The WSJ on iPhone’s Security “Vulnerability," Thoughts on the WSJ’s Article/Video, Apple Watch and iPhone Security (Daily Update)
We kick things off with a closer look at the WSJ’s article regarding a growing problem with iPhone security and passcodes. The discussion goes over Neil’s thoughts on how the WSJ covered the story and the publication’s recommendations to readers for safeguarding themselves. We also look at some major holes in the WSJ’s coverage and argument, including the absence of Apple Watch from the discussion.
Hello everyone. Welcome to a new week. We have mostly wrapped up our earnings reviews. There are a few companies that remain on my watch list – such as Sonos and Warner Bros. Discovery. For today’s update, we will focus on a WSJ story published late last week.
The WSJ on iPhone’s Security “Vulnerability”
Over at the WSJ, here are Joanna Stern and Nicole Nguyen:
“In the early hours of Thanksgiving weekend, Reyhan Ayas was leaving a bar in Midtown Manhattan when a man she had just met snatched her iPhone 13 Pro Max.
Within a few minutes, the 31-year-old, a senior economist at a workforce intelligence startup, could no longer get into her Apple account and all the stuff attached to it, including photos, contacts and notes. Over the next 24 hours, she said, about $10,000 vanished from her bank account.
Similar stories are piling up in police stations around the country. Using a remarkably low-tech trick, thieves watch iPhone owners tap their passcodes, then steal their targets’ phones—and their digital lives.
The thieves are exploiting a simple vulnerability in the software design of over one billion iPhones active globally. It centers on the passcode, the short string of numbers that grants access to a device; and passwords, generally longer alphanumeric combinations that serve as the logins for different accounts.”
This story spread like wildfire on social media. The WSJ put it on the front page of the weekend edition.
According to the WSJ, Apple has not done enough to protect iPhone users from passcode theft.
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Netflix Slashes Pricing in Dozens of Countries, YouTube’s Market Positioning (Daily Update)
Hello everyone. We begin with Neil’s thoughts on Netflix cutting prices in more than 100 territories. It is quite the surprising development. The discussion then turns to YouTube and where the streaming service sits in the broader video streaming industry. Will YouTube’s market positioning shift with the company moving deeper into paid video? Will YouTube run into user resistance as it looks to evolve beyond being a source of free, ad-supported content?
Let’s jump right in.
Netflix Slashes Pricing in Dozens of Countries
A long-term trend in paid video streaming has been higher pricing. We can go so far as to say price increases were the big trend in 2022 as companies prioritized revenue and profitability.
As a sign of how the streaming industry is far from settled, Netflix is trying something new in 2023. Here’s the WSJ:
“Netflix Inc. has reduced the cost of its service in more than three dozen countries in recent weeks, as it tries to appeal to customers around the world who have an ever-growing list of streaming options.
The streaming company’s recent price cuts span Middle Eastern countries including Yemen, Jordan, Libya and Iran; sub-Saharan African markets including Kenya; and European countries such as Croatia, Slovenia and Bulgaria.
In Latin America, nations including Nicaragua, Ecuador, and Venezuela have seen reductions in subscription costs, as have parts of Asia including Malaysia, Indonesia, Thailand and the Philippines.
The cuts apply to certain tiers of Netflix in those markets—in some cases halving the cost of a subscription.”
This is a surprising development. It is the opposite of what Netflix management talked about on its most recent earnings call. While management teams are not obliged to follow product strategy discussed on earnings calls, the breadth and magnitude of these price cuts strongly support the view of a strategy shift being in play.
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Consumers Spending Less on Electronics, Impact on Apple, Swiss Watch Sales Data for 2022 (Daily Update)
Hello everyone. Happy Wednesday. It feels good to get back into the swing of things after a little time off.
We kick off today’s update with Neil’s thoughts on Walmart and Home Depot pointing to major shifts in how consumers are spending their money. We look specifically at the impact the trend will have on Apple. The update concludes with an examination of Swiss watch industry sales for 2022 and why Neil thinks Apple Watch continues to impact the Swiss.
Consumers Spending Less on Electronics
Earlier today, a WSJ article with the headline “Walmart, Home Depot Give Cautious Outlook as Shoppers Spend More on Basics,” jumped out at me. Here’s Sarah Nassauer:
“Consumers are spending more on food and less on electronics, apparel and home improvements as inflation and changing habits zap demand for many goods, two of the country’s largest retailers reported Tuesday.
Walmart Inc. and Home Depot Inc. have enjoyed robust sales for much of the past two years as people looked for bargains or fixed up their homes. Now more of shoppers’ budgets are going to higher-priced groceries and travel, executives said.
For Home Depot, which primarily sells home-improvement goods, that dynamic meant flat sales in the most recent quarter. For Walmart, which relies on groceries for the majority of its sales, it meant larger-than-expected sales growth. But executives from both companies said consumers’ spending habits pressured profits and they gave muted outlooks for the rest of the year amid economic uncertainty.
‘Customers are still spending money,’ said Walmart Chief Executive Doug McMillon. ‘It’s obviously not as clear to us what the back half of the year looks like.’”
The following slide from Walmart’s earnings release serves as a helpful summary of what the largest retailer is seeing:
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Alphabet FY4Q22 Earnings, The Subscription War, Peloton FY2Q23 Earnings (Daily Update)
Hello everyone. We kick off today’s update with Neil’s thoughts on Alphabet’s earnings. The discussion also goes over an observation regarding the changing competitive landscaping involving Google, Amazon, and Apple. We then examine Peloton’s earnings. Let’s jump right in.
An anecdote regarding Apple TV+ and Hollywood star branding.
Looking over my Apple TV+ usage over the past few months, actors/actresses have played a key role in my watch habits. Apple’s heavy marketing around the new Jennifer Lawrence movie "Causeway" included making her Hunger Games films available to TV+ subscribers for free for a limited time. Those movies represented a decent amount of my TV+ watch time in the back half of 2022.
It is fair to question if this star power emphasis appeals to certain age demographics (i.e. older) over others. However, considering that all Apple TV+ subs are essentially family subs, Apple only needs to appeal to one family member to do well in the subscription engagement/dollars battle.
Alphabet FY4Q22 Earnings
Continuing our earnings reviews, we turn to Alphabet. The company reported 4Q22 earnings back on February 2nd.
Here are the major financial line items compared to those of peers:
(click / tap here to view table)
In what has become a theme with these releases, a main takeaway from Alphabet’s earnings call was a focus on cost controls. There was talk of economic anxiety, softness in various businesses, and a resulting push for optimization and improved profitability.
A big difference between Google and Amazon is that Google Search remains highly profitable.
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Branding in Paid Video Streaming, Amazon 4Q22 Earnings (Daily Update)
Hello everyone. We will begin today's update with one topic from yesterday that deserves more attention: branding in video streaming. Branding will gain importance as competition intensifies. The discussion will then turn to Amazon earnings. We go over Neil’s thoughts on the company’s 4Q22 earnings release and conference call.
Let's jump right in.
Branding in Paid Video Streaming
One of the more controversial debates in paid video streaming has been found with branding.
A few years ago, Bob Greenblatt, formerly of WarnerMedia, claimed Netflix lacked a brand:
“It's just a place you go to get anything -- it's like Encyclopedia Britannica. That's a great business model when you're trying to reach as many people on the planet as you can."
At the time, his comments lit a firestorm in various streaming circles. Some people thought he was right while others thought he was clueless. My view was that he was more right than wrong. Greenblatt was referring to Netflix not having any discernible content branding. While Netflix has had hit shows, the service was known more as a destination for consuming general video entertainment. “Watch Netflix” was used by some to simply mean watch TV.
HBO wrapped its brand around marquee shows. Say HBO and “Game of Thrones” or “Succession” probably comes to mind.
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Disney Earnings, Disney’s Anti-Netflix Strategy, Apple Got It Right With TV+ (Daily Update)
Hello everyone. We will kick things off with Disney earnings. The discussion includes Iger’s strategy for Disney+ and how Disney is following an anti-Netflix strategy. We conclude with the ways Apple got paid video streaming right with Apple TV+. Let's jump right in.
Disney Earnings
It’s been nearly three months since Disney board’s brought Bob Iger back to replace Bob Chapek. Last week’s earnings release represented Iger’s first one back as CEO.
In what has been a recurring earnings theme with Disney, the Parks segment results were stellar (21% revenue growth and $3B of operating income) while Direct-to-Consumer experienced a $1.1B operating loss. Linear networks (U.S.) saw flat revenue and $0.9B of operating income, testaments to how legacy TV continues to hang on.
Here are Disney’s DTC subscription totals (as of December 31st, 2022):
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Selling Non-Pro iPhones, Revisiting iPhone Repairability, Less Frequent Upgrading Can Help Apple's User Monetization (Daily Update)
Hello everyone. Welcome to a new week. In today's update, we will cover a few topics related to the iPhone. The discussion begins with Apple’s strategy for selling non-pro iPhones. This leads us to revisiting the subject of iPhone repairability. We go over three primary implications of improved iPhone repairability. The discussion ends with an example of how Apple can turn less frequent device upgrading into improved user monetization over time. Let's jump right in.
Selling Non-Pro iPhones
Over at The Sydney Morning Herald, here is Tim Biggs:
“The latest line-up of iPhones has arguably the biggest gap ever between the standard models and the Pros. The phones have different displays, different features, different cameras and different processors.
If you ask Apple, it will say the two categories are designed with two different consumers in mind, each model having its own strengths. And if you take a look inside, you’ll see that the standard phone can’t simply be written off as a stripped-down Pro or a repackaged model from last year…
It can be hard to tell just from looking at the specs and exteriors where each ‘standard’ iPhone model sits in a hierarchy amid previous models and Pros, new and old. With Pros, it’s easy to assume they’re the biggest and best iPhones at the time of release, but with the standards there’s always an implicit question of what sacrifices are made to get to the lower price.
Richard Dinh, Apple’s longtime senior director of iPhone design, said the company didn’t really think of it like that.
‘We don’t always follow a recipe, as much as maybe our customers would like to predict what we’re going to go do next, but it always starts with the customer experience,’ he said, noting that a standard phone might have different goals for performance, weight, longevity and photography than the Pro models.
‘Sometimes we do draw from the Pros because they’re just incredible, and we’re bringing some of that hardware to a broader audience, and sometimes we go do something different.’”
In talking to The Sydney Morning Herald, one of Apple's goals was to draw attention to how less expensive flagship iPhone models aren’t just pro models that had features removed. Instead, non-pro iPhone models may in some years contain features that premium models lack. For the iPhone 14 and 14 Plus, such features include superior battery life (found with the Plus) and repairability (found with the 14).
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Apple to Drop “Head of Industrial Design” Role, Jeff Williams and Design, My Updated Apple Earnings Model (Daily Update)
Hello everyone. In today’s update, we will focus on a news item related to Apple design that came out the same day that Apple reported 1Q23 earnings. We conclude with Neil’s updated Apple earnings model and how the model changed following Apple’s 1Q23 results and 2Q23 guidance commentary. Access to Neil’s Apple earnings model is a benefit associated with Above Avalon membership at no additional cost. Let’s jump right in.
Apple to Drop “Head of Industrial Design” Role
Over at Bloomberg, here’s Mark Gurman:
“Apple Inc. has decided against naming a new executive to replace its departing top product designer, marking a stark shift for a company long celebrated for the look and feel of its devices.
The iPhone maker’s vice president of industrial design, Evans Hankey, won’t be replaced when she leaves the company in the coming months, according to people with knowledge of the decision, who asked not to be identified because the deliberations are private. An Apple spokeswoman declined to comment.
Instead, the company’s core group of about 20 industrial designers will report to Jeff Williams, Apple’s chief operating officer. The company will also give larger roles to a group of Apple’s longest-tenured designers. Hankey has reported to Williams since taking the job in 2019, when top designer Jony Ive left to start his own firm.”
Gurman has spent months crafting an off-the-mark narrative that turnover in Apple’s industrial design group (ID group) is hurting Apple’s attempts to find a successor to Hankey. As we will discuss shortly, there is good reason to be skeptical of such a claim.
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Apple 1Q23 10-Q Takeaways, Apple's Share Buyback Update, Revisiting Apple’s Cash Neutral Goal (Daily Update)
Hello everyone. Today’s update will conclude our Apple earnings review as we go over Apple’s 1Q23 10-Q and focus on some balance sheet items (share buyback pace and Apple’s cash neutral goal). The plan is to include an updated version of Neil’s Apple earnings model in tomorrow’s update. Let’s jump right in.
Apple 1Q23 10-Q Takeaways
Published at the end of FY1Q, 2Q, and 3Q, 10-Q filings provide additional commentary and disclosures regarding a company's financial results.
The following items from Apple's 1Q23 10-Q jumped out at me. We will discuss Apple’s share buyback shortly.
Product Details. Apple provided additional commentary behind sales trends for its major product categories.
iPhone. Net sales decreased in 1Q23 due “primarily to lower net sales from the Company’s new iPhone models.” The comment is referring to Apple not being able to report iPhone unit sales growth due to iPhone 14 Pro and Pro Max shortages.
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Apple’s Paid Subscriptions Growth, Apple Gross Margin Hits Decade High, Apple’s Next Marginal Customer (Daily Update)
Hello everyone. In today's update, we will address a few topics carried over from Apple's 1Q23 earnings release: paid subscriptions growth trends and gross margin improvement. We begin with Neil’s estimates for new paid subscriptions added across Apple’s ecosystem on a quarterly basis. The discussion then turns to Apple’s gross margin improvement. We go over the most likely driver of the stronger performance. The update concludes with an underlying story to be told about Apple’s gross margin hitting a 10-year high. Let's jump right in.
Apple’s Paid Subscriptions Growth
It’s been five months since we last examined Apple’s paid subscriptions trends.
In keeping with its usual disclosure, Apple provided an updated total during its 1Q23 earnings call for the number of paid subscriptions across the Apple ecosystem.
Based on Apple’s commentary, here are my estimates for the number of paid subscriptions across Apple’s ecosystem (first party and third party) on a quarterly basis:
1Q20: 482M paid subscriptions
2Q20: 518M
3Q20: 553M
4Q20: 588M
1Q21: 623M
2Q21: 663M
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Reading Between the Lines of Apple’s 1Q23 Earnings Q&A With Analysts (Daily Update)
Hello everyone. Welcome to a new week.
Last Friday, we went over the numbers from Apple’s 1Q23 earnings release. We also looked at two of the major themes from earnings: the significant FX impact on Apple’s results and changing device upgrading trends.
In today’s update, we will focus on Apple’s 1Q23 earnings Q&A session with analysts. Instead of just recapping the question and answer exchanges that occurred on Apple’s call, we will go over Neil’s thoughts / response to each exchange. This will allow Neil to go beyond what was talked about on the call. Let’s jump right in.
Reading Between the Lines of Apple’s 1Q23 Earnings Q&A With Analysts
NOTE: The following earnings call questions (“Q”) and answers (“Cook” or “Luca”) have been cut, summarized, paraphrased, and rearranged for clarity. To read the full question and answer exchanges, The Motley Fool offers a written transcript here.
Supply Chain
Q: What is the state of Apple’s supply chain? Do you expect to increase inventory levels to insulate from supply disruptions?
Cook: Production is now back to “what we need it to be.” We continue to optimize our supply chain. We now have final assembly for iPhone in three countries. Given all that has happened over the past three years, our supply chain has proven to be resilient.
My response: Apple received a variation
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Apple 1Q23: By the Numbers, The FX Factor, My Apple Earnings Theory (Daily Update)
Hello everyone. Today's special Friday edition of the Daily Update will be focused on reviewing Apple's earnings. The idea is to keep things broad and look at the big picture. We also examine how Apple’s results compared to Neil’s expectations. The earnings discussion will continue next week. Let's jump right in.
Apple 1Q23: By the Numbers
We knew 1Q23 was going to be a noisy quarter for Apple. Along those lines, we didn’t get too many surprises. Results were all over the place. iPhone results missed my estimate by $5.0B while iPad beat by $1.5B.
Heading into earnings, the questions were found with Apple’s 2Q23 guidance. This is where management commentary
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Final Thoughts Heading Into Apple Earnings, Spotify Earnings (Daily Update)
Hello everyone. On Monday, we went over my expectations heading into Apple’s earnings tomorrow. We also talked briefly about my thoughts on what Apple may say about FY2Q23. Yesterday’s update included my granular financial estimates and updated Apple earnings model. One item that has been on my mind is that noise found with tomorrow’s earnings may drown out the numbers and topics that should grab attention. In today’s update, we go over those key earnings items to keep an eye on tomorrow. The discussion then turns to Spotify’s 4Q22 earnings.
Final Thoughts Heading Into Apple Earnings
One item that has been on my mind is that noise found with tomorrow’s earnings may drown out the numbers and topics that should grab attention.
iPhone strength. As alluded to in yesterday's update, earnings recap headlines will probably be focused on
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My Apple 1Q23 Estimates, Expectations by Apple Product Category, Updated Apple Earnings Model (Daily Update)
Hello everyone. Apple reports FY1Q23 earnings (results from October to December) on Thursday. Today’s update contains the second half of Neil’s earnings preview. The first half is available here. The update begins with Neil’s granular financial estimates. The discussion then turns to qualitative explanations for each of Apple’s product categories. We conclude with Neil’s updated Apple earnings model and how the model has changed over the past three months. Access to Neil’s Apple earnings model is a benefit associated with Above Avalon membership at no additional cost.
Let’s jump into today’s update.
My Apple 1Q23 Estimates
Here are my granular estimates for Apple’s 1Q23:
Revenue: $123.0B (consensus: $121.2B)
Overall gross margin: 42.8% (guidance: 42.5% to 43.5%)
Gross margin (HW): 37.0%
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Setting the Stage for Apple 1Q23 Earnings, About AAPL’s Move Higher, Looking Ahead at Apple’s 2Q23 (Daily Update)
Hello everyone. Welcome to a new week.
Apple reports FY1Q23 earnings (results from October to December) on Thursday. We kick off today’s update with Neil’s thoughts and expectations heading into Apple’s earnings. The discussion goes over implications found with AAPL’s recent outperformance to the market. The update concludes with some of Neil’s early thoughts regarding how Apple’s 2Q23 (January to March) is trending.
We will go over Neil’s granular Apple financial estimates tomorrow. His revised Apple earnings model will also be ready.
Let’s jump into today’s update.
Setting the Stage for Apple 1Q23 Earnings
Heading into Apple’s earnings release on Thursday, expectations for what Apple will announce remain muted. Even though Apple shares are up 10% so far in 2023, the move doesn’t necessarily correspond with consensus believing Apple’s results and guidance will surprise to the upside. More on that shortly.
Low or muted expectations for Apple’s results may come as somewhat of a surprise. The company’s 4Q22 results were decent. Here was a very quick summary:
“Despite facing major FX headwinds, Apple’s ecosystem remained on track in 4Q22. The company reported all-around solid 4Q22 results. The few areas of weakness (iPad and Services came in below my expectations) were offset by iPhone, Mac, and Apple Watch sales strength.”
While 1Q23 guidance was a tad weak with revenue growth coming in about 200 basis points lower versus my (adjusted) expectations – check out our 4Q22 earnings review here for the details as to how that number was derived - Tim Cook and CFO Luca Maestri sounded
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Tesla Earnings, Goldman Sachs Pulls Back on Consumer Business, Apple Card’s Future (Daily Update)
Hello everyone.
Apple reports earnings next Thursday (Feb 2nd). We will go over my expectations early next week.
For today's update, we kick things off with Tesla and then switch to Apple Card.
Tesla Earnings
Heading into Tesla’s earnings, there was an increase in anxiety regarding demand for Tesla vehicles. While it was too early to say Tesla faced a demand “problem,” cracks were starting to form in the company's growth story.
Here’s Tesla kicking off its 4Q22 update:
“Q4-2022 was another record-breaking quarter and 2022 was another record-breaking year. In the last quarter, we achieved the highest-ever quarterly revenue, operating income and net income in our history. In 2022, total revenue grew 51% YoY to $81.5B and net income (GAAP) more than doubled YoY to $12.6B.
As we progress into 2023, we know that there are questions about the near-term impact of an uncertain macroeconomic environment, and in particular, with rising interest rates. The Tesla team is used to challenges, given the culture required to get the company to where it is today. In the near term we are accelerating our cost reduction roadmap and driving towards higher production rates, while staying focused on executing against the next phase of our roadmap.”
Thanks to 4Q22 price cuts, some weakness in deliveries, and inflation, core gross margins – excluding ZEV credits and FSD recognition – declined to 22% from 27% the previous year. The concern some have is that
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Microsoft Earnings, Asking the Tough Questions About Surface, Strava Acquires Fatmap (Daily Update)
Hello everyone. Happy Wednesday.
We will kick things off with Microsoft's FY2Q23 earnings. The discussion includes Neil’s thoughts on Microsoft’s Surface business. The update then looks at mapping news with Strava acquiring Fatmap.
Let's jump right in.
Microsoft Earnings
Yesterday, Microsoft reported FY2Q23 (October to December) earnings.
If there were still questions as to why Microsoft was the latest company to announce layoffs, this earnings report provided answers. It was the weakest earnings report for Microsoft in years. Business trends worsened as the quarter progressed. Management commentary suggests little improvement in early 2023.
Here is our earnings recap table looking at the key numbers:
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Apple’s Opportunities in 2023, Apple’s Challenges in 2023 (Daily Update)
Hello everyone. One group of questions that came in from members over holiday break had to do with Apple in 2023.
Instead of going over my predictions for the year, recapping where things stand in terms of opportunities and challenges makes more sense.
Let’s jump right in.
Apple’s Opportunities in 2023
Looking at 2023, Apple has several opportunities to pursue when it comes to the supply chain, mixed reality, and ecosystem growth. We will go over each opportunity in greater detail.
Add Optionality to Supply Chain and Manufacturing Apparatus. Calls for Apple to announce a sudden supply chain or manufacturing shift out of China are misplaced. Even though Apple executives may not possess a changed mindset when it comes to China’s ability to handle Apple’s business
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Netflix Earnings, Reed Hastings Steps Down as co-CEO, Netflix Partners With Nike Training Club (Daily Update)
Hello everyone. One item on the agenda this week is to look ahead at Apple’s 2023 in terms of opportunities and challenges. For today’s update, we will examine Netflix’s earnings published last week. 4Q22 earnings season has arrived. The discussion will include Neil’s thoughts on Reed Hastings stepping down as Netflix co-CEO. Let’s jump right in.
Netflix Earnings
Last Thursday, Netflix reported CY4Q22 results. Paid subscriber results (+7.7M) beat management’s guidance of +4.5M.
Looking through the granular results by operating segments, there were no major changes on the subscriber front. As shown below in the following exhibit which tracks Netflix paid net streaming subscriber additions on a TTM, the trend continues to be down except for a slight bump higher in Latin America. Given Netflix's very weak first half of 2022, management's guidance commentary for modest subscriber growth in 1Q23 would lead to stabilization in new user growth on a TTM basis.
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Smart Speaker Competition, HomePod vs. Sonos, HomePod's Most Formidable Competitor (Daily Update)
Hello everyone. There were a few loose ends found with yesterday's update regarding HomePod and the changing competitive landscape. We will tackle those items today. The discussion goes over HomePod vs. Nest / Echo / Sonos. In addition, we go over what Neil views as the HomePod’s most formidable competitor.
Let's jump right in.
Smart Speaker Competition
The smart speaker landscape has seen quite a bit of change in just a few years. The late-2010s saw a wave of speakers enter the market spanning the price and feature spectrums. Companies that entered the space with cheap speakers introduced better-sounding speakers.
We have since seen something of a shaking out process. More niche speakers went on to be discontinued. Apple went through its share of smart speaker strategy changes.
The two big speaker players (Google and Amazon) currently have the following smart speaker product lines:
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