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State Of Apple (Post WWDC 2014)

|Includes:Apple Inc. (AAPL), NFLX

Since I already wrote several Instablogs on Apple, I will just present an outlook for the next 6-12 months in the following three areas:

  • Hardware
  • Services (or rather "Platform" / "Ecosystem")
  • (Potential) Acquisitions

1. Hardware

Following the various SDKs and initiatives I stick to my past predictions that Apple will announce (in addition to important updates like an iPhone 6 with bigger screens) two new products, the first being a completely revamped Apple TV and the second one the iWatch.

I see Amazon's new Fire TV device as a good indicator where the Apple TV box might be headed in the near future.

The Apple TV could serve as both a casual game console (eating even further into sales of other family-friendly consoles like Nintendo) and an updated media player. It could also serve as a hub for some basic home automation functions coming in iOS 8.

(Apple might also extend the Apple TV line. A basic updated device acting as a media player retaining the current sub-$100 price point and a more expensive version incorportating gaming and home automation functionality).

I already discussed the iWatch in earlier articles back in 2013, please read that article for more details. Please note that while iWatch is the product rumor most people talk about, "Wearables" is potentially a much broader product category (for example smart headphones, smart belts or smart necklaces**).

2. Services

While Apple has somewhat struggled in the past between tight control, security on one hand and openness/third-party access on the other, iOS8 opens a new chapter tilting the needle in favor of third parties.

We saw various new SDKs and offerings opened up for third-party developers (for example, Touch ID for user identification or iCloud Drive for file access and exchanges) at WWDC 2014.

At the same time, Apple is offering important new services, creating a seamless 24/7 experience and lock-in for its user base:

- CarPlay (already available on some cars and third-party audio kits)

- HomeKit (Home automation, possibly including the future iWatch)

- Health and HealthKit (Health/Fitness for the iWatch and third-party devices)

Add rumored mobile payments and local orientation/navigation services (iBeacon serving as "augmented reality" and local push messaging systems) to that and it is becoming clear very few companies will be able to match Apple's eco-system on a global basis.

Apple may be even moving into Search or at least act as a gatekeeper for Search, widening its options and lessening its dependence on Google (see the Spotlight demos where Google is bypassed completely in many occasions: www.apple.com/ios/ios8/spotlight/ ).

CNet summed up this lock-in coupled with more access in some areas very well:

With iOS 8, Apple opens its garden, but keeps thorns sharper than ever

(...)

The strategy on display is a two-fold assault. Apple wants to be as friendly and accommodating as it can be to its developer community of more than 9 million coders and established companies with which it has a symbiotic relationship. But the iPhone maker is also being overtly clear concerning the app areas in which it wants to squash competitors big and small -- namely messaging and personal media, which also includes cross-device sharing and storage for files.

( Source: www.cnet.com/news/apple-opens-garden-wit.../ )

3. Acquisitions

Moving beyond Beats, some analysts are thinking Apple will now make similar big moves in video and gaming. The two "big N" were mentioned as potential targets for AAPL (namely Netflix and Nintendo) long before the Beats acquisition by various pundits.

I don't think either is plausible: Nintendo for cultural reasons and its huge cash hoard (making it very difficult to be acquired) and Netflix for valuation and content/supply deal reasons. While AAPL could of course afford NFLX the price would be at least 10x (north of $30 billion) what it paid for Beats Music and Beats Electronics.

Video streaming and access rights are very balkanized and margins aren't that good, see here for NFLX profit margins:

ycharts.com/companies/NFLX/profit_margin

NFLX has a myriad of agreements in place with various hardware manufacturers and Apple would have to cut/end these deals over time.

I also don't think Apple wants to dabble with content creation (a new area where Netflix and its competitors are moving into, often accepting that segment - and live sports events- as a loss leader.)

I therefore think the Beats deal was an anomaly to the usual rule of Apple buying smaller tech companies (also, many people would have guessed Apple buying the leader in streaming music, e.g. Spotify or Pandora. Should history repeat itself Apple may well go for a smaller company in the video streaming business or one focused on discovery/content curation rather than the "big fish" Netflix).

Let's also point out that while Beats was the largest acquisition Apple ever made, Beats "only" has about 550 employees and is a private company, making the M&A and cultural integration into Apple easier.

Summary: I see very strong 6-12 months ahead for Apple if it introduces devices as discussed in 1. and can introduce the services as outlined in 2. without major hiccup (e.g. no major problems as with the introduction of MobileMe or the first Maps release in iOS 6).

My post-split price target for AAPL stock remains $100-125.

I reserve ultimate judgment about detailed price targets and timeframe until I see the pricing and functionality of the new Apple TV and the iWatch (there are wild rumors all over the place about iWatch pricing with some even thinking Apple will go into luxury watch territory for the high-end iWatch iterations*).

_______

* One very important stumbling block for wearables remains battery life. I think Apple could introduce a novel idea such as solar (but solar is still too weak, it may only help extend iWatch battery life) and wireless charging. Progress was made in this area in the past years, see e.g. here: techcrunch.com/2013/09/09/cota-by-ossia-.../ (I'm not implying this company will be chosen, this is just an example on the state of R&D in wireless charging for consumer electronics. Also see my previous entry on low-power screen company Luxvue acquired by Apple, this went largely unnoticed by media: seekingalpha.com/instablog/5760541-tales... ).

** Post the Beats acquisition, Apple could for example add fitness and 3D sensors to the large Beats headphones - in addition to other accessories like smart belts etc.; the iWatch worn as a wristwatch is just one possibility (and most rumors point to a smartwatch in two sizes, one for men and one for women. As with the iPod family, the wearables product category could be extended over time).

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AAPL over the next 72 hours.

Additional disclosure: I'm out of the stock for the moment and will reload in summer as I expect temporary weakness (due to fickle investors who anticipated too much at WWDC 2014 including new hardware).

Stocks: AAPL, NFLX