As a subscriber to the Seeking Alpha feed for all things Apple (NASDAQ:AAPL), I'm intimately familiar with the polarization of sentiment about the stock's future prospects. Title after title proclaims AAPL to either be a dead man walking or to be headed to its next breakthrough. Often, these articles will narrowly focus on a particular aspect of the company and bombard the reader with a slew of charts that "prove" the case, all while ignoring or glossing over the larger picture. You've been there with me. 64-bit. China. Larger screens. TVs. Watches.
While detailed examination can at times be useful, it's important to take a step backward to see how key data fits in with the larger picture. In my view, you have to first start with the value creation. What creates value in the markets in which Apple competes, and how should Apple go about creating that value?
When I consider how to value a company, I take a simplistic approach. I consider the marginal value for each user, the total user base, and how those are likely to change over time, discounting back to the present. This simplistic approach has served me fairly well, inspiring me to take a long position in AAPL in 2005 at the heady price of ~$70, pre-split. I maintain a majority of that position today because I believe that the basic value creation at AAPL remains the same.
Steve Jobs hinted at this value proposition when he announced the original iPhone. Do you remember how he announced it? "So three things: a widescreen iPod with touch controls, a revolutionary mobile phone, and a breakthrough internet communication device." It was the integration of these functions that made the iPhone a revolutionary product.
Integration offers value primarily in two ways. First, it reflects the movement of value from some other place. For example, the camera function in a modern phone obviated the benefit of carrying a separate camera for many people once the integrated cameras took photos of sufficient quality.
However, it is the second means of value creation-- the network effect-- that is the real value of integration. It's one thing to be able to avoid lugging a separate camera. It's quite another to be able to effortlessly share pictures with friends, post to a personal blog, or archive to a home computer because of the integration of camera with internet connectivity and enabling software.
Additional integration will grow the value geometrically if two conditions are met: the additional function must itself be valuable, and it cannot compromise the existing value package.
As valuation is always relative, we must also ask "relative to what?" A higher resolution display is very valuable if the comparison is to a VGA display. Additional resolution beyond a Retina display is far less marginal value creation. If it reduces battery life, it may actually be a net loss of value to have a higher resolution screen.
This is why simply focusing on specs like screen PPI and battery watt-hours can often cause loss of perspective. Not only can higher pixel density fail to provide value, it may actually destroy other forms of value.
Given the current state of the smartphone, major increases in value will not come from the phone itself. Larger screens, faster wireless, and longer battery life are margin improvements that the market expects. If a new iPhone comes to market with only those enhancements, it would likely be considered a failure.
Increasingly, the value of the smartphone seems to stem from how well it integrates with other devices and our overall lifestyles. The ability to use an iOS device as a very effective remote control for an Apple TV device shows this kind of value.
I expect that future value creation for mobile devices will fall into one of a couple of different categories.
Firstly and most significantly is e-commerce and mobile payments. AAPL's move here into iBeacons indicates its awareness of this crucial growth area. Whether Bluetooth LE or NFC ends up being the preferred protocol, people will expect to have smart shopping carts where they can pay with their phone and never need to wait in line. Geofenced coupons and context-aware marketing is a huge growth opportunity. Many of us would agree the future will take us in this direction-- but who will lead the way, and how will they do it? If the answer to these questions are "Apple" and "BTLE," then perhaps another hundred billion dollars of value will accrue to AAPL's enterprise.
Another growth area is vehicle integration. Several auto manufacturers are starting to embrace this and offer Siri extensions and such. Vehicle-unique ecosystems are doomed to fail because they work against the integration many consumers have already achieved in their electronic lifestyles. An effective vehicle infotainment system needs to run the apps people are familiar with and integrate with the other devices that run those same apps. Less visibly, the vehicles engine and systems computers need to be accessible and integrated to the user's digital world.
I don't think a consumer will long accept the need to go to a dealer to have a "check engine" light diagnosed. Why can't they get a plain-English explanation of the problem on their infotainment system-- and have that message replicated on all their integrated devices? Why isn't there an "app" on the phone that the car pushes data to, indicating the last oil change, the current tire pressure, or interior temperature? The technology already exists at low cost.
Finally, home integration and automation is another major growth opportunity. Products like the Nest thermostat will become the new norm as the "internet of things" brings our possessions into our digital world. Already, many security systems offer mobile support and access. Soon, we will demand that we be able to double-check if the front door is locked by looking at our mobile devices.
AAPL needs to demonstrate that it is taking concrete steps to successfully integrate value-adding features into its mobile devices. With $150+ billion in cash available, AAPL should perhaps even consider a huge loss leader like giving away tens of millions of iBeacons for free just to expand the scope of the iOS ecosystem. Perhaps it could launch a partnership with a company like Sierra Wireless (NASDAQ: SWIR) to provide major integration between Sierra's M2M technology and the iOS ecosystem.
If Apple is content to make faster, better mobile devices and computers, then it likely will never see a major increase in market value. But if Apple can show the market that it has successfully integrated its ecosystem's reach into more aspects of the consumer's life, then a significant gain in enterprise value may be realized.
Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I have no position in SWIR nor plans to initiate one within 72 hours.