Apple – History lesson

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History repeats as nothing has changed.

• It looks as if the iPhone SE is off to a slow start indicating that the $50 price cut was not enough to prevent the history of the iPhone 5c from repeating itself.
• Early data from analytics firm Localytics which tracks installations of 37,000 apps on 2.7bn devices globally is showing that in its first weekend the iPhone SE managed to grab just 0.1% share of the iOS ecosystem.
• This compares to 2% for the iPhone 6 and 1% for the iPhone 6s adoption in the first weekend of launch.
• This initial assessment is supported by the anecdotal observation that there were no long lines at Apple stores and that almost every outlet is reporting good availability of the device.
• This is symptomatic of one of the biggest problems that Apple is grappling with.
• Its owners are demanding growth and because it utterly dominates the segments within which it operates, it will have to go deeper into the mass market to achieve that growth.
• This is a big problem for Apple because by its own admission it does not do cheap well.
• Furthermore, its brand is aspirational such that those that can afford the cheapest model, invariably choose to spend a little more and get the more expensive version.
• The result has been that the iPhone 5c is inconsequential to Apple’s iPhone business and makes up just 5% of iPhone users today despite being the cheapest on offer.
• My issue with the iPhone SE remains that apart from a $50 lower price tag, it does nothing different from the iPhone 5c.
• Consequently, I see no reason why it should perform any differently compared to its predecessor.
• Hence I do not see Apple’s market share, iPhone ASP or revenue estimates increasing in any way as a result of this product launch.
• The iPhone SE remains a housekeeping launch from Apple (see here) that provides a good upgrade for iPhone 5s and 5c users when they have a few dollars lying around but very little more.
• The result is that Apple’s owners are unlikely to see the growth that they are looking for meaning that Apple’s valuation is likely to remain at very low levels.
• For long-term and yield investors, Apple offers exceptionally good value at less than 10x 2016E PER, but for those looking for capital appreciation, the shares are unlikely to go anywhere soon.
• Microsoft, Samsung and Google offer better prospects for short-term capital appreciation in my view.