Peak iPad Mini

The iPad mini's best days are behind it. Using app analytics data from Fiksu and Mixpanel, along with my own iOS device sales estimates and projections, I was able to derive iPad mini sales since launch. Over the past two years, iPad mini sales trends have deteriorated much faster than most people think. When taking into account the move to larger iPhones and iPads, the iPad mini's value proposition has likely been weakened to such a degree that the decline in sales is permanent. We have experienced "Peak iPad mini." More importantly, by analyzing the iPad mini's sales trends, we have better insight as to where the iPhone and iPad product lines are headed and the iOS platform's overall direction when it comes to form factors. 

iPad Mini Has Fallen Out of Favor

Conventional wisdom would suggest that the iPad mini has been the better performing iPad line due to its low price and feature set. In reality, the iPad mini has seen much weaker sales trends compared to its larger 9.7-inch screen sibling. As shown in Exhibit 1, when looking at iPad mini sales on a trailing twelve month (TTM) basis, the device's multi-year sales decline becomes quite obvious. Apple would need to sell close to double the number of iPad minis sold over the last 12 months to set a new sales record, a feat that is looking very unlikely. 

Exhibit 1: iPad Mini Unit Sales (TTM)

While everyone is aware of the iPad's sales troubles, one surprising observation is that most of the iPad's sales decline can be attributed to the iPad mini line. As seen in Exhibit 2, the 7.9-inch screen form factor has seen a dramatic 50% drop in sales on a TTM basis over the past two years while the 9.7-inch iPad line has seen much more resilient sales. This trend seems counterintuitive but provides a very strong clue as to how consumers are thinking about the iPad. When taking into account this granular iPad sales data, Apple management likely had a much easier time deciding to launch the larger iPad Pro. The trend towards larger iPads has already been years in the making.  

Exhibit 2: iPad Unit Sales by Screen Size (TTM)

What Happened?

There has been a polarizing debate as to what happened to iPad sales. Some have blamed slowing sales on longer life cycles while others have pointed to iPhone cannibalization or a combination of the two. The latest theory is that iPad software issues and a flawed App Store are to blame. When considering that the smaller iPad mini is becoming less popular than the larger models, many of those reasons fall by the wayside.

In reality, the iPad was a victim of its own success. The combination of a very popular iPad 2 (decent weight, okay screen, and good battery) and the launch of a smaller iPad mini (with a low price) led to a boom in sales that resulted in iPad sales growth peaking only three months after the iPad mini went on sale.

In retrospect, the iPad mini served as a great precursor to the phenomenon known as larger screen iPhones. There was likely significant demand for an iOS device larger than the current iPhone at the time (iPhone 5's 4-inch screen) but a bit less bulky than the 9.7-inch screen iPad. Soon, all of these reasons began to be wiped away with new, larger iPhones and thinner iPads. While the iPad mini's low price meant the device was the more popular iPad for gifting around the holidays, which is likely still true today, the need for an iPad mini was increasingly being met by the iPhone and larger iPads. 

iPad Mini's Declining Value Proposition

A slowdown in iPad mini sales is not enough to lead to the conclusion that the product line will see a permanent reduction in sales. The Mac serves as great example of this as the product seemed to have seen peak sales, only to come roaring back in subsequent quarters. Instead, the Peak iPad mini theory is predicated on the idea that the device's position in the market has fundamentally changed, leading to a weaker value proposition and corresponding cut in sales. One example of this type of value destruction is found with iPod and how the smartphone led to less demand for dedicated music players. Peak iPod occurred in 2008, a year after the iPhone was released. 

The very significant move towards larger screen iPhones has altered the iPad mini's ultimate sales trajectory. As shown in Exhibit 3, when the iPad mini was first introduced in 2012, the world was predominately using 3.5-inch screen iPhones. Meanwhile, the Android phablet movement was only just beginning to take off.  Over the course of the next two years, iPhone sales trended towards bigger screens. Today, a vast majority of iPhones sold include a 4.7-inch or 5.5-inch screen. These larger devices are increasingly serving as better consumption devices, taking away a key value proposition previously held by the iPad mini. 

Exhibit 3: iPhone Sales Breakdown by Screen Size

Meanwhile, on the other end of the spectrum, the iPad Air's resilient sales (as shown in Exhibit 2) suggest that an increasing number of consumers are looking to use an iPad as a laptop and desktop replacement. Accordingly, the iPad mini's smaller screen is not preferred as the reduction in screen real estate leads to a less useful product for media consumption, web surfing, and other basic computing tasks. 

Some have said that the iPad is being squeezed between the iPhone and Mac. In reality, the iPad mini is being squeezed between larger iPhones and the iPad Air and iPad Pro. 

iPad Mini's Price Advantage is Overrated

The iPad mini was launched in 2012 as a defense against Android OEM competitors potentially underpricing the iPad and risking a repeat of the Windows vs. Mac battle. In reality, the iPad mini is still too expensive to compete with pure media consumption devices running Android, but there is no evidence such devices pose a threat to iOS. Many now point to price as the iPad mini's secret weapon that should not be underestimated. In reality, this strength is likely overrated. At $399, a new iPad mini is only $100 less than a new iPad Air and the same price as a year-old iPad Air. This pricing dynamic likely explains why the iPad mini sales have declined more than sales of the more expensive iPad Air models. 

Meanwhile, the year old iPad mini is still $70 more than the entry-level iPod touch, which is the lowest cost entry point for the iOS ecosystem. While some may look at the iPad mini as holding a better future than the iPod touch, that isn't exactly saying much considering the iPod touch's lackluster sales. 

iOS Sales Spectrum

The iPad mini's declining sales provides clues as to iOS form factor trends. Instead of looking at the iPhone and iPad as separate product categories, I like to think of them as existing on the same iOS spectrum but occupying different screen size segments. The fact that iPhone and iPad rely on the same mobile operating system makes this view reasonable. In Exhibit 4, iOS sales according to screen size are depicted for 2013 and 2015. 

Exhibit 4: iOS Sales Spectrum (2013 vs. 2015)

In the span of two years, screen size preferences have shifted to larger screens (reflected by the blue line in Exhibit 4 shifting to the right in 2015). Notice the iOS screen sizes that saw the largest sales declines between 2013 and 2015: 3.5-inch iPhone, 4-inch iPhone, and 7.9-inch iPad. A better way to see this trend is to picture the lines in Exhibit 4 as waves, depicted in Exhibit 5. Note two differences: The new sales peaks (in blue) are now found with 4.7-inch iPhones and 9.7-inch iPads while the amplitude of the wave at 4.7-inch iPhones is increasing. Over time, it is conceivable that the wave in blue continues to shift to the right with a higher iPhone crest. 

Exhibit 5:  iOS Sales Spectrum (2013 and 2015)

A few takeaways:

1) Consumers are increasingly allowing iPhones to play a greater role in their lives. Consequentially, purchasing habits are trending to larger screen iPhones. Apple will likely look to the 5.5-inch iPhone form factor as positioned well for potential sales growth, not to mention increased revenue and profit share. There is room for Apple to slim the device's bezels, making the device easier to hold in one hand while maintaining the 5.5-inch screen. 

2) The iPad Pro is positioned well to see an increasing share of iPad sales as consumers position the device as a laptop and desktop replacement. While this replacement transition is not possible for everyone at this time, the definition of work is changing and for many consumers typing is becoming one of the last barriers to switching completely to iPad. 

3) The 7.9-inch iPad from factor is caught in the middle.  It is too big to be put in a pocket or held in one hand but too small to replace a laptop or desktop. 

iPad Mini Is a Fading Star

Apple is still selling too many iPad minis for the product to be mothballed. However, the more likely path will be a slow yet steady slide into irrelevancy. The product will see more sporadic refreshes, which has already happened with the iPad line, while the value proposition continues to become less compelling. Holiday quarters will represent iPad mini's best sales times, and it will possibly even outsell the iPad Air during certain months, but the elephant in the room will keep a lid on iPad mini's upside. Ultimately, the iPhone is the single biggest threat to both the iPad mini and the broader iPad category as Apple pushes forward in differentiating the iPhone Plus line. Such a device holds the best chance of being the most popular and useful iOS form factor. From Apple's perspective, having the iPad mini be cannibalized by an iOS device with a higher profit margin may actually turn out to be a long-term positive from a financial and strategic perspective.   

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Making the Case Against an Apple Television Set

The Apple TV and iPhone were both formally introduced to the world on January 9th, 2007. One went on to sell over 700 million units and is now responsible for an active installed base of approximately 500 million users. The other was classified as a hobby and went on to sell "only" 20 million units. In 2014, Apple reportedly shelved the idea of selling its own television set. Given renewed focus around the launch of a new Apple TV platform, have the odds of Apple having second thoughts about selling its own branded television set gone up? No. Upon closer examination, there are very few reasons to justify an Apple-branded television set. In fact, a very strong case revolving around the television's ultimate value in a mobile world can be made demonstrating why an Apple television will not receive the green light to market.

The Long Journey to Today

The technology industry has struggled for the past decade in trying to define TV's future. Countless attempts to make TVs "smart" never caught on. The problem wasn't that companies weren't thinking outside the box, but rather that they were overthinking it. The future wasn't going to be found by turning our television into a desktop computer with an accompanying keyboard. Instead, TV's future became visible only after recognizing that a television is inherently a consumption device in need of content and an easy user interface. 

The new Apple TV is a product that has literally been years in the making, dating back to Apple's sneak preview of the "iTV" project in late 2006. Over the years, as the iPhone and iPad gained momentum and priority within Apple, Apple TV and the entire television category was negated to a long-term opportunity. While early Apple TVs were okay for consuming iTunes content, the value proposition to the average consumer just wasn't too appealing. We knew television was going to change and had a general framework as to what was needed to make that change happen, but we weren't sure when that change would unfold. All the while, speculation grew that Apple would unveil its own branded television set with a built-in Apple TV box.

Enter Netflix, Hulu and HBO Now. With a growing number of new content companies gaining strength and giving the consumer revamped content bundles that went up and beyond what we were used to with traditional broadcast and cable programming, the future started to come into focus. Meanwhile, instead of pushing forward with its own television, Apple reportedly canned the project to instead focus on taking lessons learned from iPhone and iPad in terms of how voice and touch could create a user interface that works with large screens positioned a few feet in front of us.  

The New Apple TV

There are two key elements to the new Apple TV that make the product stand out from previous reiterations: a new voice-based interface and an App Store.

New Voice-Based Interface. I had one "wow" moment while interacting with the new Apple TV for the first time: using Siri to navigate my television. Relying on Siri to search for movies or TV shows, and in the process being able to avoid the tedious task of using text to search, demonstrates that voice is an attractive way to navigate a large screen positioned a few feet away. I found voice so compelling that not being able to use Siri to search for videos within YouTube quickly led me to avoid using the YouTube app on Apple TV altogether. I simply had no desire to search by manually typing each letter one at a time using finger swiping on the Siri remote. While at first it sounded like a gimmick, using Siri to check the weather, stock prices, or sports scores was quite compelling even though I could have gotten the same information on my iPhone or Apple Watch. The ability to simply press a button and talk casually was riveting. I found the error rate with Siri on the new Apple TV to be low with the only hiccups resulting from asking questions that will likely be supported in future versions.

App Store. This past May at a conference in Germany, Netflix CEO Reed Hastings declared the future of TV would revolve around apps. A few months later, Apple threw its support beyond the app model as well. After using the new Apple TV for a few minutes, it's clear Netflix and Apple are correct in getting behind the app model. Apple TV's primary purpose is to consume content. Without third party apps like Netflix, HBO, or Hulu (and active subscriptions), Apple TV's value proposition would decline dramatically. 

An app's value is rather straightforward when it comes to consuming content on a television. Instead of one company pushing the same content to all viewers, an app makes it possible to have a very tailored and personal viewing experience, even within the same household. An app also makes it possible to search a wide variety of content depending on our current interests and mood. 

When Apple introduced Apple TV this past September in San Francisco, much of the press focused on the device's App Store and how gaming will be revolutionized. An App Store for Apple TV was craved by core Apple users ever since 2008 when Apple launched the iOS App Store. While apps are likely the future of television, I remain a bit more contained in my enthusiasm for many of the apps currently being paraded around. While there may be a loyal group of users that will be attracted to gaming on Apple TV, I am skeptical gaming will be able to move beyond its niche focus. Instead, apps that are focused on helping the user consume content in a more personal way have an incredible amount of potential. 

Saying No to an Apple-Branded Television

This past May, the WSJ reported that Apple had shelved its television plans in early 2014. While the exact details may forever be kept to a select few, Apple simply was not able to make the case for why an Apple-branded television deserved the green light. The WSJ article gave hope to long-time Apple television proponents by saying that the television project was never officially killed. Apple will have a hard time justifying selling its own television due to two reasons: TVs are impersonal devices meant purely for consumption, and the television's future in a mobile world is up in the air. 

An Impersonal Consumption Device. While some may look at the new Apple TV as a device capable of turning our television into an iPhone, in reality the device's features reinforce the fact that television is inherently used for consumption. Such a scenario makes it extremely difficult for Apple to position a television screen as being able to produce the kind of premium experience users have come to know from Apple. Everything from the new voice user interface to the App Store is built to make it easy to find and consume content while sitting a few feet away from a large piece of glass. While Apple has previously sold devices like the iPod for consumption, the iPod contained a certain level of personal connection to the user - through how it was meant to be carried, touched, and even worn. We see that these personal ingredients are needed to produce premium experiences with Apple Watch, iPhone, iPad, and the Mac. The end result is that consumers are willing to value and appreciate such premium experiences. A television's inherently impersonal and immobile nature gives Apple less opportunities to make an Apple-branded television stand out from alternatives. If Apple positioned a television to be used for more than just consumption by adding cameras or sensors, the problem would be that we don't live in a vacuum and will likely have even more capable devices in the form of smartphones and tablets nearby that could handle such tasks. 

Television's Questionable Future. Apple TV may very well represent television's future, but in an increasingly mobile world, the television screen will likely play a declining role, regardless of 4K or future technological trends. As a prime example of how a large television screen will likely remain a consumption screen with consumers, after using the new Apple TV with my television for a few minutes, I found myself increasingly looking down and interacting with my iPhone. I don't think this was by mistake. While I may be entertained for a few minutes by a few apps on Apple TV, its purpose is to display long-form content that I am not interested in viewing on my mobile devices. Over time, this dynamic may change as we rely even more on our iPhones and iPads to watch content. For a company that is willing to make very few big bets every few years, putting resources into a product like a television set with a future that is inherently opposite to themes found with mobile seems counterproductive for Apple. Meanwhile, content born out of mobile like short video clips found on Vine, Instagram, and YouTube feel off when viewed on a large TV screen. Instead, being able to consume such videos on our smartphones makes much more sense. Meanwhile, new products like the iPad Pro are designed with content consumption in mind with a superior speaker system and large screen. The end result is more people will consume video content on an iPad Pro as time goes on while momentum remains on the side of mobile.

Looking Beyond Dollars and Cents

Notice the lack of "revenue," "profit," or "margin" in the preceding paragraphs for why it doesn't make sense for Apple to sell its own branded television. This wasn't by accident, but rather those financial metrics are simply byproducts of Apple being able to sell a premium experience. Apple doesn't sell a product simply because it meets certain financial criteria. Instead, management evaluates if it can improve a product to the point where it possesses certain characteristics that lead to a premium experience. Metrics such as TV life cycles, low margins, or the fact that Apple would likely only be able to sell one unit to a household simply don't play a role in the fundamental case against an Apple television set. 

Apple TV's Role

Instead of simply controlling the large piece of glass in our living room, Apple TV's more valuable role is to further position Apple as a content distributor. When looking specifically at video content, Apple's interest in creating a slimmed down bundle of broadcast and cable programming can help the company provide a full assortment of video content to its users. This range of video content would then be able to be viewed on the hundreds of millions of personal Apple devices being sold each year including iPhones, iPads, and Macs. In a way, the Apple TV is Apple's trojan horse to gain power in the quest to become an improved content distributor. This characteristic is much more interesting from an experience-building perspective than compared to the idea of selling a large piece of Apple glass. Apple was right to shelve plans to build its own Apple television. 

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Decoding Apple's North San Jose Land Mystery

Apple has big plans for north San Jose. In the past few months, Apple has spent more than $300 million quietly purchasing or leasing land close to San Jose International Airport and only 11 miles away from Apple Campus 2. When adding up the possible square footage of office space that can be built on this land, Apple would be able to erect another "Apple Campus 2." At initial glance, there are three likely scenarios that can explain Apple's motivation buying land in north San Jose. However, after looking closer at Apple's employee and office space growth as well as the company's product development strategy and pipeline, the most likely scenario is that Apple is building an R&D center for Project Titan, specifically a prototyping and testing facility for a range of automobile products.  

The Property Transactions

After a few months of rumors within Silicon Valley commercial real estate circles, Apple's play for north San Jose began to take shape this past July when reports came out that the company signed a lease for a 290,000 square foot office building close to San Jose International Airport. Over the following four months, Apple has reportedly had three additional transactions resulting in the company owning or leasing nearly 90 acres.

July, 9, 2015. Apple reportedly leases a 290,000 square foot building from Ellis Partners at 2325 Orchard Parkway. The building is able to support 1,450 employees with 12 adjacent acres approved for 665,000 square feet of additional office space. The proximity of this building and open land to San Jose international airport (bottom left corner) can be seen below.

Apple's initial land transaction in north San Jose.

August 3, 2015. Apple purchases 43-acres of open land for $138 million from Lowe Enterprises at 2347 North First St. The 2.8M square feet that is approved for the land could support up to 14,000 employees. As shown below, the 43-acre plot of land is touching land Apple had been leasing from Ellis Partners.

Apple's second land transaction in north San Jose. 

September 25, 2015. Apple buys a building previously leased from Ellis Partners, along with 12 adjacent acres of open land, for $166 million. Apple now owns enough land to support approximately 3.8 million square feet of potential office space. 

Apple's third land transaction in north San Jose. 

October 22, 2015. Apple leases a 202,000 square foot building at 2509 Orchard Parkway from Steelwave. The land is adjacent, as shown below, to previously purchased land from Ellis Partners and Lowe Enterprises. Apple now owns enough land to support approximately 4.3 million square feet of potential office space. 

Apple's fourth land transaction in north San Jose. 

Three Possible Explanations for Apple's Land Purchases

When contemplating Apple's plans with these land transactions, three scenarios seem to rise to the top: stockpiling land for eventual use in the future, building additional office buildings for a growing employee base, and building a research and development facility for Project Titan and Apple's growing automobile ambitions. 

Stockpiling Land for the Future. This theory is mostly based around the fact that land in Silicon Valley is a hot commodity. With little to no leased office space remaining in Cupertino and Sunnyvale (one estimate pegged Apple as representing 40% of Cupertino's office jobs), this theory positions that Apple management is looking to buy land in order to have room for future growth. While Apple may not have immediate plans for the land, the optionality provided by owning land in an up-and-coming geographic area somewhat close to Cupertino would give management enough reason to begin "stockpiling" land.

Upon closer examination, there are a number of holes in this stockpiling land theory that lead me to believe Apple is not just simply buying land to hold on to it for some undetermined future use down the road. The first is that Apple has never shown the desire to buy land indiscriminately without having a specific purpose or function for the land. Apple's focus mantra does not fit with a strategy of just buying large swaths of land with no clear agenda in mind. When looking at prior Apple land transactions, everything has had a purpose or reason. Apple purchased the land that is now home to Apple Campus 2 from HP years before construction began. Management has since gone on record to say the land had been purchased with a new headquarters in mind. Across the U.S. and the world, Apple's land transactions (both purchased and leased) have been conducted with specific growth plans in mind and include various locations in California, Austin, Texas, data centers in various states, Ireland, and recent sustainable forest transactions in North Carolina and Maine, as well as renewable energy initiatives in China.

One can also question the viability of a strategy where a company is spending close to $300 million dollars on land (much of it open land) simply out of fear of not having enough space to grow in the future. It just doesn't add up. Similar to how the Apple Campus 2 land became available due to rough times at HP, it is unreasonable to assume additional land wouldn't eventually become available around the Valley during an economic downturn or simple evolution of technology. It doesn't seem likely that Apple is stockpiling land in north San Jose just in case it may need it in the future. Recent reports seem to validate this stance as Apple is already working toward a development agreement with city officials. Apple has something specific in mind for this land.

Additional Office Buildings for Employees. The next plausible theory is that Apple needs additional office space for a growing employee base. This essentially represents the safe answer as to what Apple may be doing in north San Jose, and it is the one often paraded around in the press. Apple discloses its total employee count in 10-K filings each year. However, additional work is needed to break down this number into Retail Segment employees, temporary or part-time workers, and full-time non-Retail employees. Upon closer examination, I estimate Apple has approximately 60,000 full-time non-Retail employees across the world. As seen in the exhibit below, this employee count has grown significantly in the past five years and, assuming 10-15% growth each year over the next few years, it will not be long before Apple crosses 100,000 non-Retail full-time employees. It would then seem logical that Apple is looking to buy land to house all of these additional employees. 

However, a few things about this theory don't quite sit right with me. The first is that Apple is building a brand new headquarters (Apple Campus 2) with the stated goal of having most of its employees located in one large building in order to foster collaboration. Apple management has been very vocal with this reasoning, even taking journalists to tour the construction site to highlight the building's unique layout. Apple is taking pride in what they are building at Apple Campus 2. 

In order to gain perspective on how much land Apple now has in north San Jose, Apple Campus 2 will have 3.4 million square feet of office space compared to the 4.3 million square feet of potential office space in north San Jose.  I'm doubtful Apple is looking to build a sprawling campus that is larger than Apple Campus 2. The much bigger reason that I'm skeptical is that building an even bigger campus away from headquarters just doesn't fit with Apple's long-standing narrative as to how it views its functional organizational structure. 

Additional doubts that Apple is planning on building another large Apple Campus in north San Jose are raised when looking at some of the details around Apple's employee base. Apple Campus 2 will be able to house 14,200 employees. While large, the building is not large enough to house the roughly 20,000 Apple employees that work in the Cupertino/Sunnyvale area. Accordingly, Apple will continue to use its current headquarters at 1 Infinite Loop (home to 3,000 employees) and surrounding buildings. Run the math and once Apple Campus 2 is finished, Apple would actually be able to consolidate buildings. Why would management spend hundreds of millions of dollars to buy enough land in north San Jose to be able to build another Apple campus for nearly 20,000 employees when Apple Campus 2 has been the multi-year focus and cornerstone of the company's infrastructure development? I suspect the reason is that Apple isn't actually planning on building 4.3 million square feet of office buildings for 20,000 employees in north San Jose. Instead, Apple has a different type of structure in mind for the land. 

Research Facility for Project Titan. What if instead of building another large office building in north San Jose, Apple is looking to build a research facility?  What if this facility is actually a giant R&D complex in order to work on automobiles prototypes and conduct regulatory and safety testing? All of the evidence seems to point to such a thing. 

While we have no confirmation from Apple that they plan on building an electric car, there are enough clues to have a very high level of certainty that Apple is actively working on a self-driving electric car. Everything from a litany of recent automobile-related hires to Apple's interest in self-driving car testing facilities, a recent ramp in R&D spending, and overall automobile industry trends, not to mention accurate reporting from WSJ and at a handful of other publications, point to Apple planning something big with personal transport. 

Recent rumors peg Apple's Project Titan as being housed in leased office space in Sunnyvale, California, closer to Apple HQ. Apple has reportedly leased additional space in Sunnyvale to accommodate Project Titan employee growth. While this location might be a suitable place for employees to work, it is unlikely there is enough room to conduct a full range of electric car testing, including researching manufacturing techniques. 

Even though I suspect Apple is looking to build a Project Titan facility in north San Jose, I have doubts that this location will become the official Apple Car factory. As seen in the map below, there are currently two plots of land (shaded in red) that Apple has still not purchased or leased in north San Jose that are adjacent to Apple's recent land acquisitions. One is open space and the other has three buildings located on it. Even If Apple were to buy these two pieces of land, Apple's total ownership would measure approximately 140 acres. While this plot of land is indeed massive, it's quite small for it to be the location where an "Apple Car" would be manufactured at any level of scale. The lack of nearby rail also raises doubts that this location will become the primary location for manufacturing cars as rail is a cost effective way to transport finished product, not to mention receive raw material. Instead, this site's acreage would be more suitable for R&D purposes, a fact that even Apple has gone on record to discuss when questioned over these recent land purchases. 

Apple's previously acquired/leased land (green) and property currently not owned by Apple (red).

It is difficult to discuss electric automobile testing and assembly in Silicon Valley without mentioning Tesla's Fremont Factory (shown below), the former Toyota car factory located only 20 minutes away from north San Jose. Coming in at 340 acres (nearly four times the size of Apple's current north San Jose land holdings), the Fremont factory is overwhelming. Most of Tesla's assembly occurs on only roughly 120 acres of the site. However, it is important to remember that Tesla is only producing 50,000 vehicles a year, a far cry from the millions produced by the automobile industry's giants. One takeaway from the Fremont Factory is that building electric cars involves much more than just one big building. Instead, the ancillary buildings needed for handling incoming raw materials, producing components, assembly, and parking lots for finished product and transport infrastructure (like railroads), all point to these factories resembling cities rather than just factories. Looking at Apple's north San Jose land holdings, it's tough to see a similar operation like the Fremont Factory being built unless Apple plans on buying out dozens of additional buildings and hundreds of acres of land, something that doesn't seem too realistic or logical when looking at a map of the surrounding area. 

The Tesla Factory in Fremont, California 

Additional evidence suggesting Apple would need much more space to actually manufacture an Apple Car in north San Jose can be found with BMW. The company's i-series electric cars, along with other models, are produced in a factory that measures 23 million square feet. As a reminder, Apple's acquired land holdings in north San Jose amount to 4 million square feet of possible space. 

The clearest answer for what Apple has in mind for north San Jose likely rests with Apple's product philosophy and strategy. Apple will likely rely on the same manufacturing process undertaken with most of its products, including the iPhone. Instead of actually building its own car in its own factories, Apple would look to contract manufacturers to build components and conduct the actual assembly. The important point about this strategy is that Apple would still need to conduct vehicle prototyping and research in order to figure out what should or shouldn't be included in an Apple Car. Testing facilities for Apple Car would likely require a hundred acres by itself. The scale required for car development cannot be stressed.

Elon Musk is right when he said two months ago in an interview with a German newspaper that Apple can't just go to Foxconn and say, "build me a car." Look at how the iPhone became a reality. Apple didn't just go to Foxconn saying, "build us a phone." Instead, Apple needed to figure out how to put together an iPhone and come up with new machinery and processes along the way. Only after that R&D phase had been conducted, did Apple executives head to China and work with Foxconn on learning and replicating the process. As Tony Fadell recalled about iPhone development, building the first iPhone was the easy part. The much harder part was being able to produce millions of iPhones. While early stage iPhone prototyping was done at Apple HQ, in addition to testing (recall Apple's iPhone antenna labs), the actual assembly occurred in China.

When looking at north San Jose, Apple could turn its recently purchased land into an Apple Car R&D campus complete with a giant testing facility and several smaller office buildings supporting more clerical aspects of testing and more nuanced design R&D efforts. 

Future Clues in North San Jose

Apple is reportedly fast-tracking its north San Jose development plans, having submitted preliminary plans with San Jose officials. If Apple were looking to build an Apple Car R&D facility, I would expect pretty quick progress towards construction to be made in the coming months. The speed at which Apple acquired the land may be a sign of Apple's urgency. The WSJ had previously said Apple is targeting a 2019 "ship" date for an electric car. While the exact definition of a ship date is up for a debate, it's clear that Apple won't likely sit on this land for too long without much action if an Apple Car R&D facility is the ultimate goal.  

I would expect Apple to remain as tight-lipped and secretive as possible in regards to these land purchases and subsequent construction activities. While we will undoubtedly be able to track the project's physical development (via drone), Apple could end up building one large, relatively generic structure with most details hidden from the public. Management would also be able to conveniently use CarPlay or other generic R&D initiatives as reasons for the facility.

Main Takeaway: Apple Is Making Progress With Project Titan

When news first broke that Apple was thinking about designing its own electric car, many company observers were doubters. The thought of a company that had spent years building computers that can fit in a pocket all of a sudden building an automobile was just too much for many to believe. Apple would need to acquire such a significant amount of talent, in addition to constructing new R&D labs, all the while figuring out who would even build the product. However, over the past nine months, we are seeing Apple make progress toward addressing these exact concerns and doubts. Apple has been hiring the people needed for a car, and these land purchases in north San Jose would be the first tangible sign of Apple building the infrastructure for electric car testing and research. If we zoom out and look at the big picture, Apple is moving incredibly fast with its electric car plans. Apple has likely been able to work on much of the internal components of an Apple Car, including the passenger compartment. More granular work involving the battery, electric drive train, and autonomous driving software is also likely to be conducted in relatively traditional office space/commercial real estate. We are likely approaching the next stage requiring much more space and infrastructure. While 2019 seems like still a long time out, it is in fact a very aggressive timeline to develop an electric car considering that iPhone and Apple Watch were developed in 2-3 years.

Apple's $304 million of land purchases in north San Jose hint at something much larger than simple office buildings, yet not quite large enough for a sprawling electric car manufacturing facility. Instead, a R&D complex for prototyping and testing various personal transport initiatives is the leading candidate. 

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Apple Is Buying Back Shares Like There's No Tomorrow

Tim Cook and Luca Maestri are literally buying back Apple shares as fast as they can. When comparing the pace of Apple buyback over the past six months to that of the program's previous three years, it is clear that management made the decision to be opportunistic to take advantage of Apple's languishing stock price. Apple management is showing an increasing level of confidence in its future. 

While everyone quickly focused on iPhone unit sales growth guidance and clues about Apple Watch sales when Apple reported 4Q15 earnings last week, one data point that jumped out at me was the amount Apple spent on share buyback. Management bought more shares in the open market last quarter than any previous quarter. In fact, when looking at the past six months, including the most recent ASR (accelerated share repurchase program), Apple bought back $24 billion of its shares, which is a record for any six-month stretch. All of this is made even more remarkable when considering that Apple's stock price is more than 60% higher than when Apple began buying back its shares in late 2012. This shows management remains quite optimistic about Apple's future and value found in Apple shares at current price levels. 

A closer examination of Apple's buyback activity is required to notice underlining trends. When looking at the pace of buyback on a very simple annual basis (Exhibit 1), nothing stands out from the ordinary. Apple has consistently repurchased shares since launching its repurchase program in late 2012, and it would appear that the pace of buyback slowed somewhat dramatically in 2015 due to a rising stock price and dwindling U.S. cash levels.

Exhibit 1: Apple Share Buyback (Annual - Fiscal Year)

However, if looking at the pace of Apple's share buyback on a quarterly basis, as shown in Exhibit 2, we arrive at a different conclusion as to how Apple has conducted its share repurchases. Apple's elevated pace of buyback over the past few months becomes apparent. As Apple's stock price declined this past summer due to a number of reasons including fears around slowing economic growth in China, Apple management increased its share repurchase activity. The $14 billion spent on share repurchases last quarter ranks as the fourth largest quarterly amount spent on buyback. 

Exhibit 2: Apple Share Buyback (Quarterly - Fiscal Year)

However, looking at share repurchases on a quarterly basis still doesn't do the best job of explaining management's view on share buyback. The true extent of Apple's aggressive buyback activity only becomes apparent when looking at the pace of buyback on a trailing six-month basis, shown in Exhibit 3. This timeframe is able to capture management's changed attitude toward buyback this past summer. Over the past six months, Apple has spent more on buyback than any previous six month period. 

Exhibit 3: Apple Share Buyback (Trailing Six Months - Fiscal Year)

When we look at Apple's stock buyback activity in FY2015, specifically the past six months, management's motivation becomes clear. As displayed down below in Exhibit 4, the yellow highlighted months (February, August, and September) represent the three busiest months in terms of management buying back shares in the open market. In FY2015, Apple spent $30B on share buyback in the open market, repurchasing 255M shares for an average selling price at $117.68. Looking back at the news flow from recent months, the pace of share buyback increased around the time Tim Cook emailed CNBC's Jim Cramer to say that business in China was holding up well. More interestingly, Apple maintained the pace of buyback through September up to the iPhone 6s and 6s Plus launch. These actions don't seem to come from a management team that is too worried about Apple's long-term trajectory.  

Exhibit 4: Apple Share Buyback (Monthly Open Market Purchases in FY2015)

When thinking about the pace of future stock buyback, Apple's U.S. cash levels need to be addressed. The amount of cash held offshore cannot be used for share buyback (or quarterly cash dividends). I previously chronicled the dilemma this presents. Due to strong iPhone sales in China, Apple is earning more cash internationally than it can spend in the U.S. on share buyback and dividends. One near-term solution has been for management to issue debt in order to fund the capital return program. While this plan is not a long-term solution, it is likely the best near-term plan while management lobbies for U.S. corporate tax reform addressing repatriation tax on offshore earnings. In 4Q15, Apple issued $10 billion of debt to fund share repurchases in August and September (shown in Exhibit 5). This is the most likely reason why Apple didn't begin another ASR over the summer.

Exhibit 5: Apple Debt Issuance (Quarterly - Fiscal Year)

When looking at the pace of debt issuance, it is clear that Apple is only able to buy back its stock as fast as it can raise debt. Over the past nine months, Apple has issued $29 billion of debt while buying back $31 billion of shares. When taking quarterly cash dividends and Apple's routine cash needs into consideration, Apple is literally buying back shares as fast as it can. 

While ASRs represent the quickest way to buy back shares, one requirement is to have the cash up front when the ASR is initialized, something that was likely not possible over the summer. Instead of beginning another "modest" ASR of a few billion dollars, Apple management likely wanted to be much more opportunistic with buyback. The second-best alternative was to issue debt across a number of weeks and then repurchase shares in open market transactions, buying a greater number of shares as the stock price continued to drop in August and September. In terms of open market purchases, highlighted in Exhibit 6, 4Q15 was the busiest month since Apple began its buyback program, exceeding the second most active quarter by 75%. 

Exhibit 6: Apple Share Buyback (Quarterly Open Market Purchases - Fiscal Year)

When looking at the pace of debt issued and the resulting pace of buyback, I have doubts Apple management could have done much more to buy shares at a faster pace over the summer given the circumstances and share price. While Apple could have returned the $187 billion of foreign cash back to the U.S., paying the required tax on such funds would not be the most shareholder-friendly option. Stock buyback does not operate in a vacuum with management needing to weigh the costs of returning cash to the U.S. against raising debt. 

It is important to remember that share repurchases, both open market and ASRs, are unable to keep Apple's stock price from declining in the future. There are a number of high-profile examples within the financial sector were management teams were buying back stock in 2007 and 2008 only to then need to raise capital in the subsequent recession as their companies encountered a more difficult operating environment. Instead, the main takeaway from Apple's buyback program is that management increased the pace of buyback as Apple's stock price declined nearly 30% from all-time highs. The striking aspect of Apple's buyback is how management is actually buying more shares as Apple's stock price increases. In 2015, Apple repurchased shares at a $118 average stock price, 25% higher than the average price paid in 2014. When looking back at 2013, Apple was buying shares at price levels that were 65% lower than the current stock price.

Tim Cook and Luca Maestri are likely becoming more confident in Apple's future when looking at iPhone's position in the smartphone industry. The ability to entice Android smartphone owners while serving as an aspirational brand causing consumers to strive to move up to iPhone's price layers represents a long-term positive. In addition, while this may be just a coincidence, Apple management increased the pace of buyback in February 2015, around the time reports came out depicting Project Titan and Apple's growing ambitions with electric cars. Then, over the summer, the increased pace of buyback once again seemed to correspond to new reports indicating new Project Titan hires and a WSJ report in September saying the project received the green light with a 2019 target. Management is now left with $36 billion of remaining share repurchase authorization with the board planning to update the capital return program in 2016. We are seeing a management team that is betting big on a future that the stock market is still unable to see.

Receive my exclusive analysis and perspective about Apple in a daily email containing 2-3 stories (10-12 stories a week). For more information and to sign up, visit the membership page. 

Members have access to the Above Avalon stock buyback primer which can be used to become familiar with Apple's share buyback.