Apple (AAPL) has just announced its first set of new products and technology innovations of 2022. The March 8 event, called “Peek Performance,” may have gone unnoticed to some, as the market has been enthralled (and for very good reasons) with the developments coming out of Eastern Europe. But in my view, Apple’s recent announcements matter to the company’s investors.
Today, I review some of the key highlights of the event. One in particular – the third below – helps to support the investment case for the long term, in my view.
# 1. Focus on high-end consumer
Perhaps the announcement that caught most investors by surprise was the launch of the M1 Ultra chip, which will power the higher-end model of the Mac Studio computer. The new desktop’s performance is mindboggling: CPU and GPU speeds that are three to five times higher than Apple’s already powerful 27-inch iMac.
The Mac Studio caters to a target market of graphic designers and creative professionals. For that reason, Apple’s Mac Studio announcement should not have nearly the same impact to revenues that the new iPhone SE and iPad Air might. For instance, I estimated in fiscal 2020 that only about 20% of Mac shipments were desktops, with the top-of-the-line models probably representing only a fraction of this number.
But with the announcement of the Mac Studio, Apple signals that it sees an opportunity with the less price-sensitive consumer base. This could mean two things, in my view: (1) Apple might use revenue mix and pricing power as a strategy to protect its margins amid a tight supply chain environment, and (2) the highly anticipated launch of Apple’s mixed reality hardware could be targeted first to professional or commercial users, as some have speculated.
This last point is important because, unlike the Mac Studio, Apple’s entry into virtual / augmented reality and the metaverse is more likely to become a stock mover in the next several months.
# 2. Doubling down on underdog services
The first piece of news during Apple’s product launch event was the deal struck with the MLB to broadcast Friday Night Baseball – two exclusive games that will be available only on Apple TV +. The announcement was preceded by an unexpected four-minute-long presentation that boasted the appeal of Apple’s video streaming service, supported by the breadth of the platform’s content lineup and recent awards won.
It’s interesting to see Apple’s focus on this underdog service offering. According to JustWatch, Apple TV + has rarely controlled much more than 4% of the US streaming market in the past many quarters. Other sources corroborate the idea that Apple TV + is far from being a top 5 player in the space. But Tim Cook and company do not seem fazed at all.
This is probably the case because Apple understands the importance of its service portfolio as a key monetization tool. Investors should expect Apple to keep introducing new services, as it did with Fitness + a few months ago, and to try and develop them to their full potential – even if at the expense of rich content production investments, for example.
# 3. Ecosystem expansion
In my opinion, the most important takeaway from Tuesday’s event was Apple’s push to enhance its ecosystem and boost the revenue growth pipeline.
Think of the iPhone SE. Apple’s entry-level smartphone device is now equipped with 5G technology and the same powerful A15 Bionic chip that powers the Pro Max. Especially in emerging markets and even among the more price-sensitive consumers in developed ones, the announcement could encourage switchers to embrace the iOS platform.
Should this be the case, the immediate impact would be to iPhone sales, starting as soon as fiscal Q2 (the device will be available for sale about 14 days before the end of the quarter). Apple needs to pull a rabbit out of the hat to impress analysts and investors against unsurmountable smartphone sales comps in the Spring through Fall of 2022. See chart below.
But then, more importantly, Apple could monetize on the increased installed base by (1) cross-selling other devices, including the iPad and Watch, and (2) selling high-margin services – think App Store commissions and advertising revenues, for example . As a group, services carry margins of over 60% that are nearly twice as large as product margins and revenues that have been growing at a fast and consistent clip of 20% to 30% in the past few years.
Yes, slowly growing an ecosystem may not sound sexy to many investors. But I believe that this is at the core of the Apple investment thesis. Although AAPL has not corrected as much as the Nasdaq 100 (QQQ) index in 2022, and valuations remain a bit elevated relative to the peer group, I continue to think that owning the stock at current levels will lead to solid returns over the next many years.