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Apple’s 2017 iPhone event took place September 12, and it was one of the most highly anticipated of such events. Let’s take a look at what improvements are being made and how they might impact our thesis on the tech giant.
By Kris Rosemann
Newsletter portfolio holding Apple (AAPL) has made a spectacle of its annual iPhone event in which it reveals the most recent improvements it makes to its flagship product, as well as other new products and features across its lineup. This year’s event, which took place September 12, was one of the most highly-anticipated events in the iPhone’s 10-year history, due in large part to the anticipation surrounding the iPhone X (iPhone 10 in honor of the iPhone’s ten year anniversary). Management has dubbed this iteration of the smartphone the “biggest leap since the original iPhone,” an idea we’ll address shortly.
In addition to the iPhone X, Apple showcased its new iPhone 8 and 8 Plus, which include upgraded features such as an improved camera, more powerful speakers, casing that includes the most durable smartphone glass, wireless charging, and built in augmented reality features. The Apple Watch Series 3 was also unveiled at the September 12 event. This iteration of the wearable technology is LTE enabled, meaning it has the ability to take calls, messages, and stream music without being linked to an iPhone in addition to an improved operating system that includes better health and fitness tracking capabilities, all of which was done without increasing the size of the device. According to third-party sources, the iPhone-maker held 13% of the global wearable technology market as of the second quarter of 2017, and we expect that these improvements will go a long way in helping it defend such a position.
While it may be on the leading edge of wearable technology, it is generally agreed upon that Apple is playing catch up in its Apple TV efforts. Its most recent iteration includes 4k resolution, and the company plans to work with Netflix (NFLX) and Amazon (AMZN) in offering high-resolution content on its platform. Rumors continue to swirl around Apple potentially scooping up a content creation-firm in an attempt at vertically integrating the service, but we view this as an ancillary business stream compared to other endeavors for the time being.
The biggest changes unveiled September 12 were that of the highly-anticipated iPhone X. New features such as facial recognition for unlocking, the lack of a home button, wireless charging, and an edge-to-edge screen that offers the display of an iPhone Plus model on a device the size of a typical iPhone are certainly welcome improvements, but some observers feel that management comparing the leap from recent iPhones to the iPhone X to the leap in smartphone capabilities realized upon the launch of the innovative original iPhone was somewhat inaccurate. In any case, we are not of the opinion that such a leap is necessary for Apple to maintain its position as a smartphone giant and the influence of its brand.
As readers of our valuation work know, we’re not building another mega hit like the iPhone into the assumptions that drive our fair value estimate of $180+ per share, and Apple’s unmatched ecosystem of products and services–highlighted by the iPhone franchise and its seemingly never-ending list of apps–will continue to propel its fundamentals higher. Apple may not be the leading innovator it once was when it comes to smartphone capabilities (Samsung is giving the tech giant “a run for its money”), but its products and services maintain an unparalleled reputation for ease of use and integration. Apple is as much a brand as it is an innovator at this juncture.
We’ve seen a number of reports suggesting that the iPhone X is priced too high at $999, but with the release of the iPhone 8 and 8 Plus at more traditional price levels of $699 and $799, we’re not expecting a material impact from such a dynamic. The release of the iPhone X will also not take place until November 3, 2017, compared to September 22 for the iPhone 8. Many expect this to have an impact on the smoothness of the company’s third and fourth quarter earnings compared to years prior, an impact that may be intensified by potential iPhone 8 buyers waiting to see the iPhone X before making a purchase decision.
For long-term investors, we think the timing dynamic is immaterial. There is a reasonable chance that shares may face a bit of selling pressure around Apple’s third quarter earnings report as results may very well come in much lighter than usual for the quarter, and the impact could be amplified by profit-taking and overzealous Apple bears looking for any sign of weakness to hype their theses, but we continue to have confidence in Apple’s ability to continue its path of tremendous execution. We wouldn’t be surprised to see another truly innovative new product emerge from its pipeline in the years ahead, and Apple is not going anywhere. We’re not expecting to make any changes in the weighting of Apple in the newsletter portfolios anytime soon.
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