I'm not a fan of prediction posts at the start of each year. Instead, the much more valuable way to prepare for the new year is to embrace the unknown. By formulating and organizing a series of questions, it becomes that much easier to assess a company's strengths, weaknesses, priorities, and opportunities over the next twelve months. Here are my Apple questions for 2016:
- Apple Watch 2. The Apple Watch has become a litmus test for Apple's ability to create compelling new product categories. What features will Apple look to improve when the Apple Watch is updated in a few months? There is low-hanging fruit in terms of features that can see improvement, including an Apple S2 chip and slightly better battery, although the device's small footprint should be taken into consideration when thinking of realistic near-term advancements. Will Apple push ahead with health and fitness and include additional health-related sensors in Apple Watch 2? In addition, how much change will Apple push in terms of the device's physical design attributes?
- New Watch Bands. Management has been very vocal in pushing the theme of buying additional watch bands to personalize Apple Watch. After only five months on the market, Apple unveiled a range of new Sport bands this past September, including a new leather band option. Will Apple come out with a range of new Watch band options for both the Sport and Watch collections alongside updated Apple Watch cases? It is important to remember that the Watch bands themselves will likely one day contain sensors and play a more vital role than just being a fashion item.
- Pricing. Will Apple maintain its current Apple Watch pricing? With the vast majority of Watch sales attributed to the Sport collection, the $349 and $399 entry-level models will be the key ones to watch going forward. It is not a given that Apple will keep selling the original Apple Watch alongside Apple Watch 2. There would be historical precedent for Apple to stop selling the original Apple Watch once the new Apple Watch is released, similar to what occurred with the iPhone and iPad. This has a major implication on Apple Watch pricing as Apple would not have a year-old model to sell at a lower price like we see with the iPhone and iPad in recent years. At the same time, Apple likely has fresh data on how Watch sales fare at lower prices considering Best Buy and Target had $100 off Watch promotions.
- Sales Disclosure. Will Apple begin to break out Apple Watch sales numbers in 2016? It is not a question of "if" but "when." From management's viewpoint, there are pros and cons to not revealing Watch sales but at a certain sales point, the material nature of the sales will be too much to keep hidden in the "Other Products" line item.
- Marketing. Where does Apple plan on taking Apple Watch marketing? We have already seen some changes in the way Apple describes the Watch with its TV ads, moving away from the "iPhone on your wrist" messaging and embracing a fun device that can do a number of small, convenient tasks.
- Apple Watch Edition. Leading up to the Apple Watch launch last year, the Apple Watch Edition collection received an oversized amount of attention. However, in recent months there has been little press attention given to the collection. Will Apple sell new Watch case materials, such as platinum or white gold, for the Edition collection? When considering that success for the Edition collection is not measured by unit sales, Apple is likely judging the collection by other factors including material design and allure. Will we get any evidence to suggest if management is pleased with how the world has embraced the Edition collection?
- New Luxury Partnerships. Will Apple launch another Apple Watch partnership? Apple's Hermès partnership may end up being one of the sleeper hits of Apple Watch's debut year, as Apple combined the worlds of traditional luxury with personal technology. Additional partnerships involving luxury brands holding notoriety around precious metals would be a logical next step.
- The 4-inch iPhone. Is Apple planning on positioning a new 4-inch iPhone as a way to entice iPhone 5/5s/5c users to upgrade? There is no question that iPhone unit sales growth will slow in 2016 compared to 2015, a byproduct of strong iPhone 6 and 6 Plus sales in 2015 and what appears to be a slower iPhone upgrade cycle with the 6s and 6s Plus. A new 4-inch iPhone would be positioned as a catalyst to get current 4-inch screen iPhone users to make the jump.
- iPhone 7. Similar to every other annual iPhone release, Apple will strive to have three or four headline features with the iPhone 7. Will Apple remove extra bezel from the iPhone in order to make current screens feel a bit better in hand? In addition, an iPhone without a home button seems like an evolutionary next step, although it may be too big of a jump to take in the near-term with current iOS software. The biggest questions surrounding new iPhones relate to the Plus model. Will Apple begin to differentiate the iPhone Plus model beyond just screen size? Adding greater differentiation within the iPhone line would help in terms of ASP trends as well as better position the iPhone as a PC/Mac replacement.
- iPhone Upgrade Program. The highlight from Apple's "Hey Siri" keynote this past September was the iPhone Upgrade Program. Creating a process for users to easily buy a new iPhone every year directly from Apple has very significant ramifications in terms of the iPhone upgrade cycle. Currently the service is only available in Apple Retail stores in the U.S. Will Apple extend the iPhone Upgrade Program to additional countries, in addition to bringing the service online?
- New iPad Pro. The iPad Pro was the most noteworthy development for iPad in years. A 12.9-inch screen, combined with four stereo speakers, and productivity accessories, position the iPad Pro as the iPad's future. The iPad Pro pushes the larger iOS multi-touch tablet category forward by distinguishing itself from larger iPhones and smaller Macs. Will Apple push an iPad Pro update in 2016 or should we expect a longer update cycle?
- iPad Sales. Will we see early signs of iPad sales bottoming in 2016? The addition of the Pro model to the lineup will help offset some of the iPad mini sales declines, although the much bigger trend of larger iPhones cannibalizing iPad mini will continue.
- iPad Air 3. Apple did not update the iPad Air in 2015. Accordingly, does Apple plan on updating the Air in 2016?
- Apple Pencil. Will Apple ship a new Apple Pencil and extend Apple Pencil support to other iOS devices? The Apple Pencil is the most intriguing Apple accessory in 2015 with a clear directive of being used to mark, draw, or write, and not navigate. Such tasks may end up serving as a clue that Apple does not plan on expanding Apple Pencil support to other iOS devices in the near term.
- iOS 10. What will be the main features in iOS 10? The iOS home screen has been a crucial part of the iPhone user experience from the beginning. However, there are certain elements that are starting to feel a bit dated. I'm using the Spotlight search screen more frequently, and the addition of 3D Touch adds a new element to the conversation. Is Apple planning on rethinking the iOS home screen in iOS 10? Look at the iPad Pro's Springboard, and it becomes easier to conclude: yes, Apple may have something new planned for the home screen.
- App Store Debate. Up to now we really haven't seen much of a debate concerning the App Store (across all platforms). Developers have been increasingly vocal with their concerns surrounding app developer sustainability, while Apple has followed its playbook closely, listening much more than acting. With Phil Schiller now overseeing the managerial aspects of the App Store, one would expect Apple to increase its communication efforts with developers leading to an actual debate where we hear two sides of the argument.
- Trickle Down MacBooks. Apple's new $1,299 MacBook was the Mac highlight of 2015. The major theme to watch is Apple bringing features found in the new MacBook to other models in the Mac lineup.
- ARM-Based MacBook. Will Apple announce an ARM-based MacBook running an iOS derivative? There have been clues that such a move may be in the pipeline.
Project Titan (Apple's electric car)
- Construction/Real Estate. Apple acquired a significant amount of land in North San Jose through a series of closely guarded transactions in 2015. My theory is that this land is related to R&D facilities for Project Titan. Will we see Apple's plans for this North San Jose land begin to materialize in 2016? The level of progress seen in North San Jose may provide clues as to Project Titan's timeline.
- Employee Hires & Fires. One of the more tangible ways of monitoring Project Titan progress is to look at employee moves. Will Apple have any additional high-profile Project Titan hires in 2016? Contrary to consensus expectations, Apple may turn to the legacy auto industry for talent, similar to hiring Doug Betts from Chrysler. Even though Apple is focused on rethinking what it means to build and sell an automobile, such legacy auto hires have experience and background that will prove helpful for Apple.
- Regulatory Filings. The automobile space is unique compared to previous industries Apple has operated in given the much higher level of government regulation. Apple will need to adapt to these regulations, possibly providing a few early Project Titan clues for those closely monitoring Apple's every move.
- Apple Music. All indications point to Apple Music currently appealing to a small base of iOS users (5-10M members) and to a lesser extent, Android users. Will Apple lobby the record labels to lower the $9.99 monthly membership price in order to attract a wider base and compete with Spotify?
- Apple Video. Bloomberg reported that Apple suspended its plans to launch a slimmed-down cable bundle. Will content companies have second thoughts and be willing to cooperate with Apple in order to launch some type of new package?
- Apple Pay. Despite improved financial institutional support, retailer support is still lacking, especially when it comes to reaching universal support. How will Apple increase customer awareness of Apple Pay, in addition to achieving much broader retail support?
- Share Buyback. Management spent the second half of 2015 buying as many AAPL shares as possible with the stock price declining in the face of slowing economic growth in China and concerns surrounding iPhone 6s and 6s Plus sales. Given Apple's current valuation of 10.8x forward earnings (6.9x forward earnings excluding cash and cash equivalents), how will management and the board respond when it comes time to update Apple's buyback authorization in April?
- Dividends. Apple's board is expected to increase the quarterly cash dividend in April. What payout ratio does the board feel comfortable targeting given Apple's cash needs for organic growth?
- Foreign Tax Reform. In what is turning into a reoccurring question, will we see any U.S. tax reform regarding taxation of overseas profit? Apple currently has $187 billion of cash and cash equivalents held overseas.
- EU Tax Investigation. The European Commission is expected to announce its decision regarding Apple/Ireland's tax dealings sometime in 2016. What financial impact, if any, will Apple face? If using the recently announced Apple settlement with Italian authorities regarding taxation as a barometer, the European Commission's investigation into Ireland's Apple tax treatment may result in some type of payment from Apple. Overall, there is skepticism that any judgment against Apple would result in long-term headwinds for the company or stock.
- R&D Expense. Apple's R&D expenditures increased dramatically during the summer of 2014 and remained elevated throughout 2015. Should we expect Apple's R&D to continue to outpace revenue growth in 2016?
- Jony Ive. It has been approximately six months since Jony Ive officially relinquished day-to-day managerial control over Apple's industrial and software design teams. How will this change manifest itself in Apple product development in the long-run? There is little to no evidence to suggest much will change. However, additional time is the only way to confirm that the managerial change has been effective.
- Executive Turnover. With Apple Watch's debut now completely in the rearview mirror and the next big thing (Project Titan) likely at least two years away, will any senior Apple executives decide now is the time to retire/take a break? On the surface, no one executive comes to mind as being close to the exit door. Phil Schiller was recently given additional responsibilities while Cue, Federighi, Maestri, and Ahrendts are only now hitting their stride.
- Project Titan Leadership. Similar to Jeff Williams being put in charge of the Apple Watch team, when will Apple place a senior executive to oversee Project Titan? The logical choice is once again Jeff Williams, although this appointment may end up occurring in 2017 or later.
- Jeff Williams. Speaking of Apple's new COO, his stock is on the rise within Apple. Given Williams' increased visibility in 2015, should we expect Williams to play an even bigger role in Apple keynotes and the company's public image?
- Kevin Lynch. Will Kevin Lynch's stock continue to rise in Apple? The leader of Apple Watch software appears to be in a position of increasing power within Apple, and any continued move into wearables will only result in additional attention being given to Lynch.
- New Marketing Direction. Apple's hire of Tor Myhren as VP of Marketing Communications is intriguing on many levels. What should we expect from Myhren? With such a well-regarded and surprising senior hire, it is safe to expect something big in terms of Apple marketing campaigns from this development.
- Carl Icahn / Shareholder Activism. The longer a public company sits on a strong balance sheet while experiencing a declining valuation and languishing stock price, the more likely investors will become agitated. Even though Carl Icahn continues to pledge his support for Tim Cook and the rest of the management team, it would not be surprising to see individual Apple shareholders become a bit more vocal with "suggestions" for Apple on how to increase its valuation.
- M&A. In what areas does Apple feel the need to bolster its resources in 2016? Apple has been quite active on the M&A front in recent years and after considering Apple's product pipeline, continued M&A activity related to augmented reality and personal transport seems likely.
- A New Kind of Wearable Device. With a finished product from Project Titan still a few years out and the Apple machine busy cranking out iPhone, iPad, and Mac updates, the wearables category represents the best wildcard for a completely new Apple product. The leading candidates for new Apple wearables include a ring and wireless EarPods, both of which would be positioned as health-related iPhone accessories.
The Apple news, products, and events not reflected in any of these bullet points represent the unexpected.
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