MorningWord 5/27/14: Apple – Home Cooking

by Dan May 27, 2014 9:21 am • Commentary

From Apple’s 52 week low made 11 months ago, the stock has gained nearly 60%, or more than $250 billion in market capitalization.  To put that in gain in context, there are only 8 other companies in the world that have a market value greater than $250 billion. So without any NEW products and despite single digit earnings and sales growth in the last year AAPL has gained the value of a GE or WFC. While we have been far from bulls on Apple’s strategy of late, we have been fairly neutral on the stock and much preferring own it to lets say the S&P 500, from March 31st:

On the investment front, many large institutional investors view the company’s products secondary to financial engineering capabilities in their investment thesis (for now), but this will likely change when we get word from the company in the next few weeks as to what their dividend increase and any new buyback authority will be.  I remain in the camp that I would rather own AAPL’s balance sheet, dividend yield and installed base at a massive discount to the broad market then owning the S&P 500 at current levels. 

I’ve been on the sidelines for AAPL’s 15% move since the end of Q1 and I remain steadfast that 2014 is going to be a very important year for the company. The decisions they make now may determine their mobile relevance for years to come.  While the stock’s recent gains were fueled by poor sentiment, positioning, better than expected iPhone sales and a heavy dose of financial engineering, the company is about ready to embark on a 6 month period focused solely on products and services starting with the company’s World Wide Developers Forum where they have a history of introducing new software and to a lesser degree new hardware.  The buzz this year is some sort of platform for the connected home, not likely to move the needle anytime soon, but likely the sort of thing to get developers geeked up about all of the new apps they can create to assist an iOS handheld device run most daily activities (think Jetsons).  While this is interesting, they are a step or two behind GOOGLE in this area, following their $3.2 billion acquisition earlier this year of Nest.  Obviously this is the first inning of a game that is likely to go into extra innings and would be silly to count anyone out just yet, but I do find it interesting that Apple is merely going to skip the living room, long thought to be the first battlefield in the connected home and start from the top and work down.

One last point, this weekend Walt Mossberg of Re/Code, in a post titled “Here’s Why I Think Apple Might Be Buying Beats, and Some Other Things I Think They Should Do” made a fairly amazing comment. It turns out I’m not the only one talking about this:

they need to go cross platform on certain things. In my opinion, they have an interesting decision — not unlike some Microsoft decisions that have had to be made — about whether something like FaceTime or something like iMessage wouldn’t be even a bigger deal if they worked on everybody’s platform. Those are all cloud things that they have to kind of figure out, get into order, and we’ll just have to see what they wind up doing.

On March 31st I had a similar thought about what Apple’s next act may be, aside from hardware (Through the Wormhole?), and to me it seemed that the company was unlikely to make a transformative acquisition to reignite growth (given their commitment to massive buybacks and dividends) and likely look from within:

Media speculation that AAPL would license their iTunes Radio to non-iOS platforms, could be one of their most important product introductions since the opening of the App Store.  Why? Well, AAPL currently has over 600 million active iTunes accounts (that means people who have input their credit card data to Apple and have made a purchase) and less than half of those people have an iOS device.  This means that consumers have demand for their services but have yet to been wooed by their mobile hardware. Which brings me back to retention – once AAPL gets a new iOS customer, more than three quarters of them stick with AAPL.

If AAPL were to license iTunes Radio and Apps for iTunes music management, iMessage, Facetime and iPhoto (with an Instagram twist), the company would be breaking with their long standing policy of not licensing their operating system and most software for non Apple hardware (read my discussion here of how AAPL could take on Facebook’s move into Messaging with their WhatsApp acquisition: MorningWord 2/21/14: WhatsApple Gonna Do?).

If Apple were to go cross platform on iMessage, for instance, investors might look at some of their assets quite differently and start placing higher multiples on some of the faster growing side businesses. Investors and competitors have placed healthy valuations on similar apps. WhatsApp was “worth” $19 billion. What’s iMessage, Facetime, iTunes etc worth to the world outside iOS?