Apple & Facebook – FQ1 Results & F8.

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Apple FQ1 – Privacy safe house.

• Apple reported good FQ2 results where the star of the show was software and services which helped divert attention away from the lacklustre growth of the iPhone as the smartphone market stagnates.
• FQ2 revenues / EPS were $61.1bn / $2.73 slightly beating expectations of $59.9bn / $2.68 as steady iPhone performance allowed services to provide the icing on the cake.
• 2m iPhones were shipped at an average selling price of $728 which was below consensus at $740 and well below FQ1’s $796.
• This is a sign that the high price of the iPhone X is too much for many consumers to swallow, indicating that it was mostly the die-hard fan base that brought the product.
• This would explain the rapid drop in ASPs experienced which I would expect to stabilise from here.
• This left services to carry the results which grew by 31% YoY to $9.2bn, lifting the numbers just ahead of consensus.
• Apple has also increased both its dividend and its buy back program in yet another sign that the days of very high growth are well and truly over.
• Apple has been unable to come up with a major new product category, and until it does, slow and steady is likely to be the way forward.
• Given that the major theme of 2018 is likely to be data privacy, internet companies are likely to have a rough time as consumers slowly realise how their data is still being used to make money.
• Against this backdrop, privacy advocate Apple is a good way to ride out the storm.

Facebook F8 – Hello AI?

• Facebook took very few risks with the keynote at its F8 developer conference resulting in a session that revealed little about where the platform is heading long-term.
• Just like Google at i/o, the elephant in the room (AI) was largely ignored and I have long believed that AI is Facebook’s Achilles heel which will cause a big deterioration in financial performance this year (see here).
• Most significant was the launch of a dating service (presumably free) that is aimed at the 200m users on Facebook that identify themselves as single.
• Once signed up, a user is matched to potential partners which caused considerable distress to Match.com whose shares fell 22% following this announcement.
• This service is based on Facebook’s desire to facilitate meaningful relationships between people making dating a good fit.
• However, it comes with stringent privacy requirements and so how Facebook will monetise this service remains to be seen.
• Facebook also announced a slew of new features such as:
  • Clear history which allows the deletion of some browsing history from Facebook’s data repository,
  • Video calling on Instagram aimed at taking down Snapchat,
  • Translation in Messenger following Skype
  • Video calling enhancement on WhatsApp including stickers and group video calling.
• The net result was very little discussion around the really important issues effecting Facebook’s outlook as a fully-fledged ecosystem or how it will solve its AI problem.
• Hence, I remain concerned about the short and medium-term outlook and continue to see a real deterioration in financial performance in that time frame.
• Facebook still has the potential to become the biggest and most powerful ecosystem of them all, but it will have really knuckle down and address the very real problems that it faces if it wants to succeed.
• Therefore, I think that any optimism around this event is a great opportunity to take money off the table for now.