

Apple is not alone, as the electrification leader Tesla (TSLA) continues to break new ground and Alphabet (GOOGL) is working on autonomous technology in partnerships with Fiat Chrysler Automobiles (FCAU)and Lyft. BMW (BMWYY), in cooperation with Intel (INTC), reports that it intends to have Level 3, 4 and even 5 capabilities for self-driving by 2021. Level 3 is defined as conditional automation that requires a driver to intervene in certain situations, but aren’t obligated to be constantly monitoring progress. Level 4 is full autonomy, while Level 5 requires zero input from a driver to navigate city and highway roads and is expected to be at least on par with the performance level of a human driver.

 

A Conversation with One of the Pioneers of In-Car Information & Entertainment

To better understand the evolution of the smarter vehicle, on a recent episode of Cocktail Investing, Tematica Research’s Chris Versace and Lenore Hawkins spoke with Ted Cardenas, Senior Vice President of Marketing, Car Electronics Division at Pioneer Electronics Corp (PNCOY). Given that about 95 percent of his company’s business is related to auto and the company will reach its 80th anniversary next year, we thought he’d have some valuable insight. This is the company that introduced the consumer laser disc in 1979, the car CD player in 1984 and GPS car navigation in 1990, with around four decades in the car entertainment space.

Ted pointed out to us that compared to home or office-based technologies, the car is a seriously brutal local for innovation where electronics need to be able to withstand extremes in temperatures, moisture and vibrations – not exactly the friendliest environment! We discussed how the increasingly Connected Society allows for not just millions of on-demand songs, but also delivered the “killer app” of real-time traffic information thanks to all those GPS enabled smart phones tagging along with their drivers.

The Connected Society has materially changed product development for the car as well as it also means connected companies. The need for higher and higher speed data networks and the innovations that allow for and take advantage of them means that companies no longer have to, or should for that matter, go it alone. Each company is only part of the solution as we see more specialization taking place with the consumer benefiting from a simple, usually intuitive solution in which all the complexity has been blissfully hidden.

In this new development paradigm, relationships are increasingly important as companies specialize within the solution set and we’ve seen some of the complexity offloaded to smartphones, allowing for greater flexibility as consumer can choose which device best fits their needs. For Pioneer, this means offering in-dash multimedia receivers that are compatible with popular smartphone interfaces and apps such as Apple CarPlay®, Android Auto ™, and Waze®, as well as features such as Bluetooth® music streaming, hands-free calling, Spotify® and Pandora®.

Pioneer isn’t just innovating within entertainment and communications as the company is also developing advanced driver assist for both OEM and aftermarket, allowing owners of older cars to benefit from the latest in safety improvements. When asked about his expectations around the timeline for the truly driverless car, Ted framed his analysis in the context of the evolution of in-car GPS systems – an evolution by degrees rather than a binary event.

The first GPS systems were developed by Pioneer and were used to figure out where you were on a map, but could not provide point-to-point directions. Those first systems also didn’t provide 100% coverage, so drivers could find themselves driving into a GPS void when traveling in areas not covered by the devices internal maps. Over time the map coverage became increasingly more complete and turn-by-turn directions evolved from available only in highly-trafficked areas into the most remote. He suspects we will see something similar with driver-assist that will offer more thorough assistance in more populated areas with less as one gets into more rural areas. Over time the level of assistance and coverage areas will expand.

Finally, we discussed how the increasingly smart car will also do more of the heavy lifting when it comes to maintenance, providing a more seamless driver experience that not only provides autonomous transportation, but monitors and schedules its own maintenance needs. We likely not alone in looking forward to the day when we no longer find ourselves noticing that little oil change reminder sticker a few months and few thousand miles late. The car of the future will be safer, smarter and a lot more entertaining.

 

Companies mentioned on the Podcast

  • Alphabet (AAPL)
  • Apple (AAPL)
  • BMW (BMWYY)
  • Fiat Chrysler Automobiles (FCAU)
  • Intel (INTC)
  • Pandora (P)
  • Pioneer Electronics (PNCOY)
  • Tesla Motors (TSLA)
Cocktail Investing Ep. 23: The Evolution of the Safer, More Entertaining and Eventually Autonomous Car

Cocktail Investing Ep. 23: The Evolution of the Safer, More Entertaining and Eventually Autonomous Car

It seems every day we hear about the inevitability of the autonomous car, a component of our Disruptive Technology investing theme, with many hoping that it will usher in a new area of safety.  To better understand the evolution of the smarter vehicle, Tematica Research’s mixologists Chris Versace and Lenore Hawkins spoke with Ted Cardenas, Senior Vice President of Marketing, Car Electronics Division at Pioneer Electronics Corp (PNCOY).

Pioneer isn’t just innovating within entertainment and communications as the company is also developing advanced driver assist for both OEM and aftermarket, allowing owners of older cars to benefit from the latest in safety improvements. When asked about his expectations around the timeline for the truly driverless car, Ted framed his analysis in the context of the evolution of in-car GPS systems – an evolution by degrees rather than a binary event.

 

Companies mentioned on the Podcast
  • Alphabet (AAPL)
  • Apple (AAPL)
  • BMW (BMWYY)
  • Fiat Chrysler Automobiles (FCAU)
  • Intel (INTC)
  • Pandora (P)
  • Pioneer Electronics (PNCOY)
  • Tesla Motors (TSLA)

 

Resources for this podcast:
  • Chris Versace – @_ChrisVersace
  • Lenore Hawkins – @EllesEconomy
  • Tematica Research – https://www.tematicaresearch.com
  • Pioneer Electronics – http://www.pioneerelectronics.com/PUSA/

 

Chris Versace Tematica Research Founder and Chief Investment Officer
Lenore Hawkins Tematica Research Chief Macro Strategist
Apple CEO Tim Cook Thinks Disruptive Technology Augmented Reality is a ‘Huge’ Idea 

Apple CEO Tim Cook Thinks Disruptive Technology Augmented Reality is a ‘Huge’ Idea 

We’ve heard quite a bit over the last year when it comes to one burgeoning aspect of our Disruptive Technology investing theme – virtual reality (VR). There are a few flavors of VR, including Augmented Reality, which took the globe by storm with Pokemon Go. With Pokémon Go recently breaking a financial milestone – reaching one billion USD in revenue, it’s fair to say that AR is is hitting the tipping point. Interesting comments from Cook given that under his tenure Apple hasn’t released a new breakout product that has a meaningful contribution to Apple’s revenue mix. Cook’s comments mixed with Apple’s move into original content are likely to make for a very interesting Apple World Wide Developer Conference in a few months.

In terms of augmented reality, Cook reiterated that he is “excited” about the technology because it “allows individuals to be present in the world but hopefully allows an improvement on what’s happening presently.” But he added there are “things to discover” before the technology is “good enough” for the masses.

“I regard it as a big idea like the smartphone. The smartphone is for everyone, we don’t have to think the iPhone is about a certain demographic, or country or vertical market: it’s for everyone. I think AR is that big, it’s huge. I get excited because of the things that could be done that could improve a lot of lives. And be entertaining. I view AR like I view the silicon here in my iPhone, it’s not a product per se, it’s a core technology. But there are things to discover before that technology is good enough for the mainstream. I do think there can be a lot of things that really help people out in daily life, real-life things, that’s why I get so excited about it.”

Source: Tim Cook Thinks Augmented Reality is a ‘Huge’ Idea Like Smartphones – Mac Rumors

Speaking with Wealth TV on the Apple Tax Charade

Speaking with Wealth TV on the Apple Tax Charade

On May 22nd, I spoke with Graham Ledger on Wealth TV about the horrific show the Senate put on in an attempt to shame Apple for not voluntarily paying more in taxes than it required by the tax code by implying inappropriate corporate behavior.

The Daily Ledger Chewing Up Apple from One America News Network on Vimeo.

The U.S. Senate has been hosting a sham of a hearing to try and publicly berate Apple for not paying “it’s fair share” of taxes despite the reality that Apple is in full compliance with tax law. The government has not even once suggested that Apple has in any way violated the tax code.  To try and publicly shame a company that is in full compliance with the law is an embarrassment and a blight on the legitimacy of our political system.

The supposed crime is that the company has not voluntarily paid more than required by law to pay and has taken advantage of the tax code, enacted by the very group hosting this charade, to the benefit of its shareholders, employees, suppliers, and all the ancillary individuals and organizations that benefit from such a successful company. The federal government apparently would prefer that Apple voluntarily take money away from American investors, retirement funds etc and give it to the government to spend. Apple does far more good for the American economy with every dollar it generates than the federal government ever could.

Apple should not pay taxes on income generated outside of the U.S. That income is already subject to foreign taxes. It is ridiculous that the U.S. would try to argue that another sovereign charges too little in taxes, thus Apple ought to pay more.

To the extent that Apple is using the tax code in order to minimize its taxes by shifting U.S. income into foreign income, the U.S. should be taking a long, hard look at how uncompetitive the U.S. corporate tax rate has become and review the Laffer curve. By lowering the U.S. corporate tax rate, multinationals would find less value in such techniques, which would likely raise the amount of taxes collected.

I was beyond thrilled to see Rand Paul call the Senate to the floor for the atrocious nature of this hearing.

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