Apple – Pods and phones.

Apple brings 5G properly to market.

• Apple has launched four new iPhones and a Homepod Mini in an event that aims to preserve margins, bring 5G to market while realising that the pandemic-related economic hit is going to hurt.

iPhone and 5G

• Top of the list is 5G which is in every single iPhone 12 from the mini all the way up to the Pro Max.
• Apple has added some software tweaks to ensure that 5G is only on when it is really needed in what is an admission that 5G is still a big battery drain.
• However, this also makes sense because the vast majority of users in the world today do not have coverage and so would only notice a sudden drop in battery life and no meaningful improvement in performance.
• The devices also support mmWave (frequencies above 28Ghz) evidenced by the cut out in the metal casing which serves as the mmWave antenna.
• Signal propagation at 28Ghz is so weak that having the antenna on the inside of the phone would result in no signal most of the time.
• How this will work when people start slapping cases on these devices remains to be seen but I suspect that most will have a cut out keeping this antenna open to the air.
• This launch is crucial for 5G because it means that anyone who now buys a new iPhone will become a 5G-enabled subscriber whether they want to or not.
• For the next couple of years, usage of 5G is going to be minimal but critically, the market is being seeded with capable devices so that when coverage does come it can be instantly utilised.
• Apple has led the market here and I think we are going to see 5G added to most mid to high tier smartphones from here on.
• The other big winner from this is Qualcomm which I suspect is supplying all of the modems for all of the Apple line-up this year worldwide.
• This is the reason that Apple had to cave into Qualcomm in 2019 because it had already decided to go 5G in 2020 and had no other option in order to provide mmWave capable devices (see here).
• Qualcomm now has multi-year agreements with all major handset vendors and the medium-term outlook is pretty good despite the short to medium-term weakness in the smartphone market.
• Elsewhere, screens, cameras and charging have all been upgraded in what is a solid but not exactly ground-breaking launch.
• Pricing has gone up slightly to account for 5G but crucially the iPhone 12 mini is coming in at a lower price point in order to ensure that it maintains share in what may become a more price-sensitive market as the recession bites.
• Apple has also stopped including a charger with the device in what was touted as environmentalism but, in reality, is about keeping that crucial 70% wholesale price over bill-of-materials margin that keeps the cash flowing.
• To be fair to Apple, everyone who buys this device probably already has a charger and so adding one is a waste of resources in reality.
• I think Apple has done enough to hold its share but there is not much here that would make me want to rush out and instantly upgrade from the excellent iPhone 11.

HomePod Mini

• The most exciting feature of this device is its price which at $99 puts it squarely in Nest and Echo territory.
• Its biggest downside is that it is still a Siri device and I have seen no evidence to date that Apple has closed any of the performance gap to Google Assistant or Alexa.
• However, for loyal iPhone owners who have an old Amazon Echo or Google Home and want something new, this is a sensible upgrade.
• This is because it integrates seamlessly into the Apple device ecosystem and offers ease of use and cool features for iPhone owners.
• This is exactly the user base that I think that Apple is going after because, at this price, I doubt that it will materially outperform wither Google or Amazon on sound quality.

Take-Home Message

• There were very few if any surprises at this event but I think it represents a solid, if unexciting, launch that will help Apple keep its premium position in the market.
• That being said the outlook is for its core market to decline between 10% and 20% this year making earnings growth difficult.
• This is where the problems occur because Apple is trading on 37.8x 2020 earnings which is more than double its historic average over the economic cycle.
• Hence, I can’t justify even considering buying this stock and would sell it immediately if I had not already done so.