Apple and Facebook – More of same

Apple FQ2 19 – Stabilisation

• Apple reported what was considered to be good results as the iPhone business showed greater stabilisation than the more pessimistic end of the market had feared.
• FQ2 19 revenues / EPS was $58.0bn / $2.46 compared to consensus at $57.5bn / $2.38.
• Guidance was also ahead of expectations with FQ3 19 revenues / gross margins expected at $52.5bn – $54.5bn / 37% – 38% compared with consensus at $52.1bn / 37.6%.
• Emerging markets and especially China continue to be a challenge as Apple’s latest crop of products has triggered more price sensitive users to hold onto their devices for longer.
• However, in developed markets, the impact has been less which combined with solid growth in services (albeit relatively small), has helped offset the 17% decline in iPhone revenues YoY.
• The net result is a fairly stable outlook where very low growth and steady margins will keep cash generation at very healthy levels.
• Apple’s growth outlook is way below that of its peers but this is also reflected in its valuation and so I remain fairly indifferent to the shares although some profit taking would not be out of order.

Facebook F8 – Privacy doesn’t pay.

• Facebook spent a lot of time at its developer conference advocating for privacy but stopped short of explaining what this would mean for revenues which depend on exactly the opposite.
• I suspect that the reality here is that not much will change with Facebook and Instagram which is where the money is currently made.
• This means that the privacy-related changes being referred to will all be directed at Messenger and WhatsApp.
• Neither of these generates any meaningful revenues and so going fully encrypted with no data generation is not going to hurt that much.
• Hence, this looks to me to be an attempt at improving its tarnished image with the media and governments rather than users who don’t seem very bothered about privacy on Facebook.
• Despite over a year of bad headlines, breaches, leaks and so on, its users are not deserting the platform nor are the advertisers as its most recent set of results clearly show (see here).
• What is more interesting is Facebook’s move to more closely integrate its core services.
• This has prompted an exodus of the founders of the acquired companies which I think is a good thing in the long-run.
• Friends, contacts and messages will be able to cross the divide between the different apps paving the way for the back-end of these apps to be merged into one.
• This would both reduce the cost of providing the services as well as improve Facebook’s insight into its users by understanding their usage patterns as a profile rather than on an app by app basis.
• Facebook is also moving quietly into experimenting e-commerce and dating but it has a very long way to go before it can challenge Amazon or Tinder.
• Under the privacy window dressing, there are interesting initial moves that could make Facebook a more compelling place to spend one’s Digital Life.
• One can also be pretty sure that Sheryl’s cash machine will be waiting in the wings to monetise all the increased engagement beyond messaging.
• The declining profitability is now pretty much priced into expectations, but the shares have also recovered strongly so I would be waiting for the next wobble to consider a position.