By Tiernan Ray
Oppenheimer & Co.’s Andrew Uerkwitz today reiterates a “Perform” rating on shares of Apple (AAPL), writing that the company “lacks the courage to lead the next generation of innovation (AI, cloud-based services, messaging),” and as a result, “Over the next decade we believe the stock will generally underperform the market.”
“We believe Apple is about to embark on a decade-long malaise,” concludes Uerkwitz.
We believe Apple is about to embark on a decade-long malaise. The risks to the company have never been greater. However, we believe its strong profitability, a cash hoard for protection, and one last “growth” hurrah from the tenth anniversary phone will keep investors interested in the company. Our Perform rating is unchanged for now.
(Contrast this report with the bullish note today from Canaccord Genuity’s Mike Walkley.)
Apple shares are up $1.66, or 1.5%, at $111.72.
By June 29th of next year, writes Uerkwitz, the iPhone will be ten years old, Apple will have sold 1.2 billion units, and sales will probably “peak” at 245 million, he thinks, which he refers to as the first “crack” in its empire. Prices may even peak, with the next model, he thinks, as “fewer hardware breakthroughs are available today that can trigger favorable mix shift.”
Nor is he impressed with Apple’s software and its services offerings. Even though they are “the most effective defense from competition,” he thinks there’s “plenty of competitors that can seriously harm Apple’s ecosystem with software and services.”
“We believe the cracks are showing in the Apple wall of invulnerability,” he writes.
Despite Apple’s great effort at plugging holes with thumbs (inducing favorable mix shift and higher ASP), we see iPhone unit growth dropping to low single-digits in the next four years (FY16- FY20) at a CAGR of 2%. We believe that fewer new user additions and a more diversified installed base will significantly impact the sustainability and consistency of iPhone shipment growth in the next five years. We present our estimated installed base growth trajectory from 2016 to 2020 as follows.
That model shows the installed base rising from 677 million as of the fiscal year that ended in September, to 943 million by the end of 2020.
To Uerkwitz, the 8% decline in shipments this past fiscal year, despite a rise in installed base, was “the dual impact of lower new user additions and an elongated replacement cycle─the two headwinds often go together as the result of a weaker product cycle.”
As subsidies dry up, and as features become not as impressive at the high end of the smartphone market, growth is slowing overall for the most expensive devices, including the iPhone, and “the high-end smartphone segment is slowing down faster than other segments, due to the closing performance gap between lower end phones and higher end phones.”
And India, he believes, can’t pick up the slack, as “emerging regions such as India and Southeast Asia still have the market potential given their low 4G penetration and large population, but iPhones’ premium pricing may prohibit much near-term revenue upside from those emerging areas.”
And new categories seem to have dried up for Apple, he believes: “We believe in the near term it is very difficult to find anything bigger than the iPhone or iPad. Moreover, it is increasingly difficult to build on the proven success of current devices by filling the gaps with different sized displays and add-on functionalities.”
In Steve Jobs’ words, a computer is “a bicycle for our minds”; desktop PCs, laptops, tablets, smartphones are simply different forms of that bicycle. We are confident in saying that the need for such a bicycle is here to stay, but the question is: what form will it take after the smartphone? It could be an earpiece, it could a pair of glasses, it could be a watch, and it could be some electronics to be embedded in our bodies. We believe the third option is the most likely in the near term, for its market potential, feasibility, and strategic fit with Apple’s identity. A head-mounted computing device can introduce a new paradigm for human computing interface, something Apple is the most adept at. Bottom Line We believe there are only a few product categories for Apple to enter in order to resume growth when the iPhone slows down. Head-mounted displays, or AR/VR headsets, have the most potential, but near-term technical hurdles are also substantial for these devices to become a mass-market success.
As for software, he argues apps may fade, as more and more popular services can be used in a number of ways, such as by messaging. “One will no longer just be able to order an Uber via a smartphone app, but be able to do it through messaging or voice activated speaker or any device that is connected to the cloud – and all without “downloading” a native app.”
And Apple is losing the battle for A.I., he believes, which is becoming “the new operating system, the new interface”:
Apple (Siri), Facebook (bots), Google (Google Assistant), Amazon (Alexa), and Microsoft (Cortana) have showed us a glimpse of the future. In this AI-dominated future, apps, apps- turned-platforms, and mobile operating systems may all disappear into the background, “hide” inside the microphone arrays, or show up as a contact on your messenger app. It could be everywhere─Siri is still working when users are silently swiping their phones, giving restaurant recommendations and triggering review apps when it notices users are planning a dinner date in chat. Facebook apps and the Google Assistant app could do the same, on both iOS and Android platforms, removing the operating system’s role as the glue of all apps, services, and people on one’s social network. Apple originally had a two- to three-year head start on AI with the acquisition of Siri. But Siri’s development since Apple took over in late 2011 is best characterized as sluggish. It took Apple almost five years to open up Siri to third-party developers (a critical move to make it more usable by more people). Amazon and Google released products recently that are highly competitive, if not superior to Siri, and with broader support to third-party services and devices. The same disappointment can be found in many other native apps: iOS-Music, Camera/Photos, and iMessage all had years of head start, but only received key improvements as a reaction to superior third-party apps and services. Apple never seems to maintain its dominating lead in hardware in its software and services. But software and services will play a heavier role in the future of mobile user experience […] With the trends above, Apple may lose its edge as a leading innovator for interface.
