This Time It Matters: Why Apple Is Falling

Preface
Apple Inc (NASDAQ:AAPL) is dropping hard after its event to announce the new series of hardware, in particular the new iPhone 8, 8 Plus and X as well as the Apple Watch 3.

It’s Different This Time
Normally when Apple stock dives on lukewarm product reviews we stand firmly in our position that the stock market reaction is over blown. Our simple thesis for that response is to look at demand, which is hypnotically strong, every time. That is not the case this time.

A New Risk is Not Obvious But is Enormous
Apple announced a more complicated lineup of iPhones this time around. It introduced the iPhone 8 series which is an upgrade to the iPhone 7, and then it announced the highly anticipated iPhone X (pronounced iPhone Ten).

Then the company made the iPhone 8 available this month, but pushed delivery of iPhone X to early November, which pre-orders stating in late October. That has created a risk.

It turns out that Apple hyped the iPhone X so much, and poured so much new technology into it, that it has left the demand for iPhone 8 lackluster in Apple terms. Here’s what we mean.

If you go to the Apple Store, and try to purchase an iPhone 8, the wait time is essentially 1-3 days for the smaller memory version. Here is an image:

That is for the iPhone 8, in Los Angeles, on Verizon’s (NYSE:VZ) network. The other networks are essentially the same. A normal wait time for a new iPhone release is usually several weeks, let’s say 2-4 depending on where you are in the world.

There are also reports that in store lines are much smaller than before, with one report pinpointing Sydney Australia, where only 30 people were camped out for the new release. Reports from China are similar.

Here are links to two stories:

Turnout for iPhone 8 Launch in Australia “Bleak” as Customers Hold Out for Upcoming iPhone X
The iPhone 8 launch in Sydney saw “a bleak turnout,” reports Reuters, with fewer than 30 people lining up outside of the Sydney Apple Store on George Street. In past years, hundreds of people have lined up for new iPhones on release day.

Apple Falls After Analyst Report Indicates Weak iPhone 8 Demand
Consumers pre-ordered about 1.5 million handsets on Chinese retail website JD.com in the first three days, compared with about 3.5 million for the comparable period of iPhone 7 orders.

Tim Cook just said he “couldn’t be happier” with the iPhone release (and Apple Watch 3). While sales are lower than prior models, there is one reason, a big reason, that he may actually be telling the truth.

Is There a Plan?
One of the headlines that surfaced from the Apple Event was that the iPhone X was very expensive, starting at $ 999 and climbing to $ 1,200 based on the configuration.

It’s possible, maybe even likely, that Apple decided to release the iPhone 8 for less to make it appear that it was not forcing Apple loyalists to buy a far more expensive phone by offering a reduced priced new model (iPhone 8).

In fact, it does appear that even in the bearish analyst notes, each tends to comment on the fact that demand reduction for the iPhone 8 is simply a reflection of the outsized demand for the iPhone X.

If that’s true, then Apple will have an average selling price significantly higher than in prior times, and if demand is in fact to the point where Apple also sells more units, then that would bring a windfall of profits larger than any company has ever seen in one quarter. If that sound overly bullish, it’s just the choice of words — Apple already has the largest earnings ever in one quarter, so this would be a breaking of its own record — also known more simply as, “growth.”

Back to Risk
While there is a rather bullish narrative to wrap around this odd iPhone selection, there is also, in earnest this time, a reasonable bearish thesis.

Apple won’t be delivering its iPhone X until well into November, and if demand is very strong, it might not even be able to deliver before the holiday season in the United States. And while, certainly, if all of those sales simply occur later in the year (or early 2018), then that’s fine, but to consider that a foregone conclusion is a step we are not willing to take with blind faith.

Some consumers, perhaps many consumers, will not wait. And while Apple loyalists may stick around for a later date, the all-important “Android switchers” (those smartphone Android owners that switch to Apple) may not — and that is a real risk and worthy of a stock drop, until proven otherwise.

Apple’s market share in the United States is jumping as Android loses market share — an under reported but critical phenomenon. On January 11th, 2017, 9TO5Mac wrote iPhone market share grows 6.4% in USA, takes share from Android in most markets.

Apple gained 9.1% in the UK, mostly at the expense of Windows phones.

The iPhone grew its market share in Australia, France, Italy, Japan, Spain, the UK and USA, with Android seeing its own share drop in all of these countries bar Italy, where its growth was less than half that of iOS.

Those are Android switchers and Apple may have just put that group, or at least that trend, in serious jeopardy.

Now What?
We believe the iPhone X is going to be a knock-down drag-out mega hit, and the elevated price will make it yet an even larger success. But, the risk that Apple took, as of right now, is hurting the company both with iPhone 8 sales, and potentially, with Android switchers. And that is not a false narrative — it is accurate.

That risk means the stock should drop, and is dropping.

But, we’re not done yet. What we did not show you, and is easily missed unless you are really looking, is how hard Apple is focusing consumers on the iPhone X over the iPhone 8 — in our opinion.

I recorded a 45 second video arriving on the Apple Store and looking at iPhones. I have turned to video to allow you to make your own decision, as opposed to snapshots, which are too selective and an be used to weave any narrative the author likes.

When you watch this video (below), decide for yourself if you feel that Apple is purposefully pointing people to the iPhone X over the iPhone 8. Here we go:

[embedded content]

That’s hardly headline grabbing footage, but we found it noteworthy.

Apple Watch 3
There have been some pretty poor reviews of the Apple Watch 3 surrounding its LTE connectivity and its battery life. This is one of those times where the reviews are meaningless. Demand is strong and that’s all that matters.

Here is a snapshot from the Apple Store for that product:

We see the Watch becoming a runaway success as people learn to use that wearable device as a standalone product — leaving the phone at home on runs, meetings, swims, hikes, and whatever other times such a convenience could be desired.

Conclusion
We maintain our Top Pick status on Apple, but have certainly tempered our bullishness with an undeniable new risk. It might work out very well, but, it might not, and that is a new risk to Apple stock.

The author is long shares of Apple Inc (NASDAQ:AAPL).

Thanks for reading, friends.

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Disclosure: I am/we are long AAPL.

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It’s time to revisit Apple buying Dropbox

Dropbox once told Apple’s Steve Jobs that it wasn’t for sale, but now might be a good time to change its tune.

The bottom’s dropped out of Dropbox’s market. In 2011, it was invaluable. But now, in 2015, it’s clunky — an unnecessary step that feels a bit too far removed from the dozen or so apps we use regularly. Dropbox is decently integrated, but it doesn’t feel like enough now, when we can easily send files through interoffice chat and collaboration platforms like HipChat and Slack that do much more than file-sharing. While many individuals did (and still do) use Dropbox for sharing photos and big, totally legal files, Dropbox is largely for business, used by colleagues to exchange big folders and files. In fact, Dropbox says that 60 percent of its basic and pro users use Dropbox primarily for business.

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A better solution than iCloud

While we’re on the subject of services that just don’t quite pull their weight in 2015, let’s chat about iCloud.

My mom calls me all the time to ask if a photo she mistakenly deleted is in iCloud. I tell her what I’ve told everyone else who has ever asked me anything about iCloud: “I have no earthly idea.”

I don’t know what’s in my iCloud. 22.1GB worth of miscellaneous things, apparently, but I don’t actually know what makes up all of those mysterious gigabytes (edit: I checked — it’s a lot of photos, Contacts, and maybe half of my total Reminders), and I definitely don’t know how I would go about retrieving any of that purportedly precious data in the event of a catastrophic iDevice meltdown. I’m confident that I could figure it out, but I haven’t attempted it.

I don’t use iCloud at all. And that’s because iCloud is garbage. It’s only recently graduated from “glorified landing page” to “somewhat usable interface”, but it remains a part of my Apple life that I feel no real need to interact with at all, unless something goes absolutely and horrifically wrong and I’m forced into the iCloud interface as a data Hail Mary.

To be fair, I’m glad that iCloud exists. I’m glad that Apple’s making an effort to save the data that I’m too stubborn or lazy to back up. I’m glad that it’s trying to save me from myself. Or maybe it’s just trying to save a Genius or two from having to explain to a customer that all of his photos are gone because he carelessly dropped his iPhone 6 Plus into a chocolate fondue fountain. Maybe it’s both.

Either way, the fact remains that iCloud is trash, even when it’s helpful, and that’s largely because it is so underachieving. iCloud could be better, but first it has to be useable, and maybe that’s where Dropbox comes in. Because iCloud, too, is underpowered.

When Dropbox founder Drew Houston met with Steve Jobs in 2009 to talk about Dropbox, Houston famously shut down Jobs’ approach to buy the file-sharing service. According to a report from Forbes in 2011, Jobs let Houston know that he was making something of a mistake banking on Dropbox’s service to sustain a company, telling him that Dropbox was “a feature, not a product.”

Now, it sort of feels like Jobs was right. Dropbox doesn’t feel like it’s future trajectory is up. In fact, it kind of feels like the rain has started and the Dropbox is getting soggy. Dropbox isn’t going to get much further without becoming easier, more meaningful and high-powered. Dropbox isn’t going anywhere but down as a standalone app, but if it can find a way to make itself a part of our lives the way it began to before iCloud, Google Docs, Box and the rest, it might stand a chance. And, well, if there’s one company that’s become the leading expert on making itself an essential part of daily life, it’s Apple.

Theoretically, if Dropbox were to see the soft, brushed aluminum, backlit writing on the wall and decided that it wanted to take Apple’s offer six years later, would Apple even want to buy?

Well, yeah. It should, anyway.

Tiptoeing into enterprise with iPad Pro

Apple wants a bigger piece of the enterprise pie. iPad Pro proves that. Dropbox has a very solid base of enterprise users (for now), and perhaps a more robust file sharing, synching and management platform for the super-sized tablet would tip the business scales in favor of Apple’s answer to the Surface Pro.

Furthermore, as previously discussed, Apple’s iCloud leaves a lot to be desired–bringing in the world’s most valuable cloud service is far from the worst idea Apple’s ever had (a right that I have assume is reserved for the rollerball on the Mighty Mouse). Beyond that, Apple could really benefit from something of an ecosystem overhaul. Between iPads, Apple Watches, iPhones, Apple TVs and iMac/MacBook/MacBook Pros, many people now find themselves with more than one iDevice. The better those devices communicate and sync data, files, photos, contacts, etc., the more things “just work”, as Apple likes to say.

Perhaps best of all, never again would a Genius have to try to explain what the hell iCloud actually does.

It’s time to revisit Apple buying Dropbox originally published by Gigaom, © copyright 2015.

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