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After my blog a couple of months ago about trading Microsoft, I couldn't help but wonder the same about Apple Inc. Once again, the same disclaimer applies: please do not consider this investment advice, just one commentary that may or may not be useful in your overall decision-making process. Shares of Apple (AAPL) have taken quite a tumble since its historic peak of around $700 in September of this year. It now trades at almost 30% from its peak, drifting in the low $500 range. While I can't fathom all the reasons for its decline, here are some that come to mind:

  • Fear of over-valuation after taking the crown as the largest company in the world by market capitalization
  • Loss of mobile device market share to lower-priced competitors, especially Samsung
  • The perception that their most substantial and lucrative product lines (iPhone and iPad) have "played out", and Steve Jobs' demise means no innovation to grow new revenue streams
  • Profit-taking ahead of probable capital gains tax increases starting 2013
  • Profit-taking ahead of going over the "U.S. fiscal cliff"
  • The apocalyptic end of the Mayan calendar

These are all (well, almost all) good reasons for the stock to take a breather and pullback, but maybe that has created a buying opportunity. It now sports a P/E ratio in the 11.x range, which is cheaper than Google (20.x), and Microsoft (14.x), and even IBM (13.x) for that matter. It sits on well over $120 billion in assets (more than $25 billion of which is pure cash) with little to no long-term debt, enough to flat-out buy Amazon in its entirety. Shareholders also enjoy a 2% dividend yield. Now, all these numbers don't mean much if you think the company will languish away as competitors catch up and eat their top line. There will of course be new version releases of their existing products, but what will be the next home run that drives growth and keeps the bears at bay?

All eyes of course are looking at the much-rumored and much-speculated-on "iTV"*. In Steve Jobs' most recent biography he is famously quoted as saying:

 

‘I’d like to create an integrated television set that is completely easy to use,’ he told me. ‘It would be seamlessly synced with all of your devices and with iCloud.’ No longer would users have to fiddle with complex remotes for DVD players and cable channels. ‘It will have the simplest user interface you could imagine. I finally cracked it.’

 

Earlier this year, Foxconn (Apple's Chinese offshore manufacturing partner) seems to have reaffirmed that this is true. Our best guess on launch date is late 2013. As to what it actually is, very few have definitive knowledge. However, knowing Apple, it is reasonable to assume we are looking at:

  • A jaw-dropping display - Look at what they did with Retina.
  • Phenomenal UI - They are good at creating wicked simple, yet effective UI with mass appeal. I bet users will be able to control their TV with an iPad or iPhone. I wouldn't be surprised if the TV had a camera to let you control it with hand motions. Maybe for an added bonus, your dedicated iTV remote or any "iDevice" with an accelerometer/gyroscope can be used for games.
  • Integration with existing Apple TV channels and then some
  • Integration with iCloud
  • Integration with iTunes
  • Ability to resume a show on an alternate Apple device
  • Award-winning industrial design
  • Priced at a premium - I am guessing $1500 - $3000 range, depending on size.

Let's assume the iTV is real. The skeptic in me still has some qualms with whether it will succeed at a level as to drive Apple's stock price. Consider:

  • Flat screen TV sales dropped this year - I believe this is the first time in history, but considering that the market is saturated, the economy is struggling, and the migration to digital broadcast is long complete, it's no surprise the day finally came. However, demand to upgrade to larger flat screens is still fairly strong.
  • Apple seems to have struggled with signing on compelling content providers - This could be the one showstopper. They pulled it off with music in iTunes, but the recording industry had already been shaken to the core with rampant piracy, and was probably hungry for new revenue streams. The best TV content is owned by a powerful few, and they are quite happy with where they are right now. Maybe if Apple gets creative and integrates with cable set top boxes for the content but bypasses their horrid user interfaces, they can figure out a stop-gap solution (Lol - I can't help but be reminded of Samsung's commercial, "but they make the best adapters!").
  • No 4K content - To trulyappreciate Retina-level resolution, you need matching hi-res content. The best that movies and shows are recorded in right now is 1080p.
  • Price tag - Sure, consumers will pay a premium for phones and pads, but that is a lower price point. Will they fork over thousand(s) when a large flat-screen is just $500 these days?

The believer in me acknowledges all these points, but thinks they are challenges to overcome rather than deal-killers. I do know the way we consume television is ripe for disruption, since:

  • Nobody wants to pay for hundreds or thousands of channels when they only watch a handful.
  • Nobody wants to navigate through that many channels or have to remember channel numbers.
  • Media consumption is increasingly trending towards on-demand and away from linear.
  • The experience itself is a heterogeneous cluster of TV, cable box, media servers, DVR, consoles, disc players, wires, and remotes each with their own (usually) clunky UI.

Apple admittedly is in a sound position to capitalize on this opportunity when I consider:

  • Apple's huge war chest - You need a lot of money and a high risk tolerance to take on this space.
  • UI (user interface), UX (user experience) and design prowess - If the fundamental problem is electronics UI and UX, who better to tackle it?
  • Experience with on-demand media - iTunes lets you pick and choose and pay only for what you want.
  • Firm foothold in consumers' lives with iPhone and iPad - The "war for your living room" is nothing new. Microsoft has a toe-hold with Xbox. Sony arguably has the same with PS3. TV makers are trying to expand their stake with more built-in features but adoption is tepid at best. Nobody convincingly won yet. Consider iPhone and iPad adoption/loyalty, plus the fact that people are increasingly on their devices while they watch TV... hmm...

The company seems to be in a very good position to consolidate, integrate, and ultimately refine our living room experience. Furthermore, we are at a point in time when an entire generation has grown up knowing Apple products and the brand being synonymous with consumer electronics. Couple that with the company's solid fundamentals to begin with and AAPL suddenly sounds very intriguing. So while the ticker may continue to grind down in the short term, it is difficult not to place a bet and buy on the dip.

* I don't think anyone knows what the official name of the product will be, but let's call it "iTV" for the purposes of this blog, not to be confused with the current "Apple TV" set top offering.

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Tags: Apple, TV, iTV, investing, television

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Comment by Julian Yap on January 18, 2013 at 4:02pm

Meanwhile Amazon trades at P/E 3,637.00.

Apple just has Wall St manufactured volatility.  Wait a few days for earnings to come out.

Comment by Patrick Ahler on December 28, 2012 at 3:41pm

Great post! I buy into the full iTV concept (already own, love, and hacked my apple TV), but then I think it comes down to individual shows. The end question is "will I be able to watch Game of Thrones", in all seriousness it will come down to the shows for the average household. Look at all the issues TimeWarner has with NFL, these aren't easy fights. Monetization, does it come from commercials... can the on-demand model hold up? Fun challenges I think only Google and Apple are technically equipped to handle at this point. 

Comment by Daniel Leuck on December 28, 2012 at 10:26am

I agree. The new iTV could be a game changer and Apple's revenue in areas such as magazine subscriptions is skyrocketing. I believe they are currently undervalued.

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