IPhone Takes Backseat at Apple's Developer Event

Apple’s AAPL annual Worldwide Developers Conference introduced its typical slew of operating system updates across a bevy of devices. Our overall takeaway is that Apple used the event to refine the user experience for its existing devices, versus a single massive innovation or new product. Perhaps the most interesting feature was the iPadOS to better support the tablet experience, but on the whole most of the announcements seemed incremental in nature. Although none of the new features or products move the needle on our valuation assumptions for Apple, we do believe they collectively underscore the company’s services-driven growth engine and bolster the switching costs that support our narrow economic moat rating.

Although the iPhone wasn’t the focal point of the event, each product or service updated or referenced supports Apple’s crown jewel by keeping iOS users engaged with the ecosystem, which we think makes it less likely that a user will depart Apple’s walled garden. We are maintaining our $200 fair value estimate, and while the shares appear undervalued at current levels, we would wait for a wider margin of safety before investing, given the U.S.-China tensions weighing on the market.

We don't believe the Apple TV features or preview of For All Mankind, an alternative-history show with the Soviets reaching the moon before the United States, moves the needle in Apple's bid against stalwarts such as Netflix NFLX, as many features (multi-user experience and personalized recommendations) aren't novel, and the initial Apple TV+ offerings are likely to get lost in the sea of content from Netflix, Disney+ DIS, Hulu, and others. However, one interesting tidbit was the compatibility of an Xbox One S or PlayStation 4 controller with Apple TV for gaming, which could unlock the gaming potential for casual users with an Apple TV.

We found the increasing independence for the Apple Watch a welcome feature for enhancing the user experience. Specifically, independent apps and streaming music without an iPhone (as well as an app store for the watch itself) could allow a further uptick for the Apple Watch, though we note the wearables segment continues to perform remarkably well in the midst of recent iPhone softness.

Addressing the privacy concerns that are currently shaking the technology industry (with increased scrutiny of companies such as Google and Facebook by the Department of Justice and Federal Trade Commission), Apple introduced a “Sign in With Apple” feature to log in to new websites. This is juxtaposed with similar sign-in alternatives with Google or Facebook logins. With Apple’s solution, Face ID validates the user’s identity while the system hides the user’s email address and prevents data from being shared with the app. Meanwhile, the company’s new iOS 13 will feature more tools to prevent apps from tracking location data. When comparing Apple’s hardware and services offerings with those of peers, we believe the focus on privacy may offer Apple an edge, particularly for those users deciding between iOS-based and Android-based devices.

Apple announced a new iPadOS to differentiate the iPad experience from that of an iPhone (instead of replicating the user experience in a larger form). Specifically, the operating system offers more multitasking, multiple windows of the same app, the ability to use USB flash drives to upload files, and other ways to mimic a laptop experience. The iPad can also be used as a second screen for a MacBook.

One of the most important announcements, in our view, was Project Catalyst, which helps developers port existing iPad apps onto the Mac, facilitated by the latest macOS, Catalina. We believe these moves in aggregate will usher Apple toward having its MacBook offerings running on its ARM-based A-series processors in lieu of Intel processors. However, we don’t believe this will meaningfully come to fruition for at least another three or four years, if not longer, given Apple’s 100 million Mac and MacBook installed base and the incumbent applications written for Intel’s x86 architecture.

Apple will also be replacing iTunes with discrete Apple Music, Apple Podcasts, and Apple TV apps across all devices, which we believe better aligns with its broader services and content strategies. While iTunes remains a well-known product that was revolutionary for the music industry (along with the iPod), we view this move favorably as Apple focuses on modern apps to compete with Spotify SPOT, Netflix, and other pure-play offerings.

The primary new product was the new Mac Pro for graphics-intensive applications starting at $5,999. The company also announced a Mac Pro 32-inch 6K LCD monitor for $4,999. While impressive from a performance and display perspective, these products are tailored to a smaller subset of power users.