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2021-06-17

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Apple Stock Forecast For 2025: A Slow Start, Then Strong Growth

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I give","content":"Summary\n<ul>\n <li>Apple is the products company most prepared for the future, whatever that may bring. I give you nine reasons.</li>\n <li>The dangers to Apple’s long-term prospects are mostly event-based, and mostly out of their control.</li>\n <li>I lay out four scenarios and DCF models. You should treat DCF models with the skepticism they deserve.</li>\n <li>With the exception of the best case, they show the stock trading sideways or down through the end of fiscal 2022, then growing fast thereafter.</li>\n</ul>\n<img src=\"https://static.tigerbbs.com/d06df668b5536634ebfca099d90d9852\" tg-width=\"1536\" tg-height=\"988\">Nikada/iStock Unreleased via Getty Images\nThe Long-Term Apple Thesis\nI write a lot about Apple (AAPL), 15% of&nbsp;my articles&nbsp;here at Seeking Alpha since I started in 2018. Mostly, I write about what is happening now. For example, the last one was about the&nbsp;implications for Apple&nbsp;should they be forced to back off their App Store rules, whether through courts or regulation.\nAlmost a year ago, I began breaking my conclusions about Apple stock into two sections: one for investors who are into Apple for the long haul like I am, and a section for those whose time horizons are much shorter than “I hope to die with these shares.” This article is for the Die With These Shares Crowd.\nI was first an Apple shareholder in 1982, but I sold those shares when Steve Jobs sold his. Since 2005, I have been a continuous shareholder and have never sold a share. Like I said, I hope to die with them. Over the years, the reasons I remain an Apple shareholder have grown:\n<ol>\n <li>They have the most complete and unique tech stack in the world.</li>\n <li>They have the best product development process.</li>\n <li>They have the best corporate organization.</li>\n <li>They are the only megacap who sees privacy and security as a differentiator and marketable feature, not as a cost-center.</li>\n <li>ESG focus years ahead of everyone else.</li>\n <li>The Apple brand</li>\n <li>While the sum of their parts is impressive, the Apple ecosystem makes it so much more.</li>\n <li>When everything is taken into account, iPhone gives a lot of value for the price.</li>\n <li>A cash pile and cash flows to back up their ambitions.</li>\n</ol>\nWhat it adds up to is a company that is prepared for the future, whatever that may bring. Success in tech is notoriously hard to maintain. IBM (IBM) dominated computers and high end office equipment for 80 years until they didn’t. Sitting here today in 2021, I have a very high level of confidence that this will not be happening to Apple any time soon.\nThe Tech Stack\nOne of my favorite factoids about Apple is that despite the fact that their intangible assets would be the most of anyone, they do not list any on their balance sheet. This is where IP and brands go. We’ll get to the brand in a moment, but the core of what makes Apple so durable is their tech stack, now higher and more complete than anyone’s.\nThe most important things in the stack are at the base — the Apple chip design unit, which went from nothing to the best in the world in about a decade, and the operating systems, which at their root are all the same thing. They are the only company that designs products and the chips and operating systems that run them, though it looks like Microsoft (MSFT) would like to join them.\nChip Design\nCustom chip design is becoming more and more important. Apple was one of the first to recognize the importance of this in making products that are unique in a crowded marketplace. The first iPhone came with a Samsung ARM-based system-on-a-chip (SoC). Less than a year later, Apple bought PA Semi, a low-power SoC designer, for $278 million in cash. Other than the NeXT acquisition that brought back Steve Jobs, this was the best investment Apple ever made.\nThe first Apple-designed chip to show up in a product was the A4 in iPhone 4, only two years after the PA Semi acquisition. Quickly, the reaction went from “Apple thinks they can make a SoC?” to “Hey, these things are pretty good.” Now the A-series is widely regarded as the best smartphone SoC.\nThe A-series is the most important, but that is only the beginning. There is also the S-series for Apple Watch, H-series for headphones, W-series for wireless connectivity, U-series, which enables AirTags features, and the new M-series for Macs. Within a couple of years, all Apple devices, from AirPods to the Mac Pro will run on Apple Silicon.\nThe work they have done here is really showing up in the new M1 Macs, because we have something to compare to — the previous generation of the same model with Intel’s hardware.\n<img src=\"https://static.tigerbbs.com/c99acb1ab262241f7195d5ef491c64ac\" tg-width=\"640\" tg-height=\"361\">Annotated Apple video screenshot.\nBy switching to their own silicon, Apple was able to make the same computer, but with a tablet-sized motherboard, a larger screen, and very low power requirements, while still being much faster than the Intel alternative. Already, the next version of macOS will not support some features on Intel Macs, because they lack the machine learning cores. \nThe Operating Systems\nWhen Apple was developing iPhone there was two ways to go for the operating system: build up from iPod, or shrink Mac OS X. There was an internal contest along parallel tracks, and the shrunken Mac won out. Because of this decision, all the operating systems are essentially the same thing.\nOS X came from NextStep which was the reason for the NeXT acquisition. Apple had not been able to move past what became known as Mac OS Classic with its own internal project, Copeland, and they needed help. Also, the deal came with Steve Jobs.\nNextStep was the first attempt to take a UNIX operating system and put a friendly graphical user interface on top of it. At the core is a UNIX microkernel. As the name implies, this is a small bit of software that manages the most basic functions of the software/hardware interface. Everything else is built in modular blocks of code layered on each other. Each device gets the blocks it needs, and excludes the ones it doesn’t.\nSo at root, the microkernel and the core blocks of the operating systems have a ton of overlap, and are very much the same. The original iPhone OS and OS X were so similar that even before Apple released their official iPhone software development kit, or SDK, developers were already making iPhone apps using a slightly modified Mac SDK.\nA good example is networking. All the devices share the same basic networking software, but macOS has wired connection drivers the others don’t. iOS 14 has 5G drivers the others don’t.\nThe Rest\nOn top of that rock-solid foundation sits the rest of it. The list is too long to go through entirely. This is a company that&nbsp;patented a pizza box&nbsp;which is only used in Apple’s&nbsp;Caffe Macs&nbsp;employee cafeterias. But these are the parts where we see continuous development every year.\n<ul>\n <li>The location/orientation sensor package. Originally for iPhone, this now includes accelerometers, gyroscopes, GPS, altimeters, and the newest additions, LiDAR and the U1 chip, which makes AirTags possible, with more coming. With this combination, Apple devices know where they are in 3D space, orientation, and where they are relative to other objects, especially ones that also have the U1 chip.</li>\n <li>Voice recognition.</li>\n <li>AR.</li>\n <li>On-device machine learning. This includes continuous work on both hardware and software. The A-series and M-series SoCs come loaded with ML cores.</li>\n <li>Audio/video/photo. Again, both hardware and software.</li>\n <li>Maybe their own 5G radio chip. We’ll see.</li>\n</ul>\nWhat This All Means For 2025\nWhat this means is that when Apple is setting out to build a new device, they begin halfway to the finish line. The basics are there already, and they get to spend their time and energy focusing on the parts that make each device unique. And as we’ll look at in the next section, they still spend more time sweating that last mile than anyone else.\nLet’s look at Apple’s current Big Idea, which is augmenting or replacing the venerable graphical user interface with a combination of AR and voice control, AKA Siri. Apple just hit a big milestone in that journey with the announcement of on-device voice recognition in iOS 15 coming this fall. This is key to their thinking in whatever they are doing with a car, and also of course in AR/VR products. According to rumors, we should see at least some aspects of both of these by the end of 2025.\nBut beyond the AR-voice package, each device will get a chip specifically designed for that device, unlike most others who will be using chips designed for a wide range of OEMs. It will overlap a lot with other Apple SoCs, but it will contain a unique combination of units chosen just for that device. When the software team is working on the operating system and apps, most of the under-the-hood work is done. They get to focus on making the unique interface they want for that product. The sensor package will come into the design of either a car or AR glasses, as will all the rest of it.\nProduct Development\nApple approaches product development differently than every other company. In the first place, they say “no” to many things, even deep into the development process, most we never get to hear about. This allows them to focus on what they do make, and make their products unique, even when competing a crowded space.\nMy favorite example here is a negative one, the&nbsp;ill-fated AirPower charging mat. Apple wanted to make a unique offering that was specifically designed around Apple products, but they could not pull off the dual-coil design without overheating. Instead of releasing an undifferentiated product, they killed it, even though it had been pre-announced. This sort of thing happens internally all the time. We got to see the sausage made, just this once.\nBut it goes beyond just saying “no” a lot. Apple approaches almost everything in a very slow, deliberate manner:\n<ol>\n <li>Focus entirely on the customer experience.</li>\n <li>Don’t let anyone else get in between you and the customer.</li>\n <li>People often don’t know what they want until you show it to them.</li>\n <li>Don’t compete directly against successful incumbents, but figure out what Apple’s unique contribution is, focused on the entire ecosystem.</li>\n <li>Don’t release a new product or feature until you are ready to, no matter what analysts or the tech press say you should do.</li>\n <li>Find a way to dip your toe into the market first, gauge customer reaction, and slowly keep adding year after year.</li>\n <li>Have relatively few SKUs. Keep the product lines relatively simple.</li>\n <li>Don’t be afraid to ditch old but popular technologies.</li>\n <li>As much as possible, own all the key technologies in your devices.</li>\n <li>Hardware and software development are concurrent and work together.</li>\n <li>Do not worry that a new product is displacing another source of revenue.</li>\n</ol>\nSometimes this can hurt an Apple product relative to competition. The HomePod is a good example here. Because of their relative lack of data collection, Siri will never be as capable as Alexa or Google Assistant. So when designing a “smart speaker,” Apple focused more on the speaker part, because they have handicapped themselves on the smart part. This led to an expensive device that didn’t have as much functionality as competing products. But it sounded great. This is a tradeoff they are willing to make, because security and privacy in the ecosystem is a higher level goal than having a smart speaker.\nBut as careful and deliberate as Apple is, they can also act blazingly fast when they think they need to. This letter, recently served up by one of my favorite Twitter accounts,Internal Tech Emails,kind of blew my mind.\n<img src=\"https://static.tigerbbs.com/b90176b70c1560583646501f52a11f06\" tg-width=\"640\" tg-height=\"683\">\nBertrand Serlet was the SVP of Software Engineering (“SWE” in the email) at the time. Scott Forstall was the lead on iOS. Steve Jobs you know. What you see here is the birth of the App Store, now worth $16 billion a year in net sales to Apple, decided in an email exchange in less than an hour.\nThe timeline here is that iPhone was released in June 2007. In September 2007, the first easily installed app store for jailbroken iPhones, Cydia, was released. It was a warning to Apple that they had to release their own App Store, along with developer tools like they had on the Mac, or risk losing control of the device. Too many people looked at this “phone” and saw a pocket computer.\nThis email exchange happened less than a month after Cydia. Serlet laid out everything the App Store was and still is in four quick bullets, made a request for a large amount of resources to pull it off (“whoever we need in SWE”), and asked for a yes-or-no decision. Jobs replied less than an hour later with an absurd timeline (it came out in March, but was announced in January), and approved a now-$16 billion a year business in a single sentence.\nMost of the time they move very slowly and deliberately, making sure everything is exactly right before release. But they can also push something out quickly if it is of strategic importance like App Store. This can also fall on its face at launch, like Apple Maps, which is why Apple prefers to move slowly, all else being equal.\nOrganization\nOne of the key foundations of Apple’s success is their amorphous org chart which promotes collaboration and prevents turf wars. On paper, there are three key technical function-based Senior VPs below CEO Tim Cook:\n<ul>\n <li>SVP of Software Engineering, Craig Federighi.</li>\n <li>SVP of Hardware Engineering. This is now John Ternus, after longtime SVP of Hardware, Dan Riccio, moved over to shepherd AR/VR devices full time, underlining their importance.</li>\n <li>SVP of Services, Eddie Cue.</li>\n</ul>\nThis is supplemented by the SVP of Worldwide Marketing position, now filled by Greg Joswiak, after Apple lifer Phil Schiller moved on to semi-retirement as an “Apple Fellow,” whatever that is. The Epic trial made clear that Schiller is very much still involved. Joswiak and Schiller are sort of Ministers-Without-Portfolio, who dip in on all strategic questions, and the guardians of the brand. VP of Environment, Policy and Social Initiatives, Lisa Jackson, has a growing voice in big decisions.\nBut as became apparent in a lot of the Apple corporate emails that Epic presented at trial, these people and their main lieutenants are constantly up in each other’s business, and that is by design. The walls between the SVPs are very thin, and no one gets to that position unless they understand that turf wars don’t happen at Apple. But the function-based organization sort of prevents it in the first place.\nWhen Apple decided to make iPhone, iPod was 35% of Apple’s revenue. But in meetings and email exchanges, there was no SVP of iPod to object loudly that their ox was being gored. There are many companies that would have killed iPhone because of this. Hardware, Software and Services all have big roles in all Apple products, whether it’s iPod, iPhone or anything that has followed. In that email in the previous section, Bertrand Serlet asks for whomever he needs to meet a fast timeline. That means he was pulling people off the Mac OS X team to work on the iPhone SDK and App Store, of course, in concert with Services and Hardware. Phil Schiller also had a lot to say. Again, there was no SVP of Mac to loudly object.\nWe now see this collaborative organization and culture expressed as architecture in Apple Park.\n<img src=\"https://static.tigerbbs.com/51642a2ed19cf03d32baea87ed1d839f\" tg-width=\"640\" tg-height=\"409\">Apple Maps screenshot\nAt a cost of $4-$5 billion, Apple built a new campus entirely designed around the idea of encouraging collaboration across groups, and random encounters between people who normally would not be interacting. The parking lots are to south out of frame of that screenshot, and everyone enters and exits on those footpaths. Along the way, they have to pass by lots of other offices and groups, or go through the center courtyard, a central place to hang out.\nApple did not build this so people could&nbsp;work from home.\nThe Ecosystem\nBefore we talk about the sum of the parts, let’s start with the parts. These are the rankings that Apple product segments would have had in the&nbsp;2021 Fortune 500&nbsp;as stand-alones (by revenue)\n<ul>\n <li>iPhone at $166 billion in TTM net sales would place at number 12, between Costco (COST) and Cigna (CI).</li>\n <li>Services at $60 billion would place 52 between Albertsons (ACI) and Valero (VLO). That’s about a third of all Google’s revenue (number 9), and about 70% of Facebook’s revenue (number 34).</li>\n <li>Wearables, Home, and Accessories at $35 billion would place at 89 between Deere (DE) and Abbott Labs (ABT). Apple is the largest maker of both watches and headphones now. For comparison, Swatch’s (OTCPK:SWGAF) TTM revenues were $6.3 billion.</li>\n <li>Mac at $34 billion would place at 90 between Abbott and Northwestern Mutual. This is about a third of Dell’s (DELL) revenue (number 28).</li>\n <li>iPad's $30 billion would be the only segment outside the Fortune 100 at number 101, between Tesla (TSLA) and Philip Morris (PM).</li>\n</ul>\nApple consolidated comes in third by revenue behind Walmart (WMT) and Amazon (AMZN), but first in profits, 30% higher than number two Microsoft.\nOf course the ecosystem is what feeds this sales machine. Apple Watch is so popular, in part, because of its tie-in to iPhone and the suite of services, especially now with Fitness+. Apple Music as a stand-alone may not have survived without the tie in to all the rest of Apple. I could keep going on, but the success of everything rests on top of everything else.\nThe Walled Garden is a metaphor that people have used to describe the Apple family of products and services. Some, like Apple, put the emphasis on the garden. Others, like Epic, put the emphasis on the walls, like the ones in a prison. But whether people stay in the ecosystem because it’s hard to leave, or just because they like it there is a little immaterial until we get to antitrust, which we’ll talk about in a little bit. It’s a bit of both, of course, that make Apple products so sticky.\nThe foundation of this is the wide-and-tall tech stack that lets Apple be the only company that makes PCs, tablets, smartphones, smartwatches and headphones, the SoCs that run them, and also every line of code these devices ship with. These devices can seamlessly work with each other in ways the Windows/Android alternative cannot. Another one of these features is coming with the fall OS updates, Universal Control.\nEvery year at WWDC, Apple updates the software part of this, and the deep integration of services also gives Apple an advantage over competitors, which has become an antitrust focus, especially for Spotify (SPOT) in Europe.\nBut beyond that, the Apple ecosystem is entirely unique\n<ul>\n <li>Microsoft makes PC operating systems and software that sell well, and devices that sell poorly. They have some good consumer services like Xbox gaming, but not many. They are reportedly working on a chip for their Surface products.</li>\n <li>Samsung (OTC:SSNLF) makes a wide range of devices, but not operating systems (unless you count Tizen, now merging with Google's WearOS), or any notable apps or services. They design their own chips, but often use competitors’ in products.</li>\n <li>Google (GOOGL) has a very popular operating system and apps, and is the king of services, but their devices sell poorly. They make data center chips for their own use, but not for consumers.</li>\n <li>Amazon and Facebook (FB) are starting from the bottom-up. Both tried and failed with phones. Amazon has a fork of Android, and low-cost tablets that sell reasonably well. Amazon’s Echo products do well, Facebook’s hardware less so. Both do well with services and apps. The recent Amazon Sidewalk launch with Tile is Amazon trying to build up that ecosystem infrastructure. Amazon has a chip unit for AWS, but neither company has consumer chip design.</li>\n</ul>\nOnly Apple has the complete package. But there are threats to the ecosystem, and I believe Apple is very likely to have to give up some control, especially with regard to App Store. By 2025 we should expect Apple’s App Store commission rate to drop, but the rest should remain very strong.\nPrivacy, Security And ESG\nI’m lumping these together, because they add up to the same thing: Apple has been able to skate to where the puck is going on important societal issues. They see these things not as costs, but marketable features that burnish the Apple brand.\nI don’t think there’s any reason for me to belabor the security and privacy comparison with Windows and especially Android. Like everyone, Apple does not have a perfect record, and we’ll talk some more in a moment about that.\nBut let’s return to that 2007 email, which is like an Apple Rosetta Stone. Serlet's first two bullets are about limits Apple is going to place on developers with the goals of “protect the user,” and “protect the networks.” Only after that does he get to what developers get access to. That’s indicative of all their thinking. Securing the user and networks is the first order priority.\nHere’s a quick list of the security and privacy enhancements they just announced at WWDC:\n<ul>\n <li>iCloud VPN at no extra cost to paid iCloud accounts.</li>\n <li>On-device speech recognition.</li>\n <li>Third party Siri devices that do not give those third parties access to your commands. Common commands will execute without leaving the house.</li>\n <li>Further support for iCloud home security video, which does image analysis on-device, and only uploads encrypted video to the cloud.</li>\n <li>House keys and state ID support in Wallet. TSA will accept digital IDs when it becomes available.</li>\n <li>A new App Privacy Report with details on what all apps are doing with their permissions. Google just announced something very similar for Android 12.</li>\n <li>After grimly reminding us that we will all die someday, iOS 15 allows adding of legacy contact who can access your account after you are gone.</li>\n <li>Securely and privately share health data with a provider.</li>\n <li>Protection from email tracking pixels.</li>\n</ul>\nThat was just what they announced this year.\nSo let’s turn it around and talk about what these things cost Apple. The biggest costs are not direct ones but opportunity costs from their relative lack of data collection. Their services suffer because of this:\n<ul>\n <li>The iAd ad network never got off the ground because it denied advertisers the data they were getting elsewhere.</li>\n <li>Similarly, all their attempts at adding social media features have failed for the same reason.</li>\n <li>Siri lags Alexa and Google Assistant, and this also hurt them in the smart speaker space.</li>\n <li>It is harder for them to build massive centralized AI models like Google and Facebook.</li>\n <li>The engagement and targeting algorithms for App Store, News, Music, TV+, Stocks, Arcade and ads would all be better. Apple has tried to be unique here with added human curation.</li>\n <li>They don’t trade user data like other credit card companies.</li>\n</ul>\nThen there are the direct costs, which we have little insight into, but certainly stretches into the billions of dollars. Some of the key parts come under the chip design unit: the Secure Enclave and the machine learning cores. Along with the supporting software these are key units in the A and M series SoCs.\nThey currently already do a lot of work in keeping data analysis on-device, leveraging those machine learning cores, and only uploading encrypted data to the cloud using the secure enclave. But the eventual goal I believe is to have all Siri interactions happen on-device, which minimizes what Apple collects about users. As noted, they just took a major step in that direction with on-device voice recognition. To me, that was the single biggest announcement at WWDC. I thought Apple was maybe two years from announcing that.\nWhen we talk about ESG, the direct Capex costs are growing there. Apple Park is the largest LEED Platinum office building in North America. They are currently working through $4.7 billion in green bonds, building solar, wind and battery storage. Apple currently has all of Apple worldwide corporate operations carbon neutral. But the big, costly project is getting the entire supply chain to carbon neutral. They claim they will do that by 2030.\nIn 2021, this is a very effective marketing narrative, and it will only become more so over time. In 2025 these issues will resonate even more deeply.\nThe Brand\nSecurity, privacy and ESG burnish the brand, but the products are the core of it. Again, Apple does not list intangibles, but&nbsp;Interbrand&nbsp;put the value of the Apple brand at $323 billion in 2020. Amazon was number two at $201 billion. Here’s how Interbrand put it.\n<blockquote>\n Ultimately, Apple’s distinctiveness – or, in fact, uniqueness – isn’t a result of what the brand says, but what it does. It’s Apple’s products, technologies and stores that speak to the organisation’s philosophy of beautiful simplicity and individual empowerment – much more than any campaign could ever do. Inasmuch as many talk about the brand’s aura, Apple has consistently changed what was in people’s minds by changing what was in their hands.\n</blockquote>\nIt’s amazing what 25 years of making great products will do. This is important because a strong brand can buoy a company through bad weather. Apple’s brand can weather a long storm.\nThe iPhone Value Proposition\nApple products are notoriously expensive. But are they? Mac is expensive when you compare to alternatives, but iPhone turns out to be a pretty good value. To begin with, iPhone gets many years of operating system support, in contrast to Android products outside of Google’s poorly-selling Pixel. I have a friend who can afford any phone he wants, but he likes small phones, and hated Jony Ive’s rounded edges. He bought an iPhone SE in March 2016 for $399, and held on to until last December when he traded it in for an iPhone 12 mini. When he traded it in, it was running the current version, iOS 14. If he still owned it, he would be able to upgrade it to iOS 15 in the fall.\nI joke with him that he really extracted maximum value from that iPhone SE, but let’s look at what that looks like for someone in 2021 who is budget conscious. Forgetting about any trade-in subsidies:\n<ul>\n <li>$399 iPhone SE 2nd generation base model</li>\n <li>Paid for with Apple Card. That gets a 3% discount on price, and 24 months of 0% interest.</li>\n <li>Include AppleCare+ for product life to account for an inevitable battery replacement and unforeseeables.</li>\n <li>That’s $19.91 a month for the first 24 months, and $3.29 thereafter.</li>\n <li>Discount future payments by 1.75% a year for inflation.</li>\n <li>Since the phone is already a year old, we’ll shave a year off operating system support, so that’s 6 years.</li>\n</ul>\nFor 6 years of worry-free ownership and operating system updates, that’s $599 in 2021 dollars. If you wanted to risk it and not get AppleCare+, it’s only $381 paid over 2 years. This is very comparable to similar offerings from&nbsp;Samsung,OnePlus, and&nbsp;Google. Only Google’s Pixel gets guaranteed OS updates beyond that first year.\nTurning to the flagship models:\n<img src=\"https://static.tigerbbs.com/a08bc783267a97e370e0a432f3ca6dcf\" tg-width=\"640\" tg-height=\"390\">\nApple has the most expensive flagship but not by much. The Google Pixel 5 seems like a great deal to me, and I remain surprised at how poorly the Pixels have sold. Also, looking at the green bars, the iPhone 12 Pro Max looks like the best deal of the bunch.\nOnly the Pixel gets guaranteed updates beyond that first year. Apple is still supporting 5 models released in the Obama administration. But there’s a lot more that comes with iPhone that doesn’t come with any Android phone.\n<ul>\n <li>The best smartphone chip.</li>\n <li>Hardware and software developed together.</li>\n <li>Tight integration with PC, tablet, watch and wireless headphones.</li>\n <li>Far better malware security in App Store.</li>\n <li>Most new apps start on iOS, so Apple users get first crack.</li>\n <li>Native productivity suite.</li>\n <li>Native audio and video editing with surprising capability for phone apps.</li>\n <li>No tracking of location and other data by Google unless you use Google services.</li>\n <li>Convenient service and free classes at an Apple Store near you.</li>\n</ul>\nApple users give up a little bit of freedom, mostly in App Store, for all this, but I think it’s a tradeoff everyone understands at this point. As time wears on, it has become harder and harder for other phone manufacturers to keep up with Apple on both price and features. By 2025, it will be even harder.\nRisks To The Story\nThere are three big threats to the rosy picture I am painting. One is geopolitical, one is regulatory, and one is social.\nChina\nUS-China relations are at their lowest ebb since Mao hosted Nixon in 1972. The Biden Administration has pulled back from some of the excesses of the previous Administration, but we seem to be on a long march towards, at a minimum, a bifurcation of the technology world. I do not view this as a positive development for many reasons, but it hits Apple hard.\nApple is pretty unique in the scale of their dependence on China from both the supply side and the demand side. Let’s start on the supply side.\n<blockquote>\n Substantially all of the Company’s manufacturing is performed in whole or in part by outsourcing partners located primarily in Asia. A significant concentration of this manufacturing is currently performed by a small number of outsourcing partners, often in single locations.\n</blockquote>\n<blockquote>\n - Apple annual report “Risk Factors”\n</blockquote>\nFrom the demand side, it fluctuates, but in the current 3-year iPhone supercycle period, Apple is averaging 16.8% of net sales from Greater China, which includes Taiwan and Hong Kong.\n<img src=\"https://static.tigerbbs.com/2f3a5e0338dac745a79fb9839439fa60\" tg-width=\"640\" tg-height=\"375\">\nAntitrust\nI’m not going to dwell on this, since everyone is better acquainted with this threat because of the Epic trial. But there is a movement afoot to refashion antitrust law in a way that would not be favorable to Apple, with the amount of control they like to exercise over the ecosystem. This is in the US courts now, but legislative and regulatory bodies in the US and Europe are turning towards iOS, especially App Store. The threat is not open-ended like it is for Google and Facebook, as it is contained to App Store, 28% of Services net sales and 5.4% of consolidated Apple. But that second number, small as it is, has been growing quickly.\nIn contrast to China, I view some sort of reduced take from App Store as inevitable, and the only question is the scale of the reduction. Already, according to Epic trial filings, Apple’s take is probably between 25% and 26% on App Store, not 30% as it is always reported. That is going lower.\nBased on the comments in my articles on the&nbsp;Epic trial, I think Apple shareholders are also underestimating the probability of this happening.\nTall Poppy Syndrome\nThis is a phrase I just learned from an Australian friend. Wikipedia&nbsp;defines&nbsp;it as\n<blockquote>\n a cultural phenomenon of jealous people holding back or directly attacking those who are perceived to be better than the norm, \"cutting down the tall poppy\".\n</blockquote>\nThat’s roughly how my Aussie friend described it to me. People love a comeback story, and that was the Apple narrative for a long time. But Apple is now far too profitable for too long to be the Comeback Kid anymore. Now there seems to be an appetite in the media and society for cutting Apple down to size.\nFor example, Washington Post ran an article as I was writing this section that talked about&nbsp;18 scam apps&nbsp;that were in the top 1000 grossing apps on the day Apple was testifying in front of the Senate about App Store.\n<img src=\"https://static.tigerbbs.com/c268692981ac4739fd7390468e487103\" tg-width=\"640\" tg-height=\"137\">Washington Post screenshot\nApple needs to do better. But there is no control group. The article never asks how many scam apps they stopped that day, or how many scam apps were on the Google Play Store or other Android stores that day.Apple claims&nbsp;they stopped $1.5 billion in fraudulent transaction in 2020, 2.4% of all App Store transactions.\nTo be clear, the Washington Post article is claiming that Apple is not really curating App Store based on their one-day survey. The total net sales to Apple for these apps was $8.3 million before Apple axed them. Apple is a company that will have around $350 billion in net sales in fiscal 2021, and had something like $16 billion from App Store in calendar 2020. They are not sandbagging their hard-earned reputation over $8.3 million.\nThis is sometimes called the “Five Nines Problem.” Five nines is 99.999%, and is sort of the standard for “almost perfect” in a lot of tech. But tech companies like Apple, Google, Facebook, etc. operate at massive scale and they need more nines. App Store has 1.8 million apps, and five nines means 180 malicious apps get through, and maybe 10% of those wind up in the top 1000 grossers. The good news is that Apple does not need the Washington Post to tell them they need to get better at this, but it is not easy.\nThis is a more nebulous threat than the others, but the last time I felt like this was when the narrative on Microsoft turned sharply after Windows 95. That ended up in a long battle with the Department of Justice that sucked corporate focus for years.\nApple Stock Price Model: Four Scenarios\nMany of the assumptions for these models are all based off of my deep dives on Apple quarters after they report. The last of them on 2021 Q2is here.\nSo let’s take all that qualitative data, and try and stuff it through a revenue and DCF model. I recommend you be very skeptical of all models of the future, and think a lot about the underlying assumptions. Models are generally an expression of the author’s biases with math laid over it. You have the 6,000 words above if you would like to know mine.\nThe recent&nbsp;Tesla model from ARK Investment&nbsp;should stand as a cautionary tale for everyone. Anyway, I have posted&nbsp;Excel worksheets&nbsp;to GitHub with the model, and all the major assumptions are modifiable. Each scenario is a separate worksheet.\nLet’s first look at some assumptions common to all four:\n<ul>\n <li>iPhone continues to exhibit a 3-year cyclical pattern. Fiscal 2021 is the high year, so 2024 is the next one.</li>\n <li>Services growth comes off to some extent in all scenarios from reduced App Store growth from legal or regulatory action in the US and Europe.</li>\n <li>Wearables, etc. remains on its strong growth path on Apple Watch, AirPods, and at least one new product category, a VR headset.</li>\n <li>Mac and iPad return roughly to their pre-pandemic patterns. Like all PC makes, Apple saw a&nbsp;big surge&nbsp;from work-from-home.</li>\n <li>Fiscal 2021 is half-reported, so all scenarios assume that it will complete along Apple’s average seasonal pattern from 2016-2019.</li>\n <li>Other assumptions are in the Excel sheets.</li>\n</ul>\nScenarios:\n<ol>\n <li>Large, the most optimistic.</li>\n <li>Medium, my base case.</li>\n <li>Small is what Apple looks like if they come off the growth rates of the last 4-6 years.</li>\n <li>Tiny is the same as Small through 2023, and then we’re going to throw some real problems at Apple.</li>\n</ol>\nIn Medium:\n<ul>\n <li>We’ll model the iPhone cycle with the average growth rates of the 2015 and 2018 cycles.</li>\n <li>Services growth comes off of 2016-2020 trajectory because of legal or regulatory action on App Store by 2 pp.</li>\n <li>The rest, as above.</li>\n</ul>\nLarge and Small will, respectively, add and subtract from these growth rates in Medium. In addition, Large assumes:\n<ul>\n <li>Boost in fiscal 2022-2025 for iPhone on 5G adoption.</li>\n <li>Apple Silicon Macs gain Apple some PC market share.</li>\n <li>The AR glasses come out in the middle of fiscal 2025. To be clear, I view that as an unlikely timeline, but it does not have a large effect on the model since it comes 6 months from the end of our interval.</li>\n</ul>\nTiny is a special event-based scenario where we will throw the two worst plausible scenarios we can at Apple. It starts with a huge reduction in App Store revenues due to antitrust action in the US and Europe at the end of fiscal 2023, and getting kicked out of China at the end of fiscal 2024. The former will be modeled as a sharp downturn in Services revenue in fiscal 2024. The China expulsion will lead to a 15% drop in top line revenue, and a decrease in products gross margin by 5 pp in 2025. I don’t view either of these as particularly likely, but this is the worst it can get.\nIs Apple Stock A Buy Now?\nJust to double up on the warning: you should treat all models of the future with skepticism, including this one.\nThis table summarizes the results. Please hit up those Excel sheets if you’d like to frisk the math, or play around with your own assumptions.\n<img src=\"https://static.tigerbbs.com/4f5cc7ac9dba0aa62b43bacac07a51c1\" tg-width=\"640\" tg-height=\"164\">\nAs you can see, even Small doesn’t do so badly by 2025, and Tiny ends up almost in the green, since the bad events come towards the end. If they were to come earlier, those growth rates would be lower in Tiny.\nBut the year-by-year results get to something I’ve been trying to tell Apple shareholders for almost a year now:\n<img src=\"https://static.tigerbbs.com/f0dd5f3db1dee545821469b11fb4f01d\" tg-width=\"640\" tg-height=\"347\">\nThat chart will explain to you why I started breaking my Apple recommendations down between long and short term. Since the price hit $130 last summer, it was pretty clear to me that except in a best-case scenario, the gains of fiscal 2021 and 2022 were already baked in.\n<img src=\"https://static.tigerbbs.com/25ce181f892fdb01ae176c551fa19ec2\" tg-width=\"640\" tg-height=\"347\">\nEven Large only shows a marginal gain by the end of the fiscal year 2021, and Medium and Small are flat or down through the end of 2022. I’ve used the phrase, “if your time horizon with Apple is short, now is a good time to take profits,” very frequently in the past 8 months. I still mean it.\nApple Stock Forecast For 2025\nLet’s zoom into each a bit, starting with the base case, Medium.\n<img src=\"https://static.tigerbbs.com/b54f0f55b2d743586b10fdcfb3c4bbd1\" tg-width=\"640\" tg-height=\"366\">\nI've included actual price growth for fiscal 2020 so you can see how we got here. In this view we can think of slow fair value growth from today to the end of fiscal 2022 as averaging out fiscal 2020. If we look at 2019-2022, that’s a 27% CAGR, much more in line with the growth rates in the out years of the model. The model is simply predicting that 2021 and 2022 are baked into today’s price.\nBut then you see that the model really picks up steam on the out-years, as Apple’s free cash flow, growing at a 15% 5-year CAGR in Medium, catches up with the price. All together, that’s a 13.8% CAGR over the four and a third years of the model, with a terminal value of $222.\nOf course Large is larger, with an enhanced iPhone cycle from 5G adoption and a little extra boost from the AR glasses at the end of fiscal 2025.\n<img src=\"https://static.tigerbbs.com/7f1cb197112556270cfdbb2d293c0082\" tg-width=\"640\" tg-height=\"366\">\nTo be clear, I view this scenario as plausible, but not that likely, somewhere around the 25th percentile. In this scenario, 2022 does not show the flat or negative growth rates in 2022 like the others, and this is due to the 5G adoption part of our assumptions. That’s a 20.2% CAGR, and a terminal value of $283.\n<img src=\"https://static.tigerbbs.com/25c9feb0f396334a8c46a983c8191e37\" tg-width=\"640\" tg-height=\"366\">\nThis model starts off very slowly, with only an 11% 2019-2022 CAGR compared to 27% for Medium, and down in 2022. But even the Small scenario picks up steam beginning in 2023. That’s an 18% CAGR from 2023-2025. But over the life of the model it is less than half that, 7.9%, a $184 terminal value.\n<img src=\"https://static.tigerbbs.com/bc10da2578deb47fb83ad5c2497fa16f\" tg-width=\"640\" tg-height=\"366\">\nTiny is the same as Small until the events kick in beginning fiscal 2024. 2024 price growth comes way off Small, and takes a dive in 2025. Keep in mind, we are talking about the fair value a year after the event, so the price would likely go down much further first. Anyway, this one winds up roughly at the June 11 close over four years later.\nSo there it is: the thing I’ve been telling you for a while now, except with some modeling and pretty charts:\n<ol>\n <li>Except in our best case, Apple is likely to trade sideways for a while as cash flows catch up with the share price.</li>\n <li>But absent some very bad events out of Apple’s control, the long term view is still very, very bright, even if they slow down.</li>\n</ol>\nSeven thousand words summed up in two bullets.","collect":0,"html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Apple Stock Forecast For 2025: A Slow Start, Then Strong Growth</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nApple Stock Forecast For 2025: A Slow Start, Then Strong Growth\n</h2>\n\n<h4 class=\"meta\">\n\n\n2021-06-17 10:04 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4435098-apple-stock-forecast-2025>seekingalpha</a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\nSummary\n\nApple is the products company most prepared for the future, whatever that may bring. I give you nine reasons.\nThe dangers to Apple’s long-term prospects are mostly event-based, and mostly out...\n\n<a href=\"https://seekingalpha.com/article/4435098-apple-stock-forecast-2025\">Web Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","type":0,"thumbnail":"","relate_stocks":{"AAPL":"苹果"},"source_url":"https://seekingalpha.com/article/4435098-apple-stock-forecast-2025","is_english":true,"share_image_url":"https://static.laohu8.com/e9f99090a1c2ed51c021029395664489","article_id":"1152604932","content_text":"Summary\n\nApple is the products company most prepared for the future, whatever that may bring. I give you nine reasons.\nThe dangers to Apple’s long-term prospects are mostly event-based, and mostly out of their control.\nI lay out four scenarios and DCF models. You should treat DCF models with the skepticism they deserve.\nWith the exception of the best case, they show the stock trading sideways or down through the end of fiscal 2022, then growing fast thereafter.\n\nNikada/iStock Unreleased via Getty Images\nThe Long-Term Apple Thesis\nI write a lot about Apple (AAPL), 15% of my articles here at Seeking Alpha since I started in 2018. Mostly, I write about what is happening now. For example, the last one was about the implications for Apple should they be forced to back off their App Store rules, whether through courts or regulation.\nAlmost a year ago, I began breaking my conclusions about Apple stock into two sections: one for investors who are into Apple for the long haul like I am, and a section for those whose time horizons are much shorter than “I hope to die with these shares.” This article is for the Die With These Shares Crowd.\nI was first an Apple shareholder in 1982, but I sold those shares when Steve Jobs sold his. Since 2005, I have been a continuous shareholder and have never sold a share. Like I said, I hope to die with them. Over the years, the reasons I remain an Apple shareholder have grown:\n\nThey have the most complete and unique tech stack in the world.\nThey have the best product development process.\nThey have the best corporate organization.\nThey are the only megacap who sees privacy and security as a differentiator and marketable feature, not as a cost-center.\nESG focus years ahead of everyone else.\nThe Apple brand\nWhile the sum of their parts is impressive, the Apple ecosystem makes it so much more.\nWhen everything is taken into account, iPhone gives a lot of value for the price.\nA cash pile and cash flows to back up their ambitions.\n\nWhat it adds up to is a company that is prepared for the future, whatever that may bring. Success in tech is notoriously hard to maintain. IBM (IBM) dominated computers and high end office equipment for 80 years until they didn’t. Sitting here today in 2021, I have a very high level of confidence that this will not be happening to Apple any time soon.\nThe Tech Stack\nOne of my favorite factoids about Apple is that despite the fact that their intangible assets would be the most of anyone, they do not list any on their balance sheet. This is where IP and brands go. We’ll get to the brand in a moment, but the core of what makes Apple so durable is their tech stack, now higher and more complete than anyone’s.\nThe most important things in the stack are at the base — the Apple chip design unit, which went from nothing to the best in the world in about a decade, and the operating systems, which at their root are all the same thing. They are the only company that designs products and the chips and operating systems that run them, though it looks like Microsoft (MSFT) would like to join them.\nChip Design\nCustom chip design is becoming more and more important. Apple was one of the first to recognize the importance of this in making products that are unique in a crowded marketplace. The first iPhone came with a Samsung ARM-based system-on-a-chip (SoC). Less than a year later, Apple bought PA Semi, a low-power SoC designer, for $278 million in cash. Other than the NeXT acquisition that brought back Steve Jobs, this was the best investment Apple ever made.\nThe first Apple-designed chip to show up in a product was the A4 in iPhone 4, only two years after the PA Semi acquisition. Quickly, the reaction went from “Apple thinks they can make a SoC?” to “Hey, these things are pretty good.” Now the A-series is widely regarded as the best smartphone SoC.\nThe A-series is the most important, but that is only the beginning. There is also the S-series for Apple Watch, H-series for headphones, W-series for wireless connectivity, U-series, which enables AirTags features, and the new M-series for Macs. Within a couple of years, all Apple devices, from AirPods to the Mac Pro will run on Apple Silicon.\nThe work they have done here is really showing up in the new M1 Macs, because we have something to compare to — the previous generation of the same model with Intel’s hardware.\nAnnotated Apple video screenshot.\nBy switching to their own silicon, Apple was able to make the same computer, but with a tablet-sized motherboard, a larger screen, and very low power requirements, while still being much faster than the Intel alternative. Already, the next version of macOS will not support some features on Intel Macs, because they lack the machine learning cores. \nThe Operating Systems\nWhen Apple was developing iPhone there was two ways to go for the operating system: build up from iPod, or shrink Mac OS X. There was an internal contest along parallel tracks, and the shrunken Mac won out. Because of this decision, all the operating systems are essentially the same thing.\nOS X came from NextStep which was the reason for the NeXT acquisition. Apple had not been able to move past what became known as Mac OS Classic with its own internal project, Copeland, and they needed help. Also, the deal came with Steve Jobs.\nNextStep was the first attempt to take a UNIX operating system and put a friendly graphical user interface on top of it. At the core is a UNIX microkernel. As the name implies, this is a small bit of software that manages the most basic functions of the software/hardware interface. Everything else is built in modular blocks of code layered on each other. Each device gets the blocks it needs, and excludes the ones it doesn’t.\nSo at root, the microkernel and the core blocks of the operating systems have a ton of overlap, and are very much the same. The original iPhone OS and OS X were so similar that even before Apple released their official iPhone software development kit, or SDK, developers were already making iPhone apps using a slightly modified Mac SDK.\nA good example is networking. All the devices share the same basic networking software, but macOS has wired connection drivers the others don’t. iOS 14 has 5G drivers the others don’t.\nThe Rest\nOn top of that rock-solid foundation sits the rest of it. The list is too long to go through entirely. This is a company that patented a pizza box which is only used in Apple’s Caffe Macs employee cafeterias. But these are the parts where we see continuous development every year.\n\nThe location/orientation sensor package. Originally for iPhone, this now includes accelerometers, gyroscopes, GPS, altimeters, and the newest additions, LiDAR and the U1 chip, which makes AirTags possible, with more coming. With this combination, Apple devices know where they are in 3D space, orientation, and where they are relative to other objects, especially ones that also have the U1 chip.\nVoice recognition.\nAR.\nOn-device machine learning. This includes continuous work on both hardware and software. The A-series and M-series SoCs come loaded with ML cores.\nAudio/video/photo. Again, both hardware and software.\nMaybe their own 5G radio chip. We’ll see.\n\nWhat This All Means For 2025\nWhat this means is that when Apple is setting out to build a new device, they begin halfway to the finish line. The basics are there already, and they get to spend their time and energy focusing on the parts that make each device unique. And as we’ll look at in the next section, they still spend more time sweating that last mile than anyone else.\nLet’s look at Apple’s current Big Idea, which is augmenting or replacing the venerable graphical user interface with a combination of AR and voice control, AKA Siri. Apple just hit a big milestone in that journey with the announcement of on-device voice recognition in iOS 15 coming this fall. This is key to their thinking in whatever they are doing with a car, and also of course in AR/VR products. According to rumors, we should see at least some aspects of both of these by the end of 2025.\nBut beyond the AR-voice package, each device will get a chip specifically designed for that device, unlike most others who will be using chips designed for a wide range of OEMs. It will overlap a lot with other Apple SoCs, but it will contain a unique combination of units chosen just for that device. When the software team is working on the operating system and apps, most of the under-the-hood work is done. They get to focus on making the unique interface they want for that product. The sensor package will come into the design of either a car or AR glasses, as will all the rest of it.\nProduct Development\nApple approaches product development differently than every other company. In the first place, they say “no” to many things, even deep into the development process, most we never get to hear about. This allows them to focus on what they do make, and make their products unique, even when competing a crowded space.\nMy favorite example here is a negative one, the ill-fated AirPower charging mat. Apple wanted to make a unique offering that was specifically designed around Apple products, but they could not pull off the dual-coil design without overheating. Instead of releasing an undifferentiated product, they killed it, even though it had been pre-announced. This sort of thing happens internally all the time. We got to see the sausage made, just this once.\nBut it goes beyond just saying “no” a lot. Apple approaches almost everything in a very slow, deliberate manner:\n\nFocus entirely on the customer experience.\nDon’t let anyone else get in between you and the customer.\nPeople often don’t know what they want until you show it to them.\nDon’t compete directly against successful incumbents, but figure out what Apple’s unique contribution is, focused on the entire ecosystem.\nDon’t release a new product or feature until you are ready to, no matter what analysts or the tech press say you should do.\nFind a way to dip your toe into the market first, gauge customer reaction, and slowly keep adding year after year.\nHave relatively few SKUs. Keep the product lines relatively simple.\nDon’t be afraid to ditch old but popular technologies.\nAs much as possible, own all the key technologies in your devices.\nHardware and software development are concurrent and work together.\nDo not worry that a new product is displacing another source of revenue.\n\nSometimes this can hurt an Apple product relative to competition. The HomePod is a good example here. Because of their relative lack of data collection, Siri will never be as capable as Alexa or Google Assistant. So when designing a “smart speaker,” Apple focused more on the speaker part, because they have handicapped themselves on the smart part. This led to an expensive device that didn’t have as much functionality as competing products. But it sounded great. This is a tradeoff they are willing to make, because security and privacy in the ecosystem is a higher level goal than having a smart speaker.\nBut as careful and deliberate as Apple is, they can also act blazingly fast when they think they need to. This letter, recently served up by one of my favorite Twitter accounts,Internal Tech Emails,kind of blew my mind.\n\nBertrand Serlet was the SVP of Software Engineering (“SWE” in the email) at the time. Scott Forstall was the lead on iOS. Steve Jobs you know. What you see here is the birth of the App Store, now worth $16 billion a year in net sales to Apple, decided in an email exchange in less than an hour.\nThe timeline here is that iPhone was released in June 2007. In September 2007, the first easily installed app store for jailbroken iPhones, Cydia, was released. It was a warning to Apple that they had to release their own App Store, along with developer tools like they had on the Mac, or risk losing control of the device. Too many people looked at this “phone” and saw a pocket computer.\nThis email exchange happened less than a month after Cydia. Serlet laid out everything the App Store was and still is in four quick bullets, made a request for a large amount of resources to pull it off (“whoever we need in SWE”), and asked for a yes-or-no decision. Jobs replied less than an hour later with an absurd timeline (it came out in March, but was announced in January), and approved a now-$16 billion a year business in a single sentence.\nMost of the time they move very slowly and deliberately, making sure everything is exactly right before release. But they can also push something out quickly if it is of strategic importance like App Store. This can also fall on its face at launch, like Apple Maps, which is why Apple prefers to move slowly, all else being equal.\nOrganization\nOne of the key foundations of Apple’s success is their amorphous org chart which promotes collaboration and prevents turf wars. On paper, there are three key technical function-based Senior VPs below CEO Tim Cook:\n\nSVP of Software Engineering, Craig Federighi.\nSVP of Hardware Engineering. This is now John Ternus, after longtime SVP of Hardware, Dan Riccio, moved over to shepherd AR/VR devices full time, underlining their importance.\nSVP of Services, Eddie Cue.\n\nThis is supplemented by the SVP of Worldwide Marketing position, now filled by Greg Joswiak, after Apple lifer Phil Schiller moved on to semi-retirement as an “Apple Fellow,” whatever that is. The Epic trial made clear that Schiller is very much still involved. Joswiak and Schiller are sort of Ministers-Without-Portfolio, who dip in on all strategic questions, and the guardians of the brand. VP of Environment, Policy and Social Initiatives, Lisa Jackson, has a growing voice in big decisions.\nBut as became apparent in a lot of the Apple corporate emails that Epic presented at trial, these people and their main lieutenants are constantly up in each other’s business, and that is by design. The walls between the SVPs are very thin, and no one gets to that position unless they understand that turf wars don’t happen at Apple. But the function-based organization sort of prevents it in the first place.\nWhen Apple decided to make iPhone, iPod was 35% of Apple’s revenue. But in meetings and email exchanges, there was no SVP of iPod to object loudly that their ox was being gored. There are many companies that would have killed iPhone because of this. Hardware, Software and Services all have big roles in all Apple products, whether it’s iPod, iPhone or anything that has followed. In that email in the previous section, Bertrand Serlet asks for whomever he needs to meet a fast timeline. That means he was pulling people off the Mac OS X team to work on the iPhone SDK and App Store, of course, in concert with Services and Hardware. Phil Schiller also had a lot to say. Again, there was no SVP of Mac to loudly object.\nWe now see this collaborative organization and culture expressed as architecture in Apple Park.\nApple Maps screenshot\nAt a cost of $4-$5 billion, Apple built a new campus entirely designed around the idea of encouraging collaboration across groups, and random encounters between people who normally would not be interacting. The parking lots are to south out of frame of that screenshot, and everyone enters and exits on those footpaths. Along the way, they have to pass by lots of other offices and groups, or go through the center courtyard, a central place to hang out.\nApple did not build this so people could work from home.\nThe Ecosystem\nBefore we talk about the sum of the parts, let’s start with the parts. These are the rankings that Apple product segments would have had in the 2021 Fortune 500 as stand-alones (by revenue)\n\niPhone at $166 billion in TTM net sales would place at number 12, between Costco (COST) and Cigna (CI).\nServices at $60 billion would place 52 between Albertsons (ACI) and Valero (VLO). That’s about a third of all Google’s revenue (number 9), and about 70% of Facebook’s revenue (number 34).\nWearables, Home, and Accessories at $35 billion would place at 89 between Deere (DE) and Abbott Labs (ABT). Apple is the largest maker of both watches and headphones now. For comparison, Swatch’s (OTCPK:SWGAF) TTM revenues were $6.3 billion.\nMac at $34 billion would place at 90 between Abbott and Northwestern Mutual. This is about a third of Dell’s (DELL) revenue (number 28).\niPad's $30 billion would be the only segment outside the Fortune 100 at number 101, between Tesla (TSLA) and Philip Morris (PM).\n\nApple consolidated comes in third by revenue behind Walmart (WMT) and Amazon (AMZN), but first in profits, 30% higher than number two Microsoft.\nOf course the ecosystem is what feeds this sales machine. Apple Watch is so popular, in part, because of its tie-in to iPhone and the suite of services, especially now with Fitness+. Apple Music as a stand-alone may not have survived without the tie in to all the rest of Apple. I could keep going on, but the success of everything rests on top of everything else.\nThe Walled Garden is a metaphor that people have used to describe the Apple family of products and services. Some, like Apple, put the emphasis on the garden. Others, like Epic, put the emphasis on the walls, like the ones in a prison. But whether people stay in the ecosystem because it’s hard to leave, or just because they like it there is a little immaterial until we get to antitrust, which we’ll talk about in a little bit. It’s a bit of both, of course, that make Apple products so sticky.\nThe foundation of this is the wide-and-tall tech stack that lets Apple be the only company that makes PCs, tablets, smartphones, smartwatches and headphones, the SoCs that run them, and also every line of code these devices ship with. These devices can seamlessly work with each other in ways the Windows/Android alternative cannot. Another one of these features is coming with the fall OS updates, Universal Control.\nEvery year at WWDC, Apple updates the software part of this, and the deep integration of services also gives Apple an advantage over competitors, which has become an antitrust focus, especially for Spotify (SPOT) in Europe.\nBut beyond that, the Apple ecosystem is entirely unique\n\nMicrosoft makes PC operating systems and software that sell well, and devices that sell poorly. They have some good consumer services like Xbox gaming, but not many. They are reportedly working on a chip for their Surface products.\nSamsung (OTC:SSNLF) makes a wide range of devices, but not operating systems (unless you count Tizen, now merging with Google's WearOS), or any notable apps or services. They design their own chips, but often use competitors’ in products.\nGoogle (GOOGL) has a very popular operating system and apps, and is the king of services, but their devices sell poorly. They make data center chips for their own use, but not for consumers.\nAmazon and Facebook (FB) are starting from the bottom-up. Both tried and failed with phones. Amazon has a fork of Android, and low-cost tablets that sell reasonably well. Amazon’s Echo products do well, Facebook’s hardware less so. Both do well with services and apps. The recent Amazon Sidewalk launch with Tile is Amazon trying to build up that ecosystem infrastructure. Amazon has a chip unit for AWS, but neither company has consumer chip design.\n\nOnly Apple has the complete package. But there are threats to the ecosystem, and I believe Apple is very likely to have to give up some control, especially with regard to App Store. By 2025 we should expect Apple’s App Store commission rate to drop, but the rest should remain very strong.\nPrivacy, Security And ESG\nI’m lumping these together, because they add up to the same thing: Apple has been able to skate to where the puck is going on important societal issues. They see these things not as costs, but marketable features that burnish the Apple brand.\nI don’t think there’s any reason for me to belabor the security and privacy comparison with Windows and especially Android. Like everyone, Apple does not have a perfect record, and we’ll talk some more in a moment about that.\nBut let’s return to that 2007 email, which is like an Apple Rosetta Stone. Serlet's first two bullets are about limits Apple is going to place on developers with the goals of “protect the user,” and “protect the networks.” Only after that does he get to what developers get access to. That’s indicative of all their thinking. Securing the user and networks is the first order priority.\nHere’s a quick list of the security and privacy enhancements they just announced at WWDC:\n\niCloud VPN at no extra cost to paid iCloud accounts.\nOn-device speech recognition.\nThird party Siri devices that do not give those third parties access to your commands. Common commands will execute without leaving the house.\nFurther support for iCloud home security video, which does image analysis on-device, and only uploads encrypted video to the cloud.\nHouse keys and state ID support in Wallet. TSA will accept digital IDs when it becomes available.\nA new App Privacy Report with details on what all apps are doing with their permissions. Google just announced something very similar for Android 12.\nAfter grimly reminding us that we will all die someday, iOS 15 allows adding of legacy contact who can access your account after you are gone.\nSecurely and privately share health data with a provider.\nProtection from email tracking pixels.\n\nThat was just what they announced this year.\nSo let’s turn it around and talk about what these things cost Apple. The biggest costs are not direct ones but opportunity costs from their relative lack of data collection. Their services suffer because of this:\n\nThe iAd ad network never got off the ground because it denied advertisers the data they were getting elsewhere.\nSimilarly, all their attempts at adding social media features have failed for the same reason.\nSiri lags Alexa and Google Assistant, and this also hurt them in the smart speaker space.\nIt is harder for them to build massive centralized AI models like Google and Facebook.\nThe engagement and targeting algorithms for App Store, News, Music, TV+, Stocks, Arcade and ads would all be better. Apple has tried to be unique here with added human curation.\nThey don’t trade user data like other credit card companies.\n\nThen there are the direct costs, which we have little insight into, but certainly stretches into the billions of dollars. Some of the key parts come under the chip design unit: the Secure Enclave and the machine learning cores. Along with the supporting software these are key units in the A and M series SoCs.\nThey currently already do a lot of work in keeping data analysis on-device, leveraging those machine learning cores, and only uploading encrypted data to the cloud using the secure enclave. But the eventual goal I believe is to have all Siri interactions happen on-device, which minimizes what Apple collects about users. As noted, they just took a major step in that direction with on-device voice recognition. To me, that was the single biggest announcement at WWDC. I thought Apple was maybe two years from announcing that.\nWhen we talk about ESG, the direct Capex costs are growing there. Apple Park is the largest LEED Platinum office building in North America. They are currently working through $4.7 billion in green bonds, building solar, wind and battery storage. Apple currently has all of Apple worldwide corporate operations carbon neutral. But the big, costly project is getting the entire supply chain to carbon neutral. They claim they will do that by 2030.\nIn 2021, this is a very effective marketing narrative, and it will only become more so over time. In 2025 these issues will resonate even more deeply.\nThe Brand\nSecurity, privacy and ESG burnish the brand, but the products are the core of it. Again, Apple does not list intangibles, but Interbrand put the value of the Apple brand at $323 billion in 2020. Amazon was number two at $201 billion. Here’s how Interbrand put it.\n\n Ultimately, Apple’s distinctiveness – or, in fact, uniqueness – isn’t a result of what the brand says, but what it does. It’s Apple’s products, technologies and stores that speak to the organisation’s philosophy of beautiful simplicity and individual empowerment – much more than any campaign could ever do. Inasmuch as many talk about the brand’s aura, Apple has consistently changed what was in people’s minds by changing what was in their hands.\n\nIt’s amazing what 25 years of making great products will do. This is important because a strong brand can buoy a company through bad weather. Apple’s brand can weather a long storm.\nThe iPhone Value Proposition\nApple products are notoriously expensive. But are they? Mac is expensive when you compare to alternatives, but iPhone turns out to be a pretty good value. To begin with, iPhone gets many years of operating system support, in contrast to Android products outside of Google’s poorly-selling Pixel. I have a friend who can afford any phone he wants, but he likes small phones, and hated Jony Ive’s rounded edges. He bought an iPhone SE in March 2016 for $399, and held on to until last December when he traded it in for an iPhone 12 mini. When he traded it in, it was running the current version, iOS 14. If he still owned it, he would be able to upgrade it to iOS 15 in the fall.\nI joke with him that he really extracted maximum value from that iPhone SE, but let’s look at what that looks like for someone in 2021 who is budget conscious. Forgetting about any trade-in subsidies:\n\n$399 iPhone SE 2nd generation base model\nPaid for with Apple Card. That gets a 3% discount on price, and 24 months of 0% interest.\nInclude AppleCare+ for product life to account for an inevitable battery replacement and unforeseeables.\nThat’s $19.91 a month for the first 24 months, and $3.29 thereafter.\nDiscount future payments by 1.75% a year for inflation.\nSince the phone is already a year old, we’ll shave a year off operating system support, so that’s 6 years.\n\nFor 6 years of worry-free ownership and operating system updates, that’s $599 in 2021 dollars. If you wanted to risk it and not get AppleCare+, it’s only $381 paid over 2 years. This is very comparable to similar offerings from Samsung,OnePlus, and Google. Only Google’s Pixel gets guaranteed OS updates beyond that first year.\nTurning to the flagship models:\n\nApple has the most expensive flagship but not by much. The Google Pixel 5 seems like a great deal to me, and I remain surprised at how poorly the Pixels have sold. Also, looking at the green bars, the iPhone 12 Pro Max looks like the best deal of the bunch.\nOnly the Pixel gets guaranteed updates beyond that first year. Apple is still supporting 5 models released in the Obama administration. But there’s a lot more that comes with iPhone that doesn’t come with any Android phone.\n\nThe best smartphone chip.\nHardware and software developed together.\nTight integration with PC, tablet, watch and wireless headphones.\nFar better malware security in App Store.\nMost new apps start on iOS, so Apple users get first crack.\nNative productivity suite.\nNative audio and video editing with surprising capability for phone apps.\nNo tracking of location and other data by Google unless you use Google services.\nConvenient service and free classes at an Apple Store near you.\n\nApple users give up a little bit of freedom, mostly in App Store, for all this, but I think it’s a tradeoff everyone understands at this point. As time wears on, it has become harder and harder for other phone manufacturers to keep up with Apple on both price and features. By 2025, it will be even harder.\nRisks To The Story\nThere are three big threats to the rosy picture I am painting. One is geopolitical, one is regulatory, and one is social.\nChina\nUS-China relations are at their lowest ebb since Mao hosted Nixon in 1972. The Biden Administration has pulled back from some of the excesses of the previous Administration, but we seem to be on a long march towards, at a minimum, a bifurcation of the technology world. I do not view this as a positive development for many reasons, but it hits Apple hard.\nApple is pretty unique in the scale of their dependence on China from both the supply side and the demand side. Let’s start on the supply side.\n\n Substantially all of the Company’s manufacturing is performed in whole or in part by outsourcing partners located primarily in Asia. A significant concentration of this manufacturing is currently performed by a small number of outsourcing partners, often in single locations.\n\n\n - Apple annual report “Risk Factors”\n\nFrom the demand side, it fluctuates, but in the current 3-year iPhone supercycle period, Apple is averaging 16.8% of net sales from Greater China, which includes Taiwan and Hong Kong.\n\nAntitrust\nI’m not going to dwell on this, since everyone is better acquainted with this threat because of the Epic trial. But there is a movement afoot to refashion antitrust law in a way that would not be favorable to Apple, with the amount of control they like to exercise over the ecosystem. This is in the US courts now, but legislative and regulatory bodies in the US and Europe are turning towards iOS, especially App Store. The threat is not open-ended like it is for Google and Facebook, as it is contained to App Store, 28% of Services net sales and 5.4% of consolidated Apple. But that second number, small as it is, has been growing quickly.\nIn contrast to China, I view some sort of reduced take from App Store as inevitable, and the only question is the scale of the reduction. Already, according to Epic trial filings, Apple’s take is probably between 25% and 26% on App Store, not 30% as it is always reported. That is going lower.\nBased on the comments in my articles on the Epic trial, I think Apple shareholders are also underestimating the probability of this happening.\nTall Poppy Syndrome\nThis is a phrase I just learned from an Australian friend. Wikipedia defines it as\n\n a cultural phenomenon of jealous people holding back or directly attacking those who are perceived to be better than the norm, \"cutting down the tall poppy\".\n\nThat’s roughly how my Aussie friend described it to me. People love a comeback story, and that was the Apple narrative for a long time. But Apple is now far too profitable for too long to be the Comeback Kid anymore. Now there seems to be an appetite in the media and society for cutting Apple down to size.\nFor example, Washington Post ran an article as I was writing this section that talked about 18 scam apps that were in the top 1000 grossing apps on the day Apple was testifying in front of the Senate about App Store.\nWashington Post screenshot\nApple needs to do better. But there is no control group. The article never asks how many scam apps they stopped that day, or how many scam apps were on the Google Play Store or other Android stores that day.Apple claims they stopped $1.5 billion in fraudulent transaction in 2020, 2.4% of all App Store transactions.\nTo be clear, the Washington Post article is claiming that Apple is not really curating App Store based on their one-day survey. The total net sales to Apple for these apps was $8.3 million before Apple axed them. Apple is a company that will have around $350 billion in net sales in fiscal 2021, and had something like $16 billion from App Store in calendar 2020. They are not sandbagging their hard-earned reputation over $8.3 million.\nThis is sometimes called the “Five Nines Problem.” Five nines is 99.999%, and is sort of the standard for “almost perfect” in a lot of tech. But tech companies like Apple, Google, Facebook, etc. operate at massive scale and they need more nines. App Store has 1.8 million apps, and five nines means 180 malicious apps get through, and maybe 10% of those wind up in the top 1000 grossers. The good news is that Apple does not need the Washington Post to tell them they need to get better at this, but it is not easy.\nThis is a more nebulous threat than the others, but the last time I felt like this was when the narrative on Microsoft turned sharply after Windows 95. That ended up in a long battle with the Department of Justice that sucked corporate focus for years.\nApple Stock Price Model: Four Scenarios\nMany of the assumptions for these models are all based off of my deep dives on Apple quarters after they report. The last of them on 2021 Q2is here.\nSo let’s take all that qualitative data, and try and stuff it through a revenue and DCF model. I recommend you be very skeptical of all models of the future, and think a lot about the underlying assumptions. Models are generally an expression of the author’s biases with math laid over it. You have the 6,000 words above if you would like to know mine.\nThe recent Tesla model from ARK Investment should stand as a cautionary tale for everyone. Anyway, I have posted Excel worksheets to GitHub with the model, and all the major assumptions are modifiable. Each scenario is a separate worksheet.\nLet’s first look at some assumptions common to all four:\n\niPhone continues to exhibit a 3-year cyclical pattern. Fiscal 2021 is the high year, so 2024 is the next one.\nServices growth comes off to some extent in all scenarios from reduced App Store growth from legal or regulatory action in the US and Europe.\nWearables, etc. remains on its strong growth path on Apple Watch, AirPods, and at least one new product category, a VR headset.\nMac and iPad return roughly to their pre-pandemic patterns. Like all PC makes, Apple saw a big surge from work-from-home.\nFiscal 2021 is half-reported, so all scenarios assume that it will complete along Apple’s average seasonal pattern from 2016-2019.\nOther assumptions are in the Excel sheets.\n\nScenarios:\n\nLarge, the most optimistic.\nMedium, my base case.\nSmall is what Apple looks like if they come off the growth rates of the last 4-6 years.\nTiny is the same as Small through 2023, and then we’re going to throw some real problems at Apple.\n\nIn Medium:\n\nWe’ll model the iPhone cycle with the average growth rates of the 2015 and 2018 cycles.\nServices growth comes off of 2016-2020 trajectory because of legal or regulatory action on App Store by 2 pp.\nThe rest, as above.\n\nLarge and Small will, respectively, add and subtract from these growth rates in Medium. In addition, Large assumes:\n\nBoost in fiscal 2022-2025 for iPhone on 5G adoption.\nApple Silicon Macs gain Apple some PC market share.\nThe AR glasses come out in the middle of fiscal 2025. To be clear, I view that as an unlikely timeline, but it does not have a large effect on the model since it comes 6 months from the end of our interval.\n\nTiny is a special event-based scenario where we will throw the two worst plausible scenarios we can at Apple. It starts with a huge reduction in App Store revenues due to antitrust action in the US and Europe at the end of fiscal 2023, and getting kicked out of China at the end of fiscal 2024. The former will be modeled as a sharp downturn in Services revenue in fiscal 2024. The China expulsion will lead to a 15% drop in top line revenue, and a decrease in products gross margin by 5 pp in 2025. I don’t view either of these as particularly likely, but this is the worst it can get.\nIs Apple Stock A Buy Now?\nJust to double up on the warning: you should treat all models of the future with skepticism, including this one.\nThis table summarizes the results. Please hit up those Excel sheets if you’d like to frisk the math, or play around with your own assumptions.\n\nAs you can see, even Small doesn’t do so badly by 2025, and Tiny ends up almost in the green, since the bad events come towards the end. If they were to come earlier, those growth rates would be lower in Tiny.\nBut the year-by-year results get to something I’ve been trying to tell Apple shareholders for almost a year now:\n\nThat chart will explain to you why I started breaking my Apple recommendations down between long and short term. Since the price hit $130 last summer, it was pretty clear to me that except in a best-case scenario, the gains of fiscal 2021 and 2022 were already baked in.\n\nEven Large only shows a marginal gain by the end of the fiscal year 2021, and Medium and Small are flat or down through the end of 2022. I’ve used the phrase, “if your time horizon with Apple is short, now is a good time to take profits,” very frequently in the past 8 months. I still mean it.\nApple Stock Forecast For 2025\nLet’s zoom into each a bit, starting with the base case, Medium.\n\nI've included actual price growth for fiscal 2020 so you can see how we got here. In this view we can think of slow fair value growth from today to the end of fiscal 2022 as averaging out fiscal 2020. If we look at 2019-2022, that’s a 27% CAGR, much more in line with the growth rates in the out years of the model. The model is simply predicting that 2021 and 2022 are baked into today’s price.\nBut then you see that the model really picks up steam on the out-years, as Apple’s free cash flow, growing at a 15% 5-year CAGR in Medium, catches up with the price. All together, that’s a 13.8% CAGR over the four and a third years of the model, with a terminal value of $222.\nOf course Large is larger, with an enhanced iPhone cycle from 5G adoption and a little extra boost from the AR glasses at the end of fiscal 2025.\n\nTo be clear, I view this scenario as plausible, but not that likely, somewhere around the 25th percentile. In this scenario, 2022 does not show the flat or negative growth rates in 2022 like the others, and this is due to the 5G adoption part of our assumptions. That’s a 20.2% CAGR, and a terminal value of $283.\n\nThis model starts off very slowly, with only an 11% 2019-2022 CAGR compared to 27% for Medium, and down in 2022. But even the Small scenario picks up steam beginning in 2023. That’s an 18% CAGR from 2023-2025. But over the life of the model it is less than half that, 7.9%, a $184 terminal value.\n\nTiny is the same as Small until the events kick in beginning fiscal 2024. 2024 price growth comes way off Small, and takes a dive in 2025. Keep in mind, we are talking about the fair value a year after the event, so the price would likely go down much further first. Anyway, this one winds up roughly at the June 11 close over four years later.\nSo there it is: the thing I’ve been telling you for a while now, except with some modeling and pretty charts:\n\nExcept in our best case, Apple is likely to trade sideways for a while as cash flows catch up with the share price.\nBut absent some very bad events out of Apple’s control, the long term view is still very, very bright, even if they slow down.\n\nSeven thousand words summed up in two bullets.","news_type":1},"isVote":1,"tweetType":1,"viewCount":17,"commentLimit":10,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"symbols":[],"verified":2,"subType":0,"readableState":1,"langContent":"EN","currentLanguage":"EN","warmUpFlag":false,"orderFlag":false,"shareable":true,"causeOfNotShareable":"","featuresForAnalytics":[],"commentAndTweetFlag":false,"andRepostAutoSelectedFlag":false,"upFlag":false,"length":5,"xxTargetLangEnum":"ORIG"},"commentList":[],"isCommentEnd":true,"isTiger":false,"isWeiXinMini":false,"url":"/m/post/161991500"}