AAPL: Convergence & the I-Cloud. July 1st-2013. Part I.

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.

The analysts note that right now, Wall Street’s view of Apple Inc. (NASDAQ:AAPL) is bad, but they see that as a good thing for the stock.

“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

Seeking Alpha. http://seekingalpha.com/article/1530502-apple-developing-new-macbook-ether?source=email_rt_article_readmore

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?

MacBook Air

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.

Technical aside

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 MB Airs have also been extremely popular. CNET just reported on Saturday (via Mac Daily News):

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.

  1. Serve up web pages, email and similar internet services, and
  2. 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.

Now…

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.

Conclusion

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.

SEE: https://dglikes.wordpress.com/2013/07/03/apple-clouds-part-two/

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3 thoughts on “AAPL: Convergence & the I-Cloud. July 1st-2013. Part I.

  1. UPDATE: Bret Jensen Agrees
    Trading in the second quarter ended Friday. Despite the increased volatility and back up in interest rates over the last six weeks, equities have had a very good first half of the year. One stock that has not participated in the rally is Apple (AAPL). After falling some 20% in the first quarter, the tech giant’s stock fell more than 10% in the second quarter. However, there are good reasons to believe the third quarter will be kinder to this fallen one-time investor favorite.

    Some floors seem to be in place:

    First the stock starts the second half of the year close to the $385 level it bounced off on April 19th. Second the shares yield over 3% to start the quarter which some value investors use as a “threshold” for selections for income portfolios. In addition, now that quarter end and first half “window dressing” has come and went, selling pressure should lessen.

    Important Analyst Upgrade:

    Other than the rally in the overall market to start second half trading Monday, Apple shares are being buoyed by an upgrade by Raymond James from “Buy” to “Strong Buy”. The team at the analyst firm also upped its price target to $600 a share on Apple, more than 50% above the price of the stock to begin the third quarter. Among reasons cited for the upgrade were the following:

    The “Horrible” sentiment on the stock probably caps the downside to the shares from a contrarian perspective.
    A deal with China Mobile (CHL) could significantly help the shares. NOTE: Others have speculated on this before and it seems the chatter has picked up recently, and this makes too much sense for both companies to not place a high probability on this happening at some point in the future in my opinion.
    One of the more interesting reasons for the upgrade is the opportunity for “expanding the Apple iOS ecosystem through autos, televisions and other devices.” Although there have been many comments about an Apple “iTV”, an expanding ecosystem is a possible value driver that seems missing from most analysis. The company should take in some $5B in revenue from its AppStore alone in 2013.

    This follows Jeffery Gundlach’s, who correctly called for the stock’s decline near its top, comments last week calling the company “a cash flow machine” and saying it is now a good risk/reward play.

    Valuation & Other Catalysts:

    The company reports earnings on July 22nd. Given how much consensus estimates have come down over the last three months (From $9.38 a share ninety days ago to just $7.32 a share currently), the potential for an earnings beat seems fairly high. The iPhone 5S launch should also help shares later in the year. More importantly, the stock is one of the cheapest large caps in the market right now at under 9.5x forward earnings (less than 7x if you subtract cash & marketable securities) and sports a minuscule five year projected PEG (.48) as well. Finally, the company will be buying back an average of ~$2B monthly of its shares through now and the end of 2015 based on its $60B repurchase program. Given Apple’s cheap valuation, solid dividend yield, horrid sentiment and possible catalysts, I believe it is a terrific risk/reward play here and I added to my position when the shares dropped under $400 last week. BUY.

  2. VALUE WALK AGREES & AMPLIFIES
    y ValueWalk Staff

    Apple Inc. (NASDAQ:AAPL) is headed to $600 as the company is poised to excel in the new computing revolution says Raymond James in a new report. Shares of the tech giant soared 3 percent today as the stock closed well above the $400 mark

    Apple Inc. (NASDAQ:AAPL) is headed to $600 as the company is poised to excel in the new computing revolution says Raymond James in a new report. Below are some more details on the mobile computing revolution and why Raymond thinks Apple Inc. (NASDAQ:AAPL) will be a big winner in this area.

    Apple
    Apple Inc. (NASDAQ:AAPL) – The Mobile Computing Revolution Is About to Enter Phase 2

    Mobile computing is the trend, not smartphones specifically – The importance of the iPhone was not that it ushered in the era of smartphones (in fact they had existed for nearly a decade prior). The importance was that it ushered in the era of mobile computing, with a purpose-built OS for mobile devices using an ARM-based chipset for processing, an OS that assumed an “always on” mentality, and an ability to allow third party developers to write apps and monetize that investment on the platform.

    The iPhone and then iPad were simply the first incarnation of this mobile computing revolution, which we would view as Phase 1. Phase 1 of mobile computing is nearing maturation as smartphones and even tablets enter maturity in the developed world. Apple has been the dominant winner in the U.S. in Phase 1 of the mobile computing revolution and the high end of the consumer market globally. Google’s Android has successfully positioned itself as mobile computing for the masses with dominant share in countries with more price sensitive consumers. Importantly, we see very little churn from either platform and market shares appear to be solidifying globally.
    Apple Inc. (NASDAQ:AAPL) Phase 2

    Phase 2 and beyond – Although Phase 1 of mobile computing is not complete, and Apple has the ability to open up new carrier relationships and try some new form factors and price points for the iPhone/iPad product line, of more interest to investors should be what Phase 2 is in mobile computing, and how Apple is positioned. In our view, this mobile ecosystem, including chipsets, OS and apps, will find its way onto numerous devices in the future as devices become more connected. Of note, Apple mentioned at its WWDC that iOS7 will be built into car models at 12 different car manufacturers in 2014. We can expect a full TV at Apple in the future, maybe a watch, and who knows what other future devices.

    Apple is extremely well positioned to garner incremental profits from these opportunities for two main reasons. First, these new connected devices, whether they are TVs, cars or other devices are likely to be first adopted by high income consumers, over whom Apple dominates globally.

    Secondly, just like in the case of the smartphone, the power of the ecosystem is based on application developer support. It is hard to know what the “killer app” of a TV, car or other device may be, but chances are it is going to come from one of Apple’s developers, not Apple Inc. (NASDAQ:AAPL) itself. By dominating the monetization of the mobile computing ecosystem in the smartphone world (we believe 2x or more the monetization to developers vs. Android), Apple Inc. (NASDAQ:AAPL) is positioned to remain the platform of choice for developers as they make investments to create the killer app for other devices. We note that Apple will not have a monopoly, and Android will likely sell more units in smart TVs and maybe even smart cars or watches than Apple. However, much like in smartphones, Apple’s vertically integrated business model should allow it to continue to dominate the profit pool from mobile computing devices in the future by aggregating profit opportunities that historically would have flowed into separate chipset, OS, application and device vendors.
    Implications for Apple Inc. (NASDAQ:AAPL)

    What does this mean for Apple Inc. (NASDAQ:AAPL) financially? What this means is that as Phase 1 of the mobile computing revolution ushered in by the iPhone matures, Apple’s top-line growth will slow and quarterly results are likely to get more volatile as Y/Y EPS trends can now be materially impacted by relatively small movements in customer upgrade rates, currency movements, commodity price changes, timing of new product launches, etc… However, as long as Apple’s iOS user base continues to grow, which we believe it is (according to its metric of active credit card accounts, Apple Inc. (NASDAQ:AAPL)’s user base is growing ~30%+ y/y in 1H:13), and any products it launches don’t over cannibalize other products, its revenues and EPS should continue to trend up over time.

    In retrospect, FY12 was a perfect storm of positive events for Apple financially as currency and commodity prices worked in its favor and the iPhone 4S engendered a surprising amount of upgrades (we believe due to the death of Steve Jobs creating a lot of goodwill and free branding). FY13 has been the opposite with currency and commodity prices a headwind and the iPhone 5 generating fewer upgrades. However, ultimately memory and currency prices cannot be headwinds forever, and with two-year contracts, as long as the iOS user base is growing nicely, device growth will continue.

  3. Pingback: APPLE Clouds: Part Two. | DGLIKES

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