Apple FQ1 16 – One way street.

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iPhone benefits where Google could not.

  • Apple released excellent results highlighting that contrary to my previous view, iOS has been the main beneficiary of Samsung’s recent woes.
  • FQ1 17A revenues / Adj-EPS were $78.4bn / $3.36 compared to consensus at $77.3bn / $3.22.
  • iPhone was the main driver of the upside with 78.3m units shipped at an ASP of $695 beating expectations of 76.3m units at an ASP of $688.
  • In addition to the share gain, prices went up as the larger screen version of the iPhone saw its biggest contribution to the mix ever.
  • I think that has been primarily driven by Apple taking a good share of users that purchased the Note 7 and were left high and dry by the recall.
  • Users appear to have taken this opportunity to move from Android to iOS, a move which I think is pretty much a one-way street.
  • I find this surprising as the iPhone 6 is now in its third generation meaning that a large screen iOS device has been an option for users for 2.5 years.
  • This means that most high-end Android users have already purchased a new Android device despite a large screen iOS option being available.
  • This is what led me to believe that iOS would not benefit from Samsung’s Note 7 disaster but this logic appears not have been correct.
  • Instead it appears that the negative stigma surrounding the recall has been enough to encourage users to switch away from Android despite the fact that many apps will need to be repurchased.
  • I have estimated that around 2.5m users (see here) were affected by this incident of which I think around 2m have bought an iOS device and 0.5m a Google Pixel device.
  • This explains the strong performance of iPhone, the better mix towards the larger screen device (Note 7 is a large screen) and the geographic performance of Apple during calendar Q4 16.
  • It also explains Apple’s slightly cautious guidance for the coming quarter as this gain is likely to have been a one-off benefit.
  • FQ2 17E revenues / gross margin are expected to be $51.5bn – $53.5bn / 38% – 39% compared to consensus at $53.8bn / 38.7%.
  • This is bad news for Samsung as the crowd that bought the Galaxy Note 7 appear to have switched to iOS from whence they are unlikely to return.
  • Ironically, although Google has failed to win those users over to Pixel, it will still benefit as RFM research indicates that iOS users generate far more advertising revenues for Google than Android users in the same demographic groups.
  • These were good results but they do not herald the return to growth that the shares badly need if they are to see any real upward momentum.
  • I still think that the shares represent great value for income based investors but those looking for capital growth will remain better off with Microsoft, Baidu and Tencent.

Apple FQ4 16A – Margin gadfly

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Margin pressure from product mix is not a problem. 

  • Apple reported results that broadly met expectations although slight weakness in profitability is an indicator that some users are buying the cheaper iPhone 6s rather than the 7.
  • FQ4 16A revenues / EPS were $46.9bn / $1.67 compared to consensus at $47.0bn / $1.66.
  • Apple sold 45.5m iPhones which was in line with consensus at 45.0m but pricing was weaker than expected at $619 compared with consensus at $625.
  • Mac shipments fell 14% YoY 4.9m units mostly due to the overall weakness in PCs and iPad was also weak declining 6% YoY to 9.2m units.
  • Guidance was mixed with FQ1 17E revenues / gross margins expected at $76bn-$78bn / 38.0% – 38.5% compared to consensus at $75.4bn / 38.9%.
  • It is the miss on gross margin that has triggered the disappointment as a combination of higher overall revenue bringing greater scale benefits and a full quarter of the iPhone 7 should help profitability more than Apple is indicating.
  • This is especially the case as improving costs was the main reason for FQ4 16A gross margin strength which came in at 38% at the top of the guided range of 37.5%-38.0%.
  • Although Apple remains supply constrained on the iPhone 7, I suspect that the reality is that there is a slight mix shift towards the older and cheaper models.
  • Despite the new colours and no headphone jack, the new iPhone is not very different from last year’s model and the ecosystem experience for the consumer is the same as they run the same software.
  • Furthermore, I think that some consumers are put off by the lack of a headphone jack which could be driving them to upgrade their older models to the iPhone 6s rather than the 7.
  • Older devices have lower gross margins than new devices as the price falls more quickly than the cost to make them which could be responsible for this slight weakness.
  • Overall, the weakness is very slight and Apple is continuing to increase the number of users that it has in its ecosystem.
  • This is critical for its long-term outlook which I think remains pretty rosy as Google’s Android is still unable to offer much to induce users to switch away from iOS.
  • Gross margin variation due a mix shift is a normal factor in every business and this is what I think Apple is dealing with.
  • Gross margin pressure from competition is a far more serious problem and with Samsung is disarray and no real competitive threat from Google, I do not see this happening in the short-term.
  • The net result is a company in a commanding position but one that is struggling to find growth as it has high share in the segments that it addresses which are themselves increasingly saturated.
  • I do not see Apple going to lower tiers to find growth but instead it is looking for new product categories.
  • Of these there is little sign meaning that the medium term is likely to be one of very low growth but mighty cash flow generation.
  • For an income investor, this is a great place to be but anyone looking for short term capital growth should probably look to Microsoft, Tencent or Baidu.

Qualcomm vs. Intel – Storm in a teacup.

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Qualcomm thrashes Intel but not where it really matters. 

  • It appears that Qualcomm has once again demonstrated superiority over its peers when it comes to radio but I think it highly unlikely that users will notice.
  • Radio performance analysis specialists Cellular Insights have run a series of tests on the iPhone 7 powered by Qualcomm’s MDM9645M modem and the iPhone 7 powered by Intel’s XMM7360 modem to compare radio performance.
  • The results are startling and much more so than in the infamous “chipgate” episode where the A9 (iPhone 6s) made by TSMC resulted in 5-7% battery life than the same chip made by Samsung.
  • In this case the Qualcomm modem has consistently outperformed the Intel modem on 4G by 30% when the signal was moderate and 75% when the signal was at its weakest.
  • When the signal was at full strength, both modems performed similarly.
  • This does not come as a huge surprise as Qualcomm modems have for years been consistently better at performing in non-ideal radio environments giving it a major point of differentiation.
  • This difference is far greater than it was for chipgate but I doubt whether this is going to have users scrambling to check the model numbers of their devices prior to purchase.
    • First: Battery life is a major issue for every smartphone and is a concept that is very easily grasped by the consumer.
    • As long as there is a connection and the service works, most users will be satisfied, meaning that a difference in speed is less likely to be noticed.
    • A device that does not turn on or fails right at a critical moment is far more noticeable.
    • Second: Bleeding edge.
    • What Cellular Insights has measured is performance at the bleeding edge.
    • For example, in band 4 at -120dBm (very weak radio) Qualcomm manages around 30Mbps while Intel does around 12Mbps.
    • When I look at the Digital Life pie of smartphone usage there is not a single service that I think will be noticeably degraded by that difference to the point where the user will blame the radio.
    • Furthermore, almost all networks still have an underlay of 3G meaning that user will have some data coverage even in the advent that 4G fails completely.
  • Most tellingly of all is the fact that the iPhone 7 has been widely available for over a month and there has been not a single murmur from reviewers or users that one version of the device has a better radio than the other.
  • Consequently, I think that posterity will take note of this difference and move on with no real impact being felt in shipments of one variant or the other.
  • However, for Qualcomm this is an important demonstration that it remains peerless when it comes to radio modems.
  • This is critically important as this test is likely to influence device makers when they are selecting which modems to use in their products giving Qualcomm slightly better pricing power.
  • The general consensus out there is that radio modems are beginning to commoditise as LTE matures as a standard but this test clearly shows that this is not the case.
  • Despite this good news, Qualcomm still needs to expand its horizons into other device categories to keep growth going as smartphones are grinding to halt.
  • This is where its smart drone, IP camera reference platform and potential purchase of NXP semiconductors come into play.
  • This is bad news for Intel but I think it can quite easily shake it off as its performance inside the iPhone 7 is clearly good enough.

Apple – A stern test

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The iPhone 7 is a stern test of Apple’s brand. 

  • Removing the headphone jack will be a tough test of whether Apple’s brand is strong enough to wean consumers off a connector that they have loved for over 100 years.
  • Apple launched two new products and one new accessory at its annual launch event on September 7th.
    • First: iPhone 7.
    • The new device no longer has the 3.5mm headphone jack but comes with an adaptor in the box.
    • Users wanting to use traditional headphones will no longer be able to listen and charge at the same time.
    • The device also sports a brighter display, much improved camera (with wide angle and telephoto cameras on the 7+), a new home button as well as water resistance to 1m of immersion.
    • With the exception of the headphone jack, there is not much here that does not already exist on competing products although I suspect that when it comes to the camera, Apple’s combination of software and hardware will create a top notch experience and image results.
    • The iPhone 7 doubles the capacity of previous versions with the top size now being 256GB but the price is staying the same as the previous generation.
    • Second: AirPods
    • These are wireless Bluetooth headphones that automatically pair with the iPhone and Apple Watch with some very nice features that should create a great experience when used with Apple’s products.
    • They will also work with non-Apple products meaning that it the AirPods are using standard Bluetooth and so it will be important to see how well the audio quality measures up to wired headphones.
    • The AirPods also allow use of Siri with a double tap as well as voice calls and easy device switching.
    • The AirPods are very expensive at $159 and I expect them to sell only to the real top end of Apple’s fan base.
    • At the same time, Beats is incorporating the new technology into a range of its devices at more reasonable prices giving consumers more choice.
    • Third: Apple Watch 2.
    • Apple updated the Apple Watch adding water resistance to 50m making it good for swimmers as well as adding GPS to allow full activity tracking without the iPhone being present.
    • These went hand in hand with a nice new ceramic case and a version of the device which has Nike running software embedded at the factory.
    • However, what Apple did not do was provide an answer to the most asked question at the Apple Watch tables which remains: “Why should I buy it?” not “How much is it?”.
    • Hence, I do not see the Apple Watch 2 lifting the smart watch market out of its current decline and I remain very cautious on the outlook for wearables in general.
  • Apple is certainly taking a step forward in removing the headphone jack but at the same time it has given competitors material for marketing their products.
  • It also makes the device even more proprietary than it already was which is likely to anger some users.
  • The biggest risk here is not whether Apple will lose users to Android but whether users looking for a new phone will buy the 6s which is almost as good and still has the beloved 3.5mm jack rather than the 7.
  • If all goes well then I expect ASPs and gross margins to hold steady but should users shun the 7 for the cheaper 6s then ASPs, revenues and profits will come under pressure.
  • This is the big gamble that Apple is taking where clearly it is hoping that its brand is strong enough to force the industry and users to move on from something they have been using for many years.
  • I do not think that there is nearly enough here to drive a real replacement cycle (like the iPhone 6) but there should be enough to keep the ship steady while Apple searches for the next revolution.
  • Hence, I continue to think that Apple is a great long term investment as it offers great value but there is nothing from these launches that is going to drive revenues back to growth.
  • Samsung, Microsoft and Baidu are my top short-term picks.

Apple Q3 16A – High yield

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Apple as a bond is yielding 9.8%. 

  • Apple reported better than expected Q3 16A results as the iPhone SE sold better than its predecessor, the iPhone 5c, despite a much larger than expected channel inventory reduction.
  • Q3 16A revenues / EPS were $42.2bn / $1.42 compared to consensus at $42.1bn / $1.39.
  • As usual all eyes were on the iPhone which shipped 44.4m units to end users compared to consensus at 39.9m but did so at a lower price as ASPs were $595 compared to consensus at $605.
  • This is what was responsible for the better than expected results but iPad and Mac also fared reasonably well.
  • iPad shipped 10.0m units compared to consensus of 9.1m and the iPad Pro helped ASPs improve to $490 from $415m.
  • Mac shipped 4.3m units compared to consensus of 4.4m underscoring slow but steady market share gain in the PC market.
  • Q3 16A Services revenues grew by 19% YoY to $6bn underscoring that developers are faring better on iOS and are increasingly preferring to develop their apps for this platform before considering Google Play.
  • Guidance was also positive with Q4 16E revenues / gross margins expected at $45.5bn – $47.5bn ($46.5bn midpoint) / 37.5% – 38.0% (37.8% midpoint) slightly ahead of consensus at $45.8bn / 38.4%.
  • These good results underpinned another very strong quarter of cash flow with $10.1bn generated from operations, $13bn returned to investors leaving gross cash down slightly at $231.5bn.
  • With debt unchanged at $72bn this leaves the net cash position at $159.5bn.
  • Although the market was clearly relieved that the declines were not as large as had been feared, these numbers do nothing to alleviate Apple’s current problem.
  • In the eyes of the stock market, Apple has to produce growth in order to command a higher valuation and of this growth, there is no sign.
  • This is why Apple is unlikely to receive a rerating of its shares until it branches out into a new product area.
  • Apple Watch saw declines this quarter (see here) and I think that while Apple is building a car, it will never launch it (see here).
  • This leaves Apple unlikely to see much in the way of growth but it is continuing to distance its ecosystem from Google’s.
  • This gives me confidence that its superb profitability and cash flow are likely to remain intact for some time to come.
  • On that basis, I like to think about Apple equity as a bond and on that basis it is currently paying a coupon to its owners at a run rate of $52bn per year.
  • Hence, equity holders are earning a yield of 9.8% per annum with a very low risk profile.
  • For those that are not worried about capital growth, this is a no brainer as most companies with bonds yielding 10% are highly distressed.

Apple – Replacement problem.

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The iPhone 6 is so good; it does not need replacing. 

  • The summer season of speculation, rumour and leaks of what will and will not be in the iPhone to be launched this September is already in full swing.
  • With loss of the headphone jack having been already put to bed (see here), attention has turned to the screen but I suspect that Apple is unlikely to be able to do what I think it will take to launch another major replacement cycle.
  • Top of the list of screen upgrades is a move away from regular LCD to Active Matrix Organic Light Emitting Diode (AMOLED) which would have an impact on the brightness, clarity and contrast of the images shown on the screen.
  • Unfortunately, even Samsung’s best marketing videos on how AMOLED improves the viewing experience fail to make me want to rush out and spend another $700 on a new iPhone.
  • I think that a large part of the problem is that the iPhone 6 is still almost as good today as it was nearly 2 years ago.
  • This means that the user needs to see something that either appeals to his fashion consciousness or meaningfully improves his Digital Life and I can’t see an upgrade to AMOLED providing either.
  • Consequently, I think that the upgrade in the brightness and clarity of what is already a perfectly adequate display is not sufficient to encourage users to replace what is already good enough.
  • However, if Apple were to do away with the side bezels all together and have a wrap-around screen that might just create enough excitement to trigger a cycle.
  • A wrap-around screen would not necessarily improve the function of the device but it would meaningfully differentiate it from its predecessors making the current generation look old and tired.
  • As many handset companies have found to their great profit, pointless gimmicks can sell vast volumes of mobile devices and I can’t see why Apple would be any different.
  • Unfortunately, I suspect that this year’s model is very unlikely to have this sort physical upgrade leaving the iPhone 7 or iPhone 6s II looking much like those that have gone before it.
  • As a result, there is very unlikely to be an upgrade cycle of anything like the size of what we saw in 2014 and 2015.
  • Therefore, I do not see Apple showing a sudden growth spurt which will disappoint those looking for a catalyst for the shares.
  • Despite this, I think there is value to be had in Apple.
  • It is a cash machine that is second to none, with an incredible global brand but it trades like a broken steel company.
  • Hence for those that have faith that Apple’s margins are unlikely to be challenged any time soon, this makes a great long term investment.
  • In the immediate term, I think Baidu, Samsung and Microsoft have more upside in terms of share price.

Apple – Jack lives.

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The 3.5mm jack survives the attempt on its life. 

  • With the launch of the iPhone 7 approaching, the chatter is once again focusing on the headphone jack, with consensus now having decided that the 100 year old design will stay.
  • This makes complete sense to me as I have long been of the opinion that getting rid of the headphone jack would create more problems that in would solve.
  • The main reason to get rid of the headphone jack would be to free up space in the device for more battery or to make the device thinner.
  • I think that making the iPhone thinner is not a priority for Apple as:
    • First: I believe that the iPhone is already thin enough and making it thinner is unlikely to generate the kind of returns that would justify the investment to make it so.
    • Second: A thinner device would also have less structural rigidity meaning that it would be even more susceptible to being bent than its predecessors.
  • Furthermore, battery life is no longer a major issue for the iPhone although the required budget for power is likely to continue increasing as the device continues to add functionality.
  • I see significant risks in getting rid of the headphone jack as it will have to be replaced with either the existing lightening jack or Bluetooth.
  • Bluetooth headphones can have radio issues, are more expensive and need to be charged making them less appealing to average users and some airlines will force users to stop using their headphones at certain times during a flight.
  • Lightening jack would force all headphone manufactures to qualify with Apple’s MFI accessory program adding costs and headphones would no longer be universally compatible which I think is something that users will hate.
  • In the worst case, losing the 3.5mm jack could have a negative impact on the upgrade cycle where users are inclined to keep their older Apple devices for longer because of a feature that they love and investments they have made in accessories.
  • There would of course be adaptors but users tend to find these to be very inconvenient and I think they would hamper the ease and fun of use that is so important to iPhone.
  • Hence I continue think the 3.5mm headphone jack, whose initial design is over 100 years old, is here to stay a little while longer.
  • I still think the iPhone 7 will be an incremental upgrade to the iPhone 6s and as a result will not result in the huge upgrade cycle that the iPhone 6 did in 2014 and 2015.
  • Hence, I think it will be enough to keep revenues chugging along but will not return the company to growth.
  • I do not necessarily see this as a problem as even in steady state Apple is a cash machine without equal.
  • Apple still represents superb value for a long term income based investors but the problem the company faces is the lack of a growth catalyst.
  • Consequently, Baidu, Microsoft and Samsung offer a better capital growth opportunity in the short term.

Apple WWDC – Developer love.

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Developers are only increasing in their importance to Apple.

  • Apple’s WWDC conference showcased a lot of catch-up upgrades, a serious nod to the importance of China as well as some delicious eye candy for messaging.
  • More than ever before the developer was front and centre of everything that Apple does with more and more of the phone being opened up to third party apps.
  • This makes complete sense because I have long believed that Apple’s differentiation lies mostly in its ability to distribute the apps and services of third parties in an easy and fun to use way.
  • Consequently, it is of paramount importance for Apple to keep developers happy and to offer them a constant stream of new features so keep their apps fresh and earning money.
  • Apple has really distanced itself from Google Play over the last 18 months but it is in no way resting on its laurels and is doing everything to keep the environment fresh for developers.
  • WatchOS / MacOS / TvOS received incremental upgrades which addressed many of the well-known shortcomings of these platforms, moving them to be more in line with competing offerings for the same device categories.
  • As one would expect, iOS got the most attention with iOS 10 launched which will be available as a free upgrade in the autumn.
  • iOS 10 upgrades were focused in 10 areas but the ones that appeared to matter most were:
    • Messages. Apple enabled a raft of features that give the user more options in terms of expressing himself with text messages.
    • This included large emoji’s, background animations, photo editing and so on.
    • This moves Apple to the forefront of messaging, but I am be pretty sure that Messenger, Weixin and WhatsApp will quickly copy these ideas.
    • Lock Screen. Further enhancements have been made to the lock screen which improve usability but in my opinion undermine security and privacy.
    • iOS 10 now allows a whole raft of data to be accessed from the lock screen without necessarily unlocking the device which is great for usability, but also means that anyone can access that data if they pick up the device.
    • The more Apple increases what the user can do without unlocking the device, the less secure the user’s data becomes.
    • I suspect that this feature will appeal strongly to Chinese users where RFM’s research indicates that Chinese users care much less about data privacy.
    • Apple Music had a big user experience upgrade and the offering is now much more intuitive and easy to use.
    • Apple has also taken a leaf out of Spotify’s book and is offering more curated playlists for the user based on his tastes.
    • However, the user experience is the easy bit where accurately understanding users and cataloguing 40m media items is very difficult.
    • Time will tell how well Apple can do this but I think that it is still playing catch up in this area.
    • HomeKit is evolving exactly in the way that I have been expecting.
    • A new app called Home was launched that allows all of the devices in the home to be controlled from a single app.
    • This brings together all of the devices such that they can be part of a usage profile rather than individual elements.
    • For example, the user can put the house into night mode and with one click lock the doors, turn off the lights, close the blinds and so on.
    • I see HomeKit along with HealthKit as one of Apple’s key strategies to keep the iPhone differentiated long term as its edge as a developer platform will only last so long.
    • Of HealthKit there was no mention, but I still see this as early days.
  • The net result is that Apple has done enough to keep ahead of Google Play as the preferential developer platform and so there is no imminent risk of Apple losing its edge there.
  • China was also featured highly for the first time reinforcing Apple’s dependence on this market despite the fact that its services and app store do not fare very well in China.
  • None of this will solve Apple’s most pressing problem which is its lack of growth but with the valuation where it is today, I do not see this as a major problem.
  • Consequently, I still prefer Apple to Google but for share price appreciation in a 12 month window, I would look to Samsung, Microsoft or Baidu.

Apple / Twitter Results – Show me the money.

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Cash flow is king when growth deserts.

 Apple FQ3 16A. 

  • Apple reported difficult FQ2 results but critically, iPhone shipments fell by far less than many had feared, confirming my view that this is the end of a cycle not a secular decline.
  • FQ2 16A revenues and EPS were $50.6bn / $1.90 missing consensus of $52.0bn / $2.00.
  • iPhone shipments were 51.2m compared to consensus of 51.0m with ASPs of $642 compared to $670 in FQ1 16A.
  • A large part of the ASP weakness can be attributed to the strength of the USD which impacted overall revenues by 4% during the quarter.
  • iPad shipments were 10.3m slightly better than expected driven by the larger screen iPad Pro.
  • Mac shipments were 4m slightly missing expectations as the weakness in the PC market has finally impacted demand for Macs.
  • Guidance was also disappointing with FQ3 16E revenues and gross margins expected at $41bn – $43bn / 37.5%-38.0% missing consensus at $47.6bn / 39.2%.
  • Apple explained the shortfall as a $2bn inventory adjustment to reflect a more cautious outlook, the impact of the lower iPhone SE ASPs and the weaker outlook for the PC market.
  • However, I continue to believe that the issue that Apple faces is simply that the iPhone 6 product cycle has come to an end.
  • The iPhone 6 addressed a new segment of the market for the first time and also addressed the biggest complaint of iPhone owners namely the small screen.
  • Consequently, there was a lot of pent up demand for the device and many users also switched from Android to iOS.
  • This phenomenon is now over and iPhone demand has normalised leaving Apple looking at declines in revenues while its performance is being compared to periods when the cycle was in full swing.
  • What concerns me more is gross margins which will suffer in the coming quarter from the lower revenue base and a weaker product mix.
  • I highlight gross margins as they are the precursor to cash flow, and with a company that is not growing, cash flow is of paramount importance.
  • Apple has $232bn of gross cash meaning that the enterprise value of the company is $372bn (taking into account after hours trading and $70bn of debt).
  • This quarter Apple generated free cash flow of $33bn which taking into account the lower guidance, the slowing market and capex should comfortably come in at $120bn over the next 12 months.
  • This is a free cash flow yield of 32% to anyone holding the equity today and Apple is clearly moving to return more cash to shareholders.
  • With this level of return, I think growth is irrelevant but profitability must remain very strong for this thesis to work.
  • I see no real immediate threat to Apple’s profitability and on the basis of cash flow yield, the shares are extremely attractive.

Twitter Q1 16A. 

  • Twitter reported bad results as the fundamentals of the company performed more in line with RFM forecasts than the overly optimistic market.
  • Q1 16A revenues / adj-EPS were $595m / $0.15 compared to consensus at $608 / $0.10 and RFM at $573m.
  • User numbers managed to pick up a little coming in at 310m compared to consensus at 308m but guidance was very weak.
  • Q2 16E revenues are expected to be $590m-$610m compared to consensus at $678m and RFM at $576m.
  • The culprit was lower demand than expected from branded advertisers, underlining my long held concern that advertisers do not want to spend more on Twitter because its focus remains too narrow.
  • Twitter only covers 17% of the Digital Life Pie meaning that users spend the vast majority of their time on devices doing something that is outside of services that Twitter offers.
  • This fundamentally limits Twitter’s attraction to advertisers which combined with its flat-lining user growth is why revenues are grinding to a halt.
  • To turn this around, Twitter needs to find something to encourage to users to spend more time within its properties and break out of being a news broadcaster.
  • If successfully executed, I think this would have the effect of restarting user growth and reigniting advertiser interest which would unlock a period of very rapid, catch-up growth.
  • Unfortunately, this requires focused and highly engaged management team which I believe is impossible with a part time CEO.
  • Until this is rectified, I think the company will languish with very little or no growth.
  • Twitter does not have fantastic cash flow to support its valuation.
  • In the last 3 months generated a fairly meagre $103m in free cash flow translating into a yield of just 1% compared to Apple at 32%.
  • This why I think Twitter could test $10 per share as the reality of its lack of growth sinks in there is no real cash flow to backstop the valuation of the equity.

Apple App Store – Coup d’état.

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A meritocracy becomes a plutocracy.

  • The anticipated changes to the Apple App. Store will no longer mean that the apps most liked by users will rule the roost and it may also do some damage to the instant messaging platforms.
  • It looks like Apple is going to overhaul the user experience in terms of how users discover apps in the Apple App Store and at the same time add a new revenue stream.
  • This is long overdue as the app store has remained untouched for a very long time.
  • With 2.28m apps in the store, finding what one wants has become much more difficult for users.
  • It also causes real problems for the smaller developers as very often their apps sink without trace regardless of how good they are.
  • When the app store was in its infancy this was not a problem and the three main charts combined with categories and editor’s picks was enough.
  • However, apps are now a multi-billion dollar business and the app store so big that more sophisticated discovery is needed such that users are able to discover apps and services that they are willing to pay for.
  • I am pretty certain that better discovery will lead to an uplift in the amount of money that users spend on a monthly basis.
  • This is why I suspect that Apple has been hard at work making changes to how apps are discovered and may even be about to add a paid search function.
  • This would allow app developers to have their apps feature at the top of search results in a vein similar to Google.
  • However, I think that this will make life even harder for the smaller developers who can’t afford to pay to have their apps positioned more prominently.
  • This is why the search function and Apple’s understanding of its users will be very important.
  • Very much like TV, there are a few apps that everyone uses and then a very long tail of special interest apps that appeal to specific types of users.
  • It is this that Apple has to get a handle on and ensure that its AI and search algorithms are good enough such that the right apps are discovered by the right users.
  • I expect to see some progress on this at Apple’s developer conference (WWDC) in June.
  • I also think that a big improvement in app discovery will cause some problems for the instant messaging players.
  • Instant messaging is hugely popular but incredibly difficult to monetise which is why many of the suppliers have started to evolve their IM platforms to do other things.
  • Part of the reason for their success in encouraging third parties to develop within their IM platforms has been the difficulty in app discovery on the much larger Apple App Store and Google Play.
  • Consequently, if discovery becomes much easier on the Apple App Store, developers’ inclination to develop elsewhere is likely to decline.
  • However, the major instant messaging platforms are now so big that they should be able to offer developers a decent return.
  • Hence, it looks like Apple’s opportunity to quash this off-shoot of third party app development has passed.
  • The net result of these changes is likely to be that the biggest and the strongest app developers will have even more influence over what users download and pay for.
  • These developers also have the marketing budgets to advertise through the traditional channels as well as online which will make like even harder for the smaller developer.
  • Consequently, I hope that the other changes that Apple makes to the App Store will help level the playing field as it is often the smaller developers that come up with the novel and innovative ways to use the smartphone that drive the industry forward.
  • Apple remains beset with fears of falling orders and low growth and against that backdrop it is hard to see the shares rallying.
  • However, the shares are so lowly valued that those happy to sit and hold for the very long term are very unlikely to do badly.