24/7 Wall St.

By Gene Munster and Will Thompson of Loup Ventures

Apple’s Special Event [Tuesday] went largely as expected. That said, the announcements made were still incrementally positive to the story. Here are our takeaways:

• We estimate that the products announced today account for about 8% of Apple’s total revenue in FY18 and we expect a similar percentage in FY19.
• Our unit growth estimates for FY19 remain unchanged following the updates. We expect both Mac and iPad units to grow 1% in FY19.

• This does not take away from the fact that the products announced today represent Apple’s impressive speed and depth of constant innovation. The company continues to push the boundaries of consumer tech products.
• Apple continued its trend of inching ASPs higher. The entry-level MacBook Air’s price increased by 20% ($999 to $1,199), the iPad Pro’s by 23% ($649 to $799), and the Mac Mini’s by 60% ($499 to $799). We are leaving our ASP estimates unchanged to layer in a level of conservatism.
• We see today’s iPad Pro updates as an indication of the blurring the lines between the iPad, the Mac, and the iPhone. Adding tech from the iPhone like FaceID, along with full Adobe apps, Xbox-level graphics, and a USB-C port that we usually associate with a Mac makes its “tablet” categorization more ambiguous. This may increase Apple’s addressable market by effectively creating a lower entry point for a full-fledged “computer.”
• The company announced a Mac install base of 100M, slightly ahead of our expectations of 95M.
• Apple’s retail stores are an underappreciated competitive advantage with 70,000 employees providing face to face advice, support, and experiences. Microsoft has the second largest consumer technology retail footprint with 6,000 employees. Today at Apple announced 60 new sessions, furthering the number of experiences offered at retail stores.

Bigger Picture

Today’s announcements are a small part (~8% of revenue) of a bigger theme within the company: the shift to Apple as a Service. Apple reports Sep-18 results on Thursday, November 1st. This quarter’s numbers could serve as validation for 3 of the 4 pillars of this new paradigm. We expect:

September iPhone units (48.1M vs. Street at 47M) to be a non-event, which would be further evidence that iPhone is becoming a stable business, performing more like software than hardware. This should mark the 8th consecutive quarter of iPhone unit growth in the -1% to +5% range.

The focus of the call to be commentary around iPhone ASPs in FY19, which we expect will exceed the Street ($791 vs. the Street at $756). Most importantly, while long-term iPhone unit growth will be in the low single digits, the company is finding new ways to make more money from their existing user base.

Services growth of 20%, in line with the Street. This is a step down from Jun-18 growth of 28% excluding one-time benefit from Google, given the tougher 34% y/y comp compared to 22% y/y comp in Jun-18.

About $25B in capital return, which supports a 3-year path to net cash neutral. The Street is generally expecting a 5+ year timeline.

Disclaimer: We actively write about the themes in which we invest or may invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we may write about companies that are in our portfolio. As managers of the portfolio, we may earn carried interest, management fees or other compensation from such portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making any investment decisions and provided solely for informational purposes. We hold no obligation to update any of our projections and the content on this site should not be relied upon. We express no warranties about any estimates or opinions we make.