NYU Stern School Professor Scott Galloway‘s presentation (The Four Horsemen: Amazon/Apple/Facebook & Google–Who Wins/Loses) at the recent DLD15 conference is getting a lot play in the financial press this week. Not just because of his brilliant delivery but due to his fairly bold opinions on some tech leaders:
While I found the AMZN, FB & GOOGL bits very interesting, I obviously want to focus on the AAPL part at the 11 minute mark. His view on the company’s prospects is fairly consensus, but he believes that the company will reach the trillion market cap mark as the company migrates to a luxury brand. He gave some fairly sound support of the company’s focus on this endeavor through some high profile hires in their retail operations, and highlighted the growing gap between AAPL’s iPhone ASPs and that of Android from 2009 to 2014:
Despite Android having about 85% of global smartphone marketshare, AAPL has actually been able to increase the price of their devices while Android providers have appealed to the mass audience.
Galloway highlighted the fact that in the largest metropolitan areas on both coasts, NYC and LA, there is a massive concentration of iOS devices in the wealthy areas of Manhattan highlighted by the red dots, while lower income households in the Buroughs are dominated by Android devices:
Same for LA, with Beverly Hills and the coast heavy iOS and South Central and inland, Android:
He concludes that if you own an iPhone you are more likely wealthy, well educated and you will have more options of who you will mate with! If you confuse the cause and effect that could be a great new ad campaign for AAPL.
The question I would be asking myself if I were a long term AAPL shareholder is whether or not the company will have a rich person problem at some point in the future? In the U.S. it has always been an aspirational product even in a market that got fairly saturated at the highend. So if much of AAPL’s future growth for iPhone is coming from overseas how does this play out?
I would note that the proliferation of the smartphone market has really occurred since the start of an easy money policy by our central bank, monetary policy specifically designed to stimulate employment, and get businesses and people to spend cash. Since the start of 2009, AAPL has registered more than $700 billion in sales, and after this year that mark will be close to $1 trillion. I would say that the wealth effect by the reflation of risk assets as a direct result of ZIRP & QE has been very kind to AAPL.
But can this be the case in other parts of the world where AAPL has less of a cultural influence and the income levels are far lower than that of the U.S. and where local companies like Xiaomi in China may have a better foothold and far less concerned on ASPs and margins?
What will AAPL’s smartphone market-share look like on the next economic downturn? I know many will point to recent growth in China and say this argument is hogwash, but to be fair the growth is coming off of a very low base. The jury is still out on whether or not China guides themselves to a soft economic landing as they struggle with the realization that GDP may be below the 7% and in that scenario that Chinese citizens will be as willing in the future to fork over more than one month’s average wage for an iPhone when the Xiaomi look alike is less than one third of the cost.
So all is good in the hood (well that depends which neighborhood you live in) for AAPL at the moment. You are gonna get your Watch, you are gonna get your increased buybacks, you likely get continued good news from their iPhone 6 ramp in China. But then it could be merely a function of whether or not global monetary easing can continue to drag up millions of existing Android users into the middle class willing to buy iPhones so they can hook up with better looking people. Oh and with the dollar ripping will increased iPhone sales overseas have the same profitability impact of the last 7 years of iPhone sales primarily here in the U.S.?
But, Apple could have a rich person problem. And the company is so big now that a bet on its stock is becoming a bet on global economic growth and the creation of new rich people.