Apple – Middle of the road.

Mid-market makes sense for services.

• Behind the funky new watch features and the new, more expensive iPad Air are cheaper versions which are clearly aimed at keeping shipments going through what is going to be a difficult period.
• Apple also moved to add life to its services offerings which outside of Music have not fared very well to date.

Apple Watch 6

• A better screen, blood oxygen monitoring, new colours and straps made up the bulk of this release.
• At the same time, Apple is taking on Peloton et al with the launch of Fitness Plus which offers virtual workouts in the most popular categories for $9.99 per month (5 users).
• This is where Apple excels because it has elegantly integrated this service with the Watch, iPhone and TV to make a much more interesting experience than Peloton et al can offer.
• It also has the added benefit of not having to buy a really expensive piece of kit as all the monitoring is done by Apple Watch.
• Apple is also moving to address the lower end of the market with a stripped-down version of the Watch called Apple Watch SE which starts at $279 and will also be offered on a $12 per month instalment plan.
• This is a recognition that harder economic times are coming and that a lower-priced product might be a good way to keep the ecosystem growing.
• This plays well to the services where the opportunity to sell subscriptions is directly related to the number of unique users of the ecosystem.

iPad

• A run of the mill update to the iPad Air with nicer hardware allowed the price to increase, but the real story here is the cheaper product.
• This is the iPad 8^th generation which looks just like a regular iPad but has better compute performance and comes at a more attractive price of $329.
• Again, this is a story of a slight repositioning ahead of an expected period of economic difficulty where many consumers have less disposable income.

Services

• The offering of cheaper devices fits well with the services the opportunity for which is determined by the number of users that are in the ecosystem.
• However, outside of Apple Music, Apple TV+, Apple News and Arcade have not done as well as hoped.
• Apple is moving to address that by creating the Apple One bundle which puts together Music, TV and Arcade as well as 5GB of iCloud storage for $14.95 per month.
• In some countries, an extra bundle adding in Fitness+ and News will also be offered for $29.95 per month.
• I think that Fitness+ is by far the most interesting service that Apple is offering as it plays directly to all of its strengths.

Take-Home Message

• The launch of lower-priced products makes more sense than ever given the focus is gradually switching to services and the economic outlook.
• In the context of multiple services, the One bundle makes economic sense, but it does not address the reasons why some of these services have underperformed expectations.
• However, with Apple on nearly 7x forward EV/Sales and 35x forward PER, any semblance of value has long since vanished.
• Furthermore, the outlook for its end markets is not particularly great in the short-term meaning that growth is going to be increasingly hard to come by.
• In this context, I can not see value in Apple which has become a pure momentum and sentiment-based investment.
• I would exit and find something with a more reasonable price.