No. of Recommendations: 25
Apple has just released its augmented reality headset and the public reaction has been very mixed.
Some reviews are very optimistic and some believe it will be a flop. Almost no review is extremely optimistic.
I seem to be more optimistic than anyone from the perspective of how this impacts Apple, the company.
Financial times are calling out 1 million units of sales in 2024 which would be a rounding error even with the $3500 price. This would be only $3.5 billion against their earnings of nearly $100 billion.
I think the product is being grossly underrated. I view it as the most important announcement by Apple has made since the original iPhone.
The hardware and software technology is exceedingly ahead of the competition.
Keeping it social, by having the eyes projected to the front, was a crucial move. (They want a systemic effect, even if some individuals don't want people to see their eyes.)
I think the financial strategy of releasing a fully fledged version from the start, which costs them a huge amount of money to put together, was extremely insightful. It eliminates the competition because they cannot answer, without directly copying as Samsung did when the iPhone came out, but the lead time for copies will be larger than it was for the iPhone.
Developers are now drooling and can then imagine, and start to produce as I type, their apps with the broadest scope. By release time in 2024 they will have both the apps and hardware and have a huge lead. Again, the competition will fall out of the app development moat.
The price will come down but I also expect there to be even higher priced models reaching $5,000.
Apple are right to permit margins right at the start. Their production cost is gigantic. This is sort of the opposite of Coke's method of pricing so low that competitors are thrown out. In this case the hardware and software standard is so high that competitors are thrown out. Competitors can only produce hacked lower grade copies - for the software is notoriously difficult to replicate, and unlike with the early iPhone release there is a lot of substance in their custom chips this time.
I also think far more people will buy this at $3,500 than what observers currently believe. When there is no alternative, people can pay up surprisingly high.
Any number I throw up is only a guess however I think 1 million units in 2024 is a low figure. 250 million iPhone sales are sold each year.
To remind: The price is almost a magnitude higher than iPhones so they can have a magnitude fewer sales and still double their earnings. 25 million sales would be required to double their earnings, but I think this will happen after several years.
As investors we don't care what is sold next year but what is sold in ten years, and in 20 years.
The large number of people in stores wanting to try them on even without buying will also result in a (one or two year) uptick in iPhone sales; though that effect is of course temporary.
I have an composite theory as to why Apple will have higher earnings on a *sustained* basis, though, after this announcement and it may take a while to articulate. It relates to the magnitude of technology involved being particularly high; and unable to be simplified for the unified effect of how it all works together. This produces a very high production hurdle for competitors, so purely on the basis of production cost the product of this type will *remain in a much higher price* range than the iPhone.
People will buy it, including a large proportion of those mocking it right now.
Sadly Apple is now being quoted at almost historically high margins (it surpassed these margins only briefly around 2012) and on top of that a PE at a long-term high also. When you combine these two, you have a recipe for serious stock price falls with both margins mean reverting 30% down and the PE falling 30% back to 20, resulting in a quotation fall of 1-.7*.7 which is about 50% lower.
This sanity check enormously counterweights my expectation for much higher earnings in 2024, even if durably so as I predict. The earnings could simply 'grow into' the stock price so it would no longer be expensive.
On the other hand the past valuations were perpetually too low since 2009, given the earnings growth that ensued.
Investing never seems easy. But why should it be.
In any case my IV10 for Apple has increased by almost a factor of 2 over my prior IV10 figure, after this announcement. I'm referring to earnings in 2033, not next year. In other words, my expectation for earnings ten years away is double what I anticipated only one year ago.
That sounds unreasonable and rarely happens but I have been thinking about this new hardware paradigm very carefully. It is very big.
The form factor is goofy. It is presently completely unproven whether masses will wear this, as they use an iPhone.
But the form will improve a lot more than the iPhone form changed over the years.
From an investing perspective, Apple is substantially more of a software company although the attention is on the (also excellent) hardware. In design the two are very unified, but I have always viewed their competitive moat as largely in the software. It is much harder to catch up to their large software advantages than it is to catch up with their hardware.
- Manlobbi
