Convergence is an old term getting a new twist in the Apple world. The I-phone has been a great success and so has the Macbook Air, which has taken over half of the ultralight computer sales in the first half of 2013.
In the past week, AAPL shares have taken a big jump (following a lousy June) mainly because of the pair of analysts from Raymond James whose recommendation is right below. Their AAPL target is $600, a 50% jump from current levels. More importantly, however, is the direction the technology is heading and some reasons AAPL is well-positioned.
I’m entering this post at the Prevost farm, where I have strong internet, on a five-year old laptop, and as I pop versions up to the cloud I’m checking it on my smart phone, but I would never try to write this on my phone.
The PC, the smart-phone, the laptop and the ultra-thin share many characteristics now. The key differences are size of keyboard and screen (input and output) and where’s the storage?
What Manness outlines following the Raymond James duo is a big hole that Apple is uniquely positioned to fill, quickly and effectively. Think of a phone with all the functionality and software of a laptop but thinner even than a Mac Air and hopefully more rugged than the average laptop. Big difference is storage: no hard-drive (not built-in to be more precise). Your data is in the cloud. Because I move about so much, all my data is in the cloud.
What are Apple’s advantages in this market? They have all the manufacturing bits (as Manness details), plus the software bits which Samsung lacks, plus the installed base of users and potential users. They have productivity software (native and borrowed) and they have great graphic software and they have music and books and video (sort-of).
They wouldn’t lose their Macbook Air crowd because some people just like to be tethered to their workspace–but probably half of those would buy an I-Cloud.
However, the key market for a $300 entry machine would be the first time user; the person with a smart phone and finger cramps. It’s worth while looking at these two commentaries in parallel. The brokers probably don’t know who Manness is and they concentrate on autos etc, but they instinctively know that Apple has certain capabilities which mean they could do very well as the phone and the computer merge more fully with each other and the ubiquitous giant servers of today.
RAYMOND JAMES. McCourt & Toomey
Apple As An Investment Into Mobile
Raymond James analysts Tavis C. McCourt and Daniel Toomey issued a report to investors today saying that they believe the company’s “near-term financial trends will stabilize and then improve” after its June quarter. They see Apple Inc. (NASDAQ:AAPL) as “an investment into the mobile computing revolution.
The analysts said phase one of the revolution as they see it is now maturing, and phase two has just begun. They include the smartphone and tablet markets in phase one, and they said the maturation of these two markets is marking the end of phrase of the mobile computing revolution.
Apple’s Place In Phase Two
They see phrase two of the revolution as the expansion of smartphone chipsets and ecosystems into automobiles, televisions appliances and “probably uses not currently thought of for computing devices.” They believe that since Apple Inc. (NASDAQ:AAPL) dominates high income consumers and because it has a vertically integrated model which they predict will make it easy for the company to take the biggest profit share as the mobile computing revolution moves into phase two.
Raising iPhone Estimates
Raymond James said that unlike others, they are actually raising their iPhone estimates. They said even though the smartphone market is maturing, they believe that the trade-in programs are keeping Apple Inc. (NASDAQ:AAPL) strong in the U.S. They actually raised their iPhone unit estimate for the June quarter from 27 million to 28 million units.
Overall, in the near term and year over year, they expect that Apple Inc. (NASDAQ:AAPL)’s trends “will be choppy,” but they say that the trends in revenues and earnings per share are upward and that believe the company’s user base is growing about 30 percent year over year.
Earnings Per Share Estimates For Apple
The analysts said they raised their earnings per share estimate for the June quarter very slightly to $7.89 per share. They kept their fiscal year 2013 earnings per share estimate the same at $40.11 but slightly lowered their fiscal year 2014 earnings per share estimate to make up for the margin impact of currency price moves. Their new 2014 earnings per share estimate it $46.13 per share.
“Sentiment is bad,” the analysts wrote. “Make that horrible, in the institutional investor community, they said, but ultimately they see it as “feedstock for outperformance.” In addition to upgrading Apple Inc. (NASDAQ:AAPL) shares to a strong buy, they also maintained their $600 per share price target for the stock.
J. M. Manness
Apple (AAPL) has disrupted several industries over the last decade or so. Most recently, the introduction of the iPad has launched the meme “the death of the PC.” If the iPad was right hook to the gut, knocking the wind out of the PC, will a new “MacBook Ether” be the knockout punch?
The MacBook Air, first released in 2008, ushered in the era of ultra light weight laptops. It began as an expensive toy for the executive and airline warrior, but as the price of SSDs (memory based “hard” drives) came down, the Air now represents the entry level laptops in Apple’s Mac lineup. Apple’s Air pretty much defined the Ultrabook category of computers, several years before the name “Ultrabook” was used.
A computer’s CPU is the electronic chip that runs the device. It takes a program or app and runs the instructions that make all the parts of the device function. (Geeks: Please excuse the simplification.) In mobile computing for a smartphone or tablet, one primary concern is the electric current needed to run the CPU. The more compute power you want, the more energy you need. If you want to haul a truckload of bricks up a mountain, you will need a lot more gas than if you are just riding a motorcycle. The more juice your CPU needs, the bigger, and heavier, the battery gets. So, for any given state of technology, there is always a trade off between compute power and the size/weight/cost of the system.
For this reason, most smartphones and tablets run on CPUs based on designs by ARM Holdings, plc (ARMH). They have designs that they license for chips that sip the juice very sparingly. Thus you can have a smartphone that is as powerful as a 10 year old desktop but weighs under four ounces and lasts for hours.
Still, this is nowhere near the power of a laptop such as a MacBook, be it a Pro or an Air.
Current state of affairs
The MBA grabbed 56 percent of U.S. thin-and-light laptop sales in the first five months of the year, Stephen Baker, an analyst at the NPD Group, told CNET.
Also, for the last several years, the Air has frequently rated number one laptop on Amazon.com (AMZN).
That is, until very recently. Now the number one spot consistently goes to the Samsung Chromebook, a laptop selling for just $249. (The 13″ Air at $1094, is currently #3, right behind a MacBook Pro.) What distinguishes the Samsung (SSNLF.PK) product, is that it is built on a high end tablet Central Processing Unit [CPU] – their Exynos 5000 Series – instead of a typical, full scaled processor by Intel (INTC) or Advanced Micro Devices, Inc. (AMD). The Exynos is one of the most powerful processors available of the ARM designs.
The key to the Chromebook (this and others of its kind) is that they provide a level of use that is that of a good tablet, but with the form factor of a laptop. They provide a reasonable user experience because they have changed the model of usage. No longer does one rely on running full-blown applications on the computer itself, rather the computer is designed to do two things.
- Serve up web pages, email and similar internet services, and
- Provide access to productivity applications that reside in the cloud, specifically Google Docs.
Apple also uses system chips based on the ARM designs, but they use their own designs, what are called the A-series chips. The iPhone 5 runs their A6 chip, and the latest iPad runs the A6x.
Web site Quartz looked at a couple of recent news items in a post titled How long before Apple ditches Intel in the only segment that counts? First they note:
The first bit of news came from IT industry research firm Gartner on Monday. It predicted that the one category of “PC” in which sales are growing at a reasonable clip is the “ultramobile” notebook computer. That includes Apple’s MacBook Air, tablet/notebook hybrids, and some Chromebooks…
They then point to recent news from Digitimes that:
Taiwan Semiconductor Manufacturing Company (TSMC) and its IC design service partner Global UniChip have secured a three-year agreement with Apple to supply foundry services for the next A-series chips built using 20nm, 16nm and 10nm process nodes, according to industry sources.
Digitimes goes on to say:
TSMC will start to manufacture Apple’s A8 chips in small volume in July 2013, and substantially ramp up its 20nm production capacity after December, the sources revealed.
And that they will begin producing A9 and A9x processors in the third quarter of next year.
Quartz puts this together to suggest that Apple will replace the Intel processors in MacBook Air. With new faster chips, Apple could produce the Air with their own A-series.
Beg to differ
But I do not see this happening. The MacBook Air is solidly positioned as Apple’s entry level, full scale laptop. For every jump in A-series performance, Intel will do the same with their line. No, Apple will not do this to the Air.
They will do it to a new line – I hypothesize it will be the MacBook Ether. Like the Chromebooks, it will be basically designed to be an internet appliance, running low-key apps locally, and productivity applications in the cloud.
Steve Jobs always said that Apple was not interested in the netbook format because they provided an unsatisfactory user experience. But now times have changed.
Apple can indeed build serious new laptops based on its ARM-based A-series CPUs that will provide a quality experience. Doing so, it will finally enter the low cost computing world, opening up a whole new market.
In a follow up article, I will discuss the economics of such a move, and its new weapon to secure that market.