Peter Misek has over 15 years of VC experience and over 20 years of experience on Wall Street, Bay Street and in the City of London. He has been an active advisor to DN Capital since its inception. He now one of the firm's venture partners and focuses on the enterprise software sector in North America. Previously, Peter co-led the global tech team at Jeffries and has frequently been ranked Canada's top rated Morningstar tech analyst. Peter has advised Canadian business leaders and government at the highest levels.
April is an important month for Apple Inc. That's when the company launches its newest gadget the Apple Watch while at the same time reporting earnings for the first quarter. Meanwhile, buzz for its next potential invention, Apple TV has been building. Media reports indicate that Apple is set to finally launch a new TV offering roughly two years later than I initially expected.
What does this mean for investors?
The reality is that iPhone sales account for over two-thirds of Apple's profit. The record iPhone sales last quarter and, with them, record profits were driven by the wildly successful launch of the iPhone 6 and iPhone 6 Plus. While new subscribers probably have increased total iPhone subscribers to almost 500 million, the upgrade cycle is really something that has provided a tremendous boost and remains misunderstood by investors due to a lack of information. What is critical to Apple is the number of subscribers coming up for upgrade each quarter. These are users who typically get a new phone every two years as their carriers, think Rogers or Bell in Canada, subsidize the cost of the new device.
Based on my analysis, roughly 200 million subscribers will be coming up for upgrade this year. The peak quarter for this will happen in the September to November time frame. This upgrade trend, aided by defections from Android and other smart phones, likely means Apple has at least another great year ahead of it.
So what about other products? The iPad is being cannibalized by larger screened iPhones and impacted by a much longer replacement cycle, so don't expect huge growth there. Longer term, foldable screens are very likely to cause the products to merge.
What about Apple Watch? The Apple Watch will probably do well but in its first iteration, the Watch is likely to have some issues in terms of utility. For example, you need an iPhone to use it. But we expect a standalone cellular capable watch within three years. Longer term, its ability to assist in gesture recognition is also likely to play an important role in the success of Apple's new TV set top box product as gesture and voice are likely to feature prominently.
The rival Kinect from Microsoft, while interesting, has its precision issues which, when combined with a watch, could be overcome. Expectations for Apple Watch appear to be high but even a blowout success won't move the needle from an overall profit perspective. But a combination of the watch, TV, Apple Pay and new content subscription services are likely to have a positive impact in several ways. First, it will increase loyalty causing people to remain on iOS and even replace devices not currently using iOS with Apple products. Second, recurring profitability is likely to be enhanced as users drive increased usage, making each iOS subscriber more monetized and more valuable. For example, people will buy more apps, music, movies and TV shows. Third, unit sales of iPhones, iPads, TV set top boxes and watches are likely to increase over time as the utility of each device increases thanks to these new services.
Ultimately though the success of Apple will also be determined by size. At over $700-billion in market capitalization, Apple now has over $100 of market cap for every man woman and child on Earth. So its own success is likely to weigh on stock performance and ultimately that may be a key limiting factor for investors to think about. The days of soundly beating the market are likely over. But solid performance at least for the next year seems likely.