We believe virtual reality will be the next major entertainment platform, with Facebook uniquely positioned as we discussed in our 7/23 blog post (click here). While we expect consumers to be able to buy Oculus headsets by the end of 2015, we believe it will be far easier and cheaper for the masses to enjoy virtual reality experiences using their pre-existing smartphones. Consumers will simply need to purchase some form of head gear device that carries your phone. The screen quality on most high-end smartphones today is already good enough to create high-quality VR environments, especially on Android phones with larger screens.
Thankfully, a team at Google has made it so anyone with an Android phone (running Jellybean 4.1 and above) can experience virtual reality today, by creating Google Cardboard. Google Cardboard was announced during the 2014 Google IO event keynote on June 26, 2014. The following day, the team that created Cardboard gave an in-depth presentation (the more detailed Cardboard presentation is embedded to the right and is a very interesting watch to understand how and why Google Cardboard came to life).
Google Cardboard Developer website with FAQ: click here http://https://developers.google.com/cardboard/
The simplest and fastest way we found to buy Google Cardboard is via Unofficial Cardboard’s website, where you can buy a pre-assembled, fully-functional Cardboard kit with NFC for $21.95.
BTIG Research » Blog Archive » Buy Google Cardboard – Market.
Google seems keen to re-establish core Google services at the heart of Android going forward, both in emerging and mature markets. But another thing Google seems to be trying to do is give people a reason to choose Android itself across a range of devices, rather than a particular flavor of Android.
| Tech.pinions – Perspective, Insight, Analysis.
Sales from consumers shopping on mobile phones will increase to $38 billion this year and sales from tablets will hit $76 billion, or about $114 billion in total according to Forrester Research. That’s up significantly from last year smartphone commerce sales of $24 billion and tablet sales of $48 billion. More than 29% of all online retail sales in the US will be transacted on smartphones and tablets by the end of 2014. Media goods (e.g., video, music, books), clothing, and consumer electronics account for the majority of the approximately $86 billion in mobile phone and tablet eCommerce sales, and an additional $28 billion will be sold on these devices in other categories such as travel and food-services/restaurant ordering.
Online retail sales in the US are only $294 billion in 2014, or approximately 9% of all sales in the US. Strong compound annual growth rate (CAGR) of 9.5% between 2013 and 2018 for US eCommerce, yielding approximately $414 billion in online sales by 2018. By 2018, Forrester expects that online sales will account for 11% of total US retail sales.
Apple’s $3.2 billion acquisition of Beats is about buying cool? It can’t be paying for headphones or the some 111k users of the streaming service. How do those increase sales of iPhones, iPads or Macs? A bit of a stretch to claim a natural add-on for the wearable market/iWatch market. So it must be buying for cool.
The trouble with cool is it’s better worn by independent companies not branded by large behemoths like Apple. Certainly the shine is off the apple symbol of cool, but how can Apple translate Dr Dre’s cool factor back into the ecosystem is created. Simply – it cannot do it.
The fact is that Steve and Woz did not care about what others thought of them, they just built something they thought was cool. The Mac gained initial success being brought into corporations by the back door for desktop publishing. Mac was the under-dog to IBM and Microsoft. It was cool to be a non-conformist and advocate Macs in business and to be an early adopter.
Too some degree, Apple is suffering from its own success. What do do next when everyone owns an iPhone, lots of business folks and consumers have iPads and the Apple is no longer a sub-culture, rather its mainstream.
So instead of being radical in product or by design, its listened to the mainstream and reversed Job’s notion of the finger to “The Man” by returning $130 billion to “long term” shareholders with share repurchases and dividend increases and a $12 billion debt offering to support it. Like an aging rocker, it’s no longer cool to watch Mick Jagger on stage or Madonna performing with younger artists to “pass on” the baton.” Face it, Apple is mainstream, not a radical subculture with cool products. Beats for $3.2B dose not have a wow factor of either technology, IP, innovation or a brand that will translate into higher sales of 76% of its core business. In fact, what are the traditional synergies of the acquisition?
Was returning $130 billion to shareholders the best use of cash for an innovative technology company or to re-invigorate growth? Is $3.2 billion the best large acquisition to augment the $4 billion iTunes segment or help position iRadio? Most importantly, will Beats really augment the new wearable and iWatch strategy? Sorry Apple, you cannot buy cool and now are relegated to a value play for investors to clip coupons.
With $147 billion of cash on their balance sheet, why is Apple adding debt by going into the commercial paper market for the first time since 1997?
Apple will issue approximately $10 billion of CP ostensibly to manage the mismatch of cash overseas vs the US to manage the $90 billion share buyback (increased from $60 billion) and 8% dividend increase. Indeed US interest rates are attractive for taking on debt. Nevertheless Moody’s characterized the tactic as “very unusual” among U.S. nonfinancial issuers, “despite Apple’s uncommonly large cash holdings.” Last year, Apple placed $17 billion across six long-term debt issues, which at the time was the largest bond offering on record (subsequently supplanted by Verizon’s $49 billion last September), and which marked the first-ever material debt load on the company’s balance sheet.
Apple maintains significant excess of cash ($41.4 billion at the end of March) relative to the current $17 billion of debt. It also retains substantial offshore cash holdings ($111 Billion), and cannot repatriate under current tax policies. Apple’s $176 billion of revenue over the last year (through March 2014) translated to nearly $47 billion of cash flow, after accounting for capital expenditures.
Apple bought back $44 billion of its shares and paid out $11 billion in dividends over the 12 months through March, up from less than $2 billion and $7.5 billion, respectively, over the year-earlier period. Apple’s incremental debt will back a material increase in its shareholder-return target through 2015 to $130 billion, from $100 billion.
The question investors should be asking generally is if the US economy is on a sustainable recovery trajectory, why are US companies continuing to use cash for dividend hikes and share repurchase programs versus capex?
Given Apple’s core business iPhone and iPads (76.5% of business) are under competitive pressure, is financial engineering the best use of $130 billion of cash? Acquisitions seem to be a better place to gain access to new markets, add additional geographic presence or fight competition. Again this seems to be a move by a value oriented equity versus a growth technology company seeking to re-invest in innovation and competitive positioning.
Microsoft under Satya Nadella showed a new face by stating “As I have told our employees our industry does not respect tradition, it only respects innovation.” We used to call Microsoft “the Borg” for assimilating technologies, IBM was the dinosaur park and a few billion dollar acquisition was big (DEC’s $9.6B was the biggest tech deal ever). The lack of execution and multiple missed markets for over a decade forced MSFT from master of the universe with revenue and earnings growth, to an aging lady dividend yield play paying out its cash.
Indeed the old lady showed signs of life with Office 365 up 100%, commercial cloud 101% and Azure up 150% during Q3:14. And as Nadella also committed to “What you can expect of Microsoft is courage in the face of reality.” Microsoft was never a leading technology company, rather a follower who entered later, but leveraged its sales muscle though its ownership of the desktop. Under Balmer MSFT missed the mark on most new market opportunities.
During Q3:14 Microsoft core business showed some resurgence in customer acceptance of its product offering especially in the cloud:
• Commercial Other revenue grew 31%, to $1.90 billion, driven by Commercial Cloud revenue
• Commercial cloud rose 101% and Azure increased 150%
• SQL Server revenue grew more than 15%
• Combined revenue from Office 365 Home and Office Consumer, grew 28%.
• Office 365 revenue grew over 100%, and seats nearly doubled
• SQL Server revenue grew more than 15%
• Bing search revenue grew 38%
Unearned revenue was up 14% YoY and flat QoQ, above seasonality as annuity mix was higher with customers selecting subscriptions and multi-year agreements. Contracted not billed balance exceeded $22.0 billion, up over $1 billion from a year ago, and total bookings increased 6%. Cash grew 12% to $88.4 billion.
The recent quarterly results beat forecasts, and Nadella’s transition to re-focus the strategy on open platform cloud and mobile give glimmers of hope that the company will face the reality of its underdog position with more than 50% of its revenues still rooted in its older PC base. Indeed, there is a long trek before cloud and mobile will represent a significant part of the revenue and operating profit story. With $3.00 in earnings, $11 per share in cash and 2.81% yield, the stock is still an value play similar to Apple, but the downside risk is probably $39+/- and upside to $45.
Just looking at the chart for Apple’s hardware trends into this quarter, you would not guess the stock to be up +8%. I get the 7 to 1 stock split allows it to be included in indices and retail hands, $30 billion increase to the stock repurchase plan (3 quarters worth of net income) and 8% dividend increase. But with revenue growth of only 5% YoY and YoY iPod units down -51%, iPad off -16% you would think the bottom line would be affected. However, Apple beat consensus estimates. What is clear, 57% of revenues is dependent on iPhones with rev growth of 14% and 17% unit growth. Nevertheless, this 57% is under attack by multiple vendors, as is the tablet market which accounts for 16.7% of Apple’s revenues.
Before you think this is recommending a short, its not, rather its reinforcing the notion that Apple is a value play not a growth stock. I made money previously in 1986 watching the trend of Mac’s being covertly brought into corporate offices for DTP, the building of Mac culture, and 10 years later shorting the decline in Macs due to lack of software development for Macs, then buying again for the rebuilding of the Apple momentum in 2005 with rumors of entering the phone market. So whats left?
Yes Apple has other areas to branch out into and even the notion of software and services with iTunes (including the possibility of e-payments) as a backbone could be interesting. iTunes software and services is a $4 billion segment accounting for approximately 10% of Apple’s revenues which grew 11% in the quarter. But the trends are changing. While revenues per annual iTunes account is down, its still a solid business.
The point is that Apple is a value stock and should carry a commensurate valuation. Hence the stock is probably a safe haven with less downside ($520), but limited up side ($600) or 5%. Moreover with 823 analyst coverage, evolutionary product upgrade cycle and competitive pressure on 74% of its revenue base, positive alpha is less likely going forward versus simple beta exposure. There are better opportunities for growth play in the markets and within technology. Time to move on…
In this article I used the data from Jackdaw Research who did great work on the data. http://www.beyonddevic.es/2014/04/23/thoughts-on-apples-q2-fy-2014-earnings/