Welcome to Trade Ideas, I am Brian Price here for you on Real Vision joined today by Dan
Ives, managing director of Wedbush Securities.
Dan, great to have you with us.
Great to be back.
So we're talking Apple today.
We got earnings two weeks ago, appeared to be a beat on the top and bottom line.
Now, we're looking at shares that have fallen like a stone.
What say you?
Look.
I mean, the big focus with Apple wasn't really the quarter.
Where you saw a little slight softness on iPhone units was really about the guidance.
And I think the big issue was them pulling the unit metrics.
I mean, look, transparency is key to stocks.
As transparency is more cloudier, which we've seen with Apple, now, the bears thing that
they're hiding just a massive decelerating iPhone unit story.
And if you look at data points that have come out even over the last week or two from Asia
and from some suppliers, it kind of confirms some of that thesis.
So right now, Apple is a guilty until proven innocent stock.
And it's definitely a knife fight that we're seeing, and bears are piling in.
We think it's overdone here.
But nonetheless, I would view it as the pivotal hand-holding period for Apple.
Is there a disconnect in terms of information from what we got from earnings to what was
related to suppliers and what we're seeing subsequently now?
Yeah.
I mean, ultimately, the way Apple works is they give guidance.
And ultimately, they relay that data usually to suppliers over next week or two.
So there's nothing new we've seen that technically should have changed guidance in terms of unit
growth.
But you've seen some of the suppliers, especially facial recognition, some of those units have
been cut 25%, 30%.
And obviously, the read-through there is that OK, iPhone units instead of being 220 million
for the year, they're going to be closer to 200 million.
I think that's sort of a little too negative.
I do believe some of that is also focused on iPads, as well as some other facial recognition
areas in a supply demand issue.
It's a dangerous art reading supply chain for Apple.
We've seen many investors that have had to redo their resumes because they read too far
into supply chain data points in their calls at Apple.
So nonetheless, we view it as, you got to take it all in perspective.
There is no doubt that Apple, the multiples come down now to a trough multiple called
12, 13 times.
But in our opinion, this is still a risk-reward that's just massively compelling, very similar
to six months ago when we talked in terms of where the stock is relative to the fundamental
growth, especially on the services side, going forward.
So do you look at this now as a value name or a growth name?
How do you approach it?
You've always viewed it on a value name.
I mean, look, the New York City cab driver could tell you when a stock gets to 12, 13
times P/E, that's where you buy it.
That's historically the last call at 5, 10 years.
When it gets to 16 times toward the top of that range, that's obviously where you're
going to view it as expensive.
We saw it kind of break through that area as the stock went to a trillion-dollar-plus.
Now, it's trading the trial for that range.
In our opinion right now, I mean, this is one even though it's going to be rocky, we
ultimately believe on the services side, which is going to be a $50 billion revenue stream
by 2020, for stock trading right now, at the trough, its range with massive free cash flow,
an iPhone cycle that I believe at this point is going to be moderately decent.
Not great, but ASPs are obviously the big growth driver.
Ultimately, it's call it what I view as a $30, $40 upside in the near term, $5 to $10
downside.
So before we get to levels, I just want to drill down a little bit, because you mentioned
services.
Are we talking about Apple in the near-term and long-term as a software company or a hardware
company?
Look, it's a hardware-led services company.
I mean, ultimately, iPhones will continue to be the vast majority of profits, revenue
for the foreseeable future.
But ultimately, the big thing-- and it's ultimately why Cook and company decide to pull the metrics
is that services now is that growth area.
Now, it's further monetized, and that 1.3 billion iOS devices sold to date.
Right now, we think there's about 750 million active iPhones, including second-hand, in
the world.
The goal is they upgrade, whether it's an 8, 8 Plus, X, XR, XS.
And ultimately, it's that services piece to further monetize.
Right now, it's only about 20% of the base that's been monetized.
If that goes to 40%, we're talking basically a services business over the coming years.
It's all about units.
I mean, look, investors are trained to focus on units, data points.
That's how you trade Apple.
That's going to continue to be, I doubt, for the foreseeable future.
But ultimately as we go longer-term, I think that's where ultimately the multiple actually
expands, even though it's a painful transition period for the stock.
I want to drill down also on the stickiness of the devices.
Because it used to be you'd have one, you'd upgrade, and so on and so forth.
Do you think they are retaining loyal customers like they used to, or are people now being
tempted more so than ever to go over to the Androids and go over to these other competing
devices that maybe offer comparable services?
Look, it's a 92% retention rate.
So if you look at retention rate, that hasn't massively changed.
And you've seen in the numbers of look at Google's numbers, look at Samsung.
Obviously, look, smartphones are more mature.
But it fundamentally comes down to me and you, the average consumer, used to upgrade
every 24 months, 25 months.
You had the 2--year package through whatever your carrier was.
As those gone away, now, you look, the average upgrade's about 31 32 months, eventually going
to 34 to 35.
So you basically had a typical consumer every two years.
Now, it's every three.
And if that's been elongated, you're not necessarily seeing them go off of Apple.
It's more, when are they upgrading?
Is the hardware device so appealing for them to upgrade?
And look, that's spoken to some of the softness we've seen with Apple and iPhones.
Also, it's price points.
ASPs used to be 600.
Now, they're 800.
You will get some of the areas that they're really going after, China.
China's 25%, 30% of the growth.
Is a $1,000 iPhone something that's digestible for the average Chinese consumer?
No.
That's why the XR is at $750.
And ultimately, you're seeing an inflationary pressure slash profitability start to creep
into the smartphone industry in a mature cycle where units, it's no surprise that they've
gone from double digits to low single digits.
I want to take a quick look at the technicals.
I know you focus on the fundamentals.
But I think it's important for the folks at home to see Apple's chart with a 200-day moving
average.
The last 2 instances where shares dipped below that 200-day moving average, we saw a nice
bounce.
That's where we're at right now, trading at around 190.
Is that an additional point of encouragement, that we're right below the 200-day moving
average, and that we could see a jump?
Or is that something that you're maybe not weighing as much on right now?
Yeah.
Well, you know we look at it fundamentally.
There's no one that we hear from a ton of investors in the technical.
And it's one of those things where this is definitely a white knuckle period in terms
of how that stock trades, technically speaking, especially with so much negative sentiment.
Every day, you're getting another downgrade.
So it's one, it continues to push that stock lower.
And adds it goes through certain technical levels, I think that really is one where right
now, we're at a pivotal few weeks to how the stock trades, just given how negative sentiment
is out there.
At what level, though, would you be nervous?
Where would you stop be currently at where we're trading at right now?
Look, I look at it even over the last 6 months or a year.
I mean, there are times this thing broke technicals.
At one point, that stock was going to 155.
It felt like it was going much lower.
Everyone was negative on it.
But fundamentally, you viewed it as for someone that's covered Apple for a long time, you
look at it like, OK, what do the fundamentals look like?
Where does the stock trade?
Let's walk through the growth catalyst, look at sentiment.
It's a hand-holding period.
And that's why I think Apple is one where we continue to be permabullish on it, as we've
had for the last decade.
But I think there are certain times where sentiment is disconnected with core fundamentals,
and we're kind of getting into one of those areas.
So you mentioned briefly the upside.
Walk me through where we're at right now, your time frame, and ultimately, what you're
anticipating from where we're at currently.
Yeah.
Look, I think right now, you got to look at over the next quarter, because I think especially
the fact that they pulled unit metrics.
This December quarter, which will get reported late January, is probably one of the most
pivotal quarters that we've had in the last 40 quarters.
Because--
4-0.
4-0, because think about it.
Like, since iPhone comes out 2007, you've always had unit metrics.
What ASPs, unit, both not just on iPhones, but obviously, the other hardware pieces.
Now, you're not going to have that, so it's a mathematical gymnastics.
So that's why it's like, if December holds well, and ultimately, the bark was worse than
the bite, I think that's where we go to a stock that rerates back to those levels that
we've talked about, 210, 220.
But I think in the near-term, all eyes are negative sentiment going into December.
You're not really going to have any good data points per se between now and earnings.
So I think as an investor, you need to navigate through this negative news flow and ultimately
go back to 6 to 9 months ago where if you look at all those iPhone read-through on units,
and cuts, and production, they were actually dead wrong.
And that's why I think a lot of investors missed out when the stock got crushed, and
they didn't own it.
And obviously, the stock went from 160 to 220.
I know you're permabullish, but is there anything that could derail your thesis as of right
now?
What would be a major red flag for you?
A major red flag would be if unit growth significantly decelerated.
So look, a typical iPhone lasts 8 quarters, plus or minus 3% to 4%.
So we don't get too bugged out when it's within this band.
If it decelerates to a 10%, 15% unit growth, backing it in into ASPs, look, that's where
I think there's a dent in the thesis.
Because ultimately, services is driven by that sort of unit desell.
So that desell is more than expected, I think that's where it gets into a grayer area where
you get a little more nervous.
So Dan, break this all down for me.
Give me 30 seconds on the rundown.
Look, I would view it like right now, Apple is probably going through its biggest white
knuckle period that we've seen since 2015.
I think right now, even though sentiment is so negative, it's really starting to transition
to an ASP-driven services company.
And I think anyone that's bet against Cook and Apple over the last decade has proven
themselves wrong.
I view this as a little different, because the unit metrics, transparency, you've seen
it way in the multiple.
But I think we get through this rocky period and ultimately emerge a healthier comeback,
actually start to rerate higher over the coming years.
Dan, thank you so much, as always, for joining us.
Great to be here.
So Dan likes buying shares of Apple.
He suggests getting in at current levels and has a stop loss of 180 with a target price
of 220 over the next 3 months.
For Real Vision's Trade Ideas, that's Dan Ives with Wedbush Securities, and I am Brian Price.
Thanks so much for watching.