Apple's True Opportunities In 2013

| About: Apple Inc. (AAPL)

I have been called an Apple (NASDAQ:AAPL) fanboy. I don't consider it a pejorative.

In June 2007, when Apple transformed the wireless telephony industry with the introduction of the iPhone, I thought I was fine with my Blackberry but got caught up in the excitement when I had to go to the Lenox Mall in Atlanta to relieve my then-pregnant wife who was waiting in line outside the Apple store. We bought two and have never seriously considered another device (although my 44-year old eyes would appreciate a larger screen).

In April 2010 (almost 3 years later), when Apple transformed the portable computer industry with the introduction of the iPad, I found myself at the Lenox Mall again. As it would turn out, I was "interviewed" by CNN Tech and was mentioned in their main article and, although misquoted, I ended up standing by my quote. I blogged about the experience here. All of my blogs related to the iPad - there are just a few - can be found here.

Now, here we are (almost 3 years later) and I believe on the verge seeing at least one more transforming product, if not two, before the end of the year...but more on that later.

Here are my reasons for liking Apple at $433.11 on March 14, 2013.

  • P/E of approximately 9.8. I know all of the arguments...Samsung is surging...Google OS is dominating...A significant amount of Apple's value is tied up in cash and what return can you get on cash these days...there have been no new products...All of these are valid points, but given the rate of growth that Apple has experienced and the opportunity that lies ahead for core products, a P/E of less than 10 seems ridiculous.
  • Dividend of 2.5%. Sure, it isn't much and could be more, but it is certainly better than the money market that I currently have.
  • There is still a HUGE opportunity for Apple in China and other markets with existing products.
  • If you believe, as most people speculated, that there were products in the pipeline when Steve Jobs died, the only "new product" that has come to the market is the iPad mini. That really wasn't a new product - and really something that Steve said wasn't needed. If there are other products, we should start to see them this year since Apple usually has about 3 years between major product released of the iPhone and iPad. (There were 6 years between the iPod and the iPhone but there were 3 years between the 1st generation and the 4th generation - the one that I bought - and 3 years between the 4th generation and the iPhone.)

Now for my speculation for 2013 and the transformative products that I expect.

Speculation #1: The iWatch will be introduced and will become a disruptive force in multiple industries. I think that the iWatch will have all of the "iWatch features" that everyone speculates (i.e., the Pebble Watch). And they may also include other useful features like charging using the movement of the body. However to be a true success, I think that the iWatch will need to go much further. An NFC-enabled (Near Field Communication) iWatch would allow it to become a disruptive force and/or opportunity for:

  • Payments. It is a bit more than odd that Apple has only dipped its toe in the electronic wallet with a somewhat passing Passbook app that is somewhat better for streamlining tickets and rewards cards rather than providing an alternative payment methodology. What if Apple recognized years ago, as the iWatch was conceived and mobile payments were first discussed, that people would not only want to keep their wallet in their pockets when making a payment - they want to keep their phone in their pocket as well? There has been a strong case made that the future of mobile payments is NFC rather than traditional debit/credit cards, SIM cards and bar codes. If the iWatch comes with an NFC, that would allow (once merchants upgrade their Point of Sale system to recognize it) Apple's iTunes customers (200 million+) to use payment forms associated with their account. Payments at the grocery store, fast food restaurant, office supply store, department store, mass merchant store and others can be easily made with a wave of the wrist rather than having to dig in your pocket or purse for a wallet or mobile device. Also, think about how easy it could be to collect face-to-face payments by initiating a transaction on the iWatch or another iPhone and sending the payment by touching your watch to that of the person to whom you wish to send the payment. Payments might also be sent using your iTunes account (that can carry a balance like any debit account) using any iOS device via text or email.
  • Tickets. Imagine using your Apple account (through iTunes) to purchase a ticket on Ticketmaster. You could then pay for it with any account (credit/debit) associated with your iTunes account and then associate your iWatch NFC chip with the eTicket, allowing you to simply swipe your watch at the stadium/airport/venue for access - no more fumbling for your paper ticket as you approach the front of the line.
  • Building security. Instead of having a card in your wallet or a fob on your key chain, an NFC-enabled iWatch, once registered and configured, would allow quick access to buildings, elevators and other secured venues. On the back end, the system could be administered the same way cards/fobs are monitored today.
  • Automobile access/start. By programming your car to recognize the NFC chip in your iWatch, you could easily unlock and start your car without having to carry the additional fob from the car manufacturer.
  • Event check-in and session tracking. As with the ticketing application, if you register for a conference or event that doesn't use tickets, you could use your Apple ID when registering online (similar to how you pay for items using PayPal today) and then you could similarly swipe your iWatch at the registration desk to sign in when you arrive. If the conference provides benefits for tracking session attendance, attendees could simply swipe their iWatch at the door of the session to register their presence.
  • Tradeshow booth tracking. For those that attend trade shows, by associating your Apple ID when registering online, you could easily request information and track the booths you visited at the show.

Speculation #2: The iTelevision will be a disruptive force in the gaming and cable industries

  • I do believe that an iTelevision could be successful in as of itself (although at lower margins that Apple might typically demand) by integrating the AppleTV OS and App Store into a sleekly designed case. I would envision this device to be a 45" to 55" (maybe 65" please) that would look very much like an oversized iMac (current model but please put the DVD back) with substantial RAM and SDD space - RAM for graphically intensive gaming (and other computing programs) and SDD for downloaded games, resident programs and time-shifted TV content (i.e., Tivo-ish features).
  • iOS devices have already become a disruptive force for the gaming industry. Imagine how much more disruption could occur if you give developers the ability to create games for a much larger screen that allows for even greater processing power and RAM.
  • Speaking of those iOS devices, I recently read that over 400 million have been sold. Granted many of those are people that bought each/most versions of a specific product (i.e., iPhone, an iPhone 3G, iPhone 3GS, iPhone 4, iPhone 4S and iPhone 5) but there are still a majority of these devices still in use whether by the original purchaser or by someone else as a used device and many of those could make excellent remote controls for gaming on the iTelevision. iCade Mobile and iControlPad could further the experience by allowing for the addition of buttons and joysticks to be used with iPhones and iPod Touches.
  • These iOS devices could also be used as like the "memory cards" of the PS2 (are these on the PS3?) that would allow a person to save their progress on their iPhone/iPad/iPad Mini/iPod Touch and resume the game on another iTelevision or Mac computer.

Preparation for a product such as the iTelevision is my speculation of one reason Apple has amassed such a huge cash reserve. While I am sure that Apple hoped they could have signed deals similar to ones with the record companies to partner for the provision of content for the iTelevision, the rumor mills seem to indicate that will not be the case. Thus, Apple will need to buy/pay for the use of the content. It is speculated that Apple will have $150+ Billion in cash by the end of the September quarter. Here are three ideas of how to put the cash to work to bolster the iTelevision product:

  • Use political connections to lobby heavier for repatriation holiday of international funds. Maybe even commit to domestic production of additional products for the ability to repatriate foreign cash with reduced or no tax consequence.
  • Buy Netflix (NASDAQ:NFLX) - Assumed cost around $13 Billion - a near 30% premium. They could have done this in late 2012 and paid a lot less, but that would have really tipped their hand. Integrating this service into iTunes and potentially making it available on iOS and Mac OS equipment. Owning Netflix, rather than forming a strategic relationship, would provide Apple with significantly greater customer usage information than they would have otherwise.
    All of this is looking ONLY at the access to content. The projected growth of Netflix would certainly provide a greater return than Apple is getting on their cash today - and should help them sell many more devices!
  • Buy Tivo (NASDAQ:TIVO) - Assumed cost around $3 billion - There is still interest in time-shifted viewing and the benefit of providing DVR capabilities as part of an iTelevision instead of allowing content providers to provide Apps (such as the ABC app for iPad) is that Apple maintains the data on what people are watching and when (like the Netflix example given above).
  • Here is the potentially crazy one... Buy Disney (NYSE:DIS) or pay tens of billions of dollars for exclusive rights to content on mobile devices and non-cable/antenna delivery methods to Smart TVs. Assumed cost around $120 Billion to purchase (near 20% premium) or $40-$50 Billion to form an exclusive rights relationship. If you assume the purchase route, Apple could reduce the cash requirement by spinning off the theme parks and/or issuing $40-$50 Billion in debt.
    Let's face it... one of the main reasons that a lot of people (including me) don't completely cut the cord from cable today and go to the use of OTA (over the air) programming and Netflix is the loss of sports content. Buying Disney would allow Apple to provide all of the ABC channels (including ABC, A&E Networks, ESPN and MUCH more), significant control over Walt Disney Studios content (including Walt Disney Pictures, Touchstone Pictures, LucasArts/Star Wars, Pixar and MUCH more) and significant control over Marvel Entertainment content (think Iron Man, Spider Man, The Avengers).
    Simply making certain content available on iOS or Mac OS devices earlier than other distribution methods (DVD, On Demand, etc.) could be a huge boost to hardware sales. Think about releasing The Avengers 2 or Cars 3 (for a nominal pay-per-view fee) on iTelevisions at the same time they are also released in theaters.
    The collective demand of this content from consumers would give Apple significant leverage when negotiating with Time Warner, Comcast and other content providers and distributors.
    I know there are lots of factors I am not considering for this, but it's fun to dream, right?

Given all of this what, you might ask, could change my "like" of Apple in 2013?

  • An iWatch that does not have an NFC chip in it. From attending a recent analyst meeting for one of the largest Point Of Sale (POS) retailers, it would appear that the industry (and specifically companies like MasterCard and Visa) are getting behind NFC as the standard rather than bar codes. Bar codes (used in the Passbook app today) are easy to use and can be easily rolled out at the POS if the POS system can scan a bar code. However, from what I understand, they are not as secure and not the future.
  • No iTelevision this year.
  • No bold plan announced before the end of 2013 to use the cash they have. Apple has been so successful over the past 6 years and has generated such an amazing return for its shareholders that I think they deserve patience in how they use the cash they have amassed. But there does need to be a plan and at some point, shareholders should expect to get a glimpse of this plan to generate some return on this portion of Apple's worth.

I guess I am an Apple fan boy...however, as I am sure you can tell, I still don't think that is a pejorative.

Disclosure: I am long AAPL, TIVO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.