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Weekly Issue: Key Developments at Apple (AAPL) and AT&T (T)

Weekly Issue: Key Developments at Apple (AAPL) and AT&T (T)

Key points inside this issue:

  •  Apple’s 2019 iPhone event – more meh than wow
  •  GameStop – It’s only going to get worse
  •  Elliot Management gets active in AT&T, but its prefers Verizon?
  •  California approves a bill that changes how contract workers are treated
  • Volkswagen set to disrupt the electric vehicle market

I’m going to deviate from the usual format we’ve been using here at Tematica Investing this week to focus on some of what’s happening with Select List residents Apple (AAPL) and AT&T (T) this week as well as one or two other things. The reason is the developments at both companies have a few layers to them, and I wanted to take the space to discuss them in greater detail. Don’t worry, we’ll be back to our standard format next week and I should be sharing some thoughts on Farfetch (FTCH), which sits at the crossroads of our Living the Life, Middle Class Squeeze and Digital Lifestyle investing themes, and another company I’ve been scrutinizing with our thematic lens. 

 

Apple’s 2019 iPhone event – more meh than wow

Yesterday, Apple (AAPL) held its now annual iPhone-centric event, at which it unveiled its newest smartphone model as well as other “new”, or more to the point, upgraded hardware. In that regard, Apple did not disappoint, but the bottom line is the company delivered on expectations serving up new models of the iPhone, Apple Watch and iPad, but with only incremental technical advancements. 

Was there anything that is likely to make the average users, not the early adopter, upgrade today because they simply have to “have it”? 

Not in my view. 

What Apple did do with these latest devices and price cuts on older models that it will keep in play was round out price points in its active device portfolio. To me, that says CEO Tim Cook and his team got the message following the introduction of the iPhone XS and iPhone XS Max last year, each of which sported price tags of over $1,000. This year, a consumer can scoop up an iPhone 8 for as low as $499 or pay more than $1,000 for the new iPhone 11 Pro that sports a new camera system and some other incremental whizbangs. The same goes with Apple Watch – while Apple debuted a new Series 5 model yesterday, it is keeping the Series 3 in the lineup and dropped its price point to $199. That has the potential to wreak havoc on fitness trackers and other smartwatch businesses at companies like Garmin (GRMN) and Fitbit (FIT). 

Before moving on, I will point out the expanded product price points could make judging Apple’s product mix revenue from quarter to quarter more of a challenge, especially since Apple is now sharing information on these devices in a more limited fashion. This could mean Apple has a greater chance of surprising on revenue, both to the upside as well as the downside. Despite Apple’s progress in growing its Services business, as well its other non-iPhone businesses, iPhone still accounted for 48% of June 2019 quarterly revenue. 

Those weren’t the only two companies to feel the pinch of the Apple event. Another was Netflix (NFLX) as Apple joined Select List resident Walt Disney (DIS) in undercutting Netflix’s monthly subscription rate. In case you missed it, Disney’s starter package for its video streaming service came in at $6.99 per month. Apple undercut that with a $4.99 a month price point for its forthcoming AppleTV+ service, plus one year free with a new device purchase. To be fair, out of the gate Apple’s content library will be rather thin in comparison to Disney and Netflix, but it does have the balance sheet to grow its library in the coming quarters. 

Apple also announced that its game subscription service, Apple Arcade, will launch on September 19 with a $4.99 per month price point. Others, such as Microsoft (MSFT) and Alphabet (GOOGL) are targeting game subscription services as well, but with Apple’s install base of devices and the adoption of mobile gaming, Apple Arcade could surprise to the upside. 

To me, the combination of Apple Arcade and these other game services are another nail in the coffin for GameStop (GME). 

 

GameStop – It’s only going to get worse

I’ve been bearish on GameStop (GME) for some time, but even I didn’t think it could get this ugly, this fast. After the close last night, GameStop reported its latest quarter results that saw EPS miss expectations by $0.10 per share, a miss on revenues, guidance on its outlook below consensus, and a cut to its same-store comps guidance. The company also shared the core tenets of a new strategic plan. 

Nearly all of its speaks for itself except for the strategic plan. Those key tenets are:

  • Optimize the core business by improving efficiency and effectiveness across the organization, including cost restructuring, inventory management optimization, adding and growing high margin product categories, and rationalizing the global store base. 
  • Create the social and cultural hub of gaming across the GameStop platform by testing and improving existing core assets including the store experience, knowledgeable associates and the PowerUp Rewards loyalty program. 
  • Build digital capabilities, including the recent relaunch of GameStop.com.
  •  Transform vendor and partner relationships to unlock additional high-margin revenue streams and optimize the lifetime value of every customer.

Granted, this is a cursory review, but based on what I’ve seen I am utterly unconvinced that GameStop can turn this boat around. The company faces headwinds associated with our Digital Lifestyle investing theme that are only going to grow stronger as gaming services from Apple, Microsoft and Alphabet come to market and offer the ability to game anywhere, anytime. To me, it’s very much like the slow sinking ship that was Barnes & Noble (BKS) that tried several different strategies to bail water out. 

Did GameStop have its time in the sun? Sure it did, but so did Blockbuster Video and we all know how that ended. Odds are it will be Game Over for GameStop before too long.

Getting back to Apple, now we wait for September 20 when all the new iPhone models begin shipping. Wall Street get your spreadsheets ready!

 

Elliot Management gets active in AT&T, but its prefers Verizon?

Earlier this week, we learned that activist investor Elliot Management Corp. took a position in AT&T (T). At $3.2 billion, we can safely say it is a large position. Following that investment, Elliot sent a 24-page letter telling AT&T that it needed to change to bolster its share price. Elliot’s price target for T shares? $60. I’ll come back to that in a bit. 

Soon thereafter, many media outlets from The New York Times to The Wall Street Journal ran articles covering that 24-page letter, which at one point suggested AT&T be more like Verizon (VZ) and focus on building out its 5G network and cut costs. While I agree with Elliot that those should be focus points for AT&T, and that AT&T should benefit from its spectrum holdings as well as being the provider of the federally backed FirstNet communications system for emergency responders, I disagree with its criticism of the company’s media play. 

Plain and simple, people vote with their feet for quality content. We’ve seen this at the movie box office, TV ratings, and at streaming services like Netflix (NFLX) when it debuted House of Cards or Stranger Things, and Hulu with the Handmaiden’s Tale. I’ve long since argued that AT&T has taken a page out of others’ playbook and sought to surround its mobile business with content, and yes that mobile business is increasingly the platform of choice for consuming streaming video content. By effectively forming a proprietary content moat around its business, the company can shore up its competitive position and expand its business offering rather than having its mobile service compete largely on price. And this isn’t a new strategy – we saw Comcast (CMCSA) do it rather well when it swallowed NBC Universal to take on Walt Disney and others. 

Let’s also remember that following the acquisiton of Time Warner, AT&T is poised to follow Walt Disney, Apple and others into the streaming video service market next year. Unlike Apple, AT&T’s Warner Media brings a rich and growing content library but similar to Apple, AT&T has an existing service to which it can bundle its streaming service. AT&T may be arriving later to the party than Apple and Disney, but its effort should not be underestimated, nor should the impact of that business on how investors will come to think about valuing T shares. The recent valuation shift in Disney thanks to Disney+ is a great example and odds are we will see something similar at Apple before too long with Apple Arcade and AppleTV+. These changes will help inform us as to how that AT&T re-think could play out as it comes to straddle the line between being a Digital Infrastructure and Digital Lifestyle company.

Yes Verizon may have a leg up on AT&T when it comes to the current state of its 5G network, but as we heard from specialty contractor Dycom Industries (DY), it is seeing a significant uptick in 5G related construction and its top two customers are AT& T (23% of first half 2019 revenue) followed by Verizon (22%). But when these two companies along with Sprint (S), T-Mobile USA (TMUS) and other players have their 5G network buildout competed, how will Verizon ward off subscriber poachers that are offering compelling monthly rates? 

And for what it’s worth, I’m sure Elliot Management is loving the current dividend yield had with T shares. Granted its $60 price target implies a yield more like 3.4%, but I’d be happy to get that yield if it means a 60% pop in T shares. 

 

California approves a bill that changes how contract workers are treated

California has long been a trend setter, but if you’re an investor in Uber (UBER) or Lyft (LYFT) — two companies riding our Disruptive Innovators theme — that latest bout of trend setting could become a problem. Yesterday, California lawmakers have approved Assembly Bill 5, a bill that requires companies like Uber, Lyft and DoorDash to treat contract workers as employees. 

This is one of those times that our thematic lens is being tilted a tad to focus on a regulatory change that will entitle gig workers to protections like a minimum wage and unemployment benefits, which will drive costs at the companies higher. It’s being estimated that on-demand companies like Uber and the delivery service DoorDash will see their costs rise 20%-30% when they rely on employees rather than contractors. For Uber and Lyft, that likely means pushing out their respective timetables to profitability.

We’ll have to see if other states follow California’s lead and adopt a similar change. A coalition of labor groups is pushing similar legislation in New York, and bills in Washington State and Oregon could see renewed momentum. The more states that do, the larger the profit revisions to the downside to be had. 

 

Volkswagen set to disrupt the electric vehicle market

It was recently reported that Volkswagen (VWAGY) has hit a new milestone in reducing battery costs for its electric vehicles, as it now pays less than $100 per KWh for its batteries. Given the battery pack is the most expensive part of an electric vehicle, this has been thought to be a tipping point for mass adoption of electric vehicles. 

Soon after that report, Volkswagen rolled out the final version of its first affordable long-range electric car, the ID.3, at the 2019 Frankfurt Motor Show and is expected to be available in mid-2020.  By affordable, Volkswagen means “under €30,000” (about $33,180, currently) and the ID.3 will come in three variants that offer between roughly 205 and 340 miles of range. 

By all accounts, the ID.3 will be a vehicle to watch as it is the first one being built on the company’s new modular all-electric platform that is expected to be the basis for dozens more cars and SUVs in the coming years as Volkswagen Group’s pushed hard into electric vehicles. 

Many, including myself, have been waiting for the competitive landscape in the electric vehicle market to heat up considerably – it’s no secret that all the major auto OEMs are targeting the market. Between this fall in battery cost and the price point for Volkswagen’s ID.3, it appears that the change in the landscape is finally approaching and it’s likely to bring more competitive pressures for Clean Living company and Cleaner  Living Index constituent Tesla (TSLA). 

 

WEEKLY ISSUE: Investment themes changing the diamond industry, Apple’s WWDC 2018 and more

WEEKLY ISSUE: Investment themes changing the diamond industry, Apple’s WWDC 2018 and more

  • Following Apple’s WWDC 2018 keynote presentation, we are boosting or price target on Apple (AAPL) shares to $210 from $200.
  • As MGM Resorts (MGM) avoids Las Vegas strike disruptions, our price target remains $39
  • Paccar (PCAR) shares catch an upgrade; our price target remains $85
  • We are adding shares of Charles & Covard (CTHR) to the Tematica Investing Contender List as part of our Affordable Luxury investing theme.

As the market gets ready for the upcoming trade summit, we are seeing trade tensions heat up ahead of that date. We’ve also got a new government in Italy, and while the recent economic data has been positive, I’m seeing increasing signs of inflation in the system. To me, that looks likely to lead the Fed to the increasingly expected four interest rate hikes this year.

I suspect all of the issues discussed above — trade, interest rates and other geopolitical tensions — will be recurring ones that will likely lead to an ebb and flow of uncertainty in the market, ultimately keeping it rangebound in the near-term. In that type of environment, I’ll continue to look for new opportunities utilizing our thematic approach to investing. As compelling situations are uncovered, we’ll look to be opportunistic.

With a number of things to get to, including how the diamond industry is beginning to pivot in response to some of our thematic tailwinds, I’ll cut it there for this week…

 

Apple’s WWDC 2018 was far from boring

Earlier this week, following Apple’s (AAPL) World Wide Developer Conference (WWDC) 2018 that focused on the company’s various software platforms the shares hit a multi-year high at $193.42 before settling modestly lower. I’ve been waiting in the wings to bump our price target on this Connected Society company higher and following this week’s keynote that introduced the software updates that consumers will have access to later this year, I am boosting that target to $210 from $200.

The expectation coming into the event was Apple would focus on software refinements and performance. While that was the case, there were a number of new features that in our view did more than that.

Now let’s discuss some of the announcements…

Apple got to it early on with iOS, taking the wraps of iOS 12 that will power both past and present iPhone and iPad models. While the initial conversation was on performance improvements, Apple soon ticked off a number of features including more robust Augment Reality capabilities, including multiplayer gaming; deeper integration of its digital assistant Siri in the OS and with third party apps; overhauled News, Stocks, Voice Memo and iBooks apps; new features for iMessage, including Memoji; and at long last group Facetime. There was some thought Apple would also introduce more robust controls to limit usage, and it does so with updates to its Do Not Disturb and Notifications capabilities, but also introduced Screen Time that should help people as well as parents restrict usage time on iOS devices.

Next up was watchOS, which continued its focus on connectivity and activity as it debuted Walkie Talkie mode that allows people to quickly communicate with each other. The iOS improvements with Siri are also finding their way to Apple Watch as is a new Podcast app. Apple also shared later this year it will debut Student ID support with both iOS and watchOS. Student ID will allow students to gain access from dorms and dining halls to gyms and libraries, along with campus events or attending class, making purchases from campus retail shops and bookstores, and paying for laundry and items from vending machines. Apple expects to roll this out with a handful of universities and expand it over time.

Turning to the OS that powers Apple TV, better known as tvOS, it gains support for Dolby Atmos surround sound, as well as a streamlined sign-in protocol for cable providers.

As for macOS, the upcoming version dubbed Mojave, will have  all new features like a dedicated Dark Mode, an all-new App Store, tweaks to the desktop, and the migration of several iOS apps. That migration for News, Stocks, Voice Memo and Home is part of a longer-term initiative to port iOS apps to mac OS, and Apple expects developers will be able to transition their apps to Mac sometime in 2019. Finally, in the wake of the Cambridge Analytica data scandal, Apple emphasized privacy, with a new Safari feature that preemptively blocks tracking sites like Facebook’s Like and Comment feature and asks you to allow it to appear when you’re browsing a website.

While developers will have access to these new OS iterations shortly, consumers will not until sometime this Fall. Historically, Apple has formally released these platforms shortly after it debuts its new hardware.

Are these updates ho-hum?

Not at all in my opinion. While they could be seen a quieter updates, they bring features and functionality that will spur usage as Apple once again does what it has done in years past – used its software and design expertise to remove friction for consumers. Odds are these features will help spur users of older Apple devices to upgrade later this year, but I continue to see a far larger iPhone upgrade cycle coming once 5G networks go mainstream.

Factor in Apple’s dividend and share repurchase plans, and what some may call boring still looks pretty exciting to me.

  • Following Apple’s WWDC 2018 keynote presentation, we are boosting or price target on Apple (AAPL) shares to $210 from $200.

 

MGM avoids the Las Vegas strike

Last week, I discussed the pending union strike for casino hotel workers on the Las Vegas Strip and how we would be assessing its potential impact for MGM Resorts (MGM). Over the weekend, the company has reportedly reached a new tentative 5-year contract that covers approximately 24,000 workers at 10 casino resorts on the Las Vegas Strip. We’ll continue to monitor the situation and assess any potential impact but, in my view, this tentative agreement is a step in the right direction and could lead to a modest boost to MGM’s properties as its competitors contend with the strike.

  • Our price target on MGM Resorts (MGM) shares remains $39

 

Paccar shares catch an upgrade

Yesterday shares of heavy-duty and medium duty truck company Paccar (PCAR) caught an upgrade to an Outperform rating from Neutral at investment firm Macquarie complete with a $75 target. That upgrade came on the news that May preliminary net orders of heavy trucks (Class 8) in North America were 35,600 units, up 110% year-on-year and up 2.5% vs April.

Despite the swelling order book for heavy and medium duty trucks that reflects the current shortage that is driving freight costs higher, Macquarie is one of the few to turn bullish on Paccar shares. Candidly, given the year over year strength in new truck orders we’re surprised that more haven’t turned positive on the shares.

I’ll look for further confirmation in the soon to be published May Cass Freight Index data. That data for April showed a 10% year over year increase in freight shipments, which in our view served to signal the domestic economy was firming. As more data is had that points to the improving outlook for new truck demand, I expect others will jump on board, boosting their ratings and price targets along the way.

You know what they say when it comes to situations like this – better to be early than late.

  • Our price target on Paccar (PCAR) shares remains $85;

 

Examining a lab grown diamond company as De Beers adjusts its business model

Last week I posted a Thematic Signal that discussed legendary diamond firm De Beers having to pivot its business as it contends with the reality that is our Cash-strapped Consumer investing theme. As I’ve said for some time, these thematic tailwinds and headwinds lead to a change in behavior at consumers and businesses that companies must respond to it they want to survive and thrive. If not, they run the risk of being dead on the vine. If consumers aren’t buying diamonds because they can’t afford them, then the exiting business model at De Beers has to change. Simple. As. That.

In this case De Beers has launched a new line of synthetic diamonds that are a fraction of the price for natural diamonds. Prices for the synthetic diamonds will start at $200 for a quarter carat and increase to $800 for a full carat stone. The company’s natural stones start at roughly 10 times that amount, depending on their clarity and other attributes. We see this move at this price point as part of De Beers’ attempt to capture incremental business associated with our Affordable Luxury investing theme.

With De Beers embracing synthetic diamonds, odds are the flood gates will soon open up with others doing the same. To me, this sounds like a new market opportunity for Charles & Covard (CTHR), the original creator and leading source of Forever One™, Forever Brilliant® and Forever Classic™ moissanite gemstones for fine jewelry. Charles & Covard’s gemstones are based on a patented a thermal growing process for creating pure silicon carbide (SiC) crystals in a controlled laboratory environment that enables lab created grown moissanite gemstones. As the company has positioned its wears, they are free from environmental and ethical issues, and capable of disrupting traditional definitions of fine jewelry.

As background, the global jewelry market is estimated by McKinsey & Company to be $257 billion in size. Like many other industries the move to digital sales is also resulting in a shift in where consumers are buying jewelry. Per McKinsey, by 2020 the global online fashion jewelry market is expected to drive $45 billion in sales, roughly 15% of the global jewelry market, with the global online fine jewelry hitting $30 billion of the global jewelry market. By comparison, estimates put the lab-created gemstone market near $8 billion by 2020 with the largest geographic market being Asia-Pacific followed by North America.

Charles & Covard, which derives more than 90% of its revenue from the domestic market, sells loose moissanite jewels and finished jewelry through two operating segments:

  • Online Channels (38% of sales) which is comprised of the company’s charlesandcolvard.com website, e-commerce outlets, including marketplaces such as Amazon (AMZN) and eBay (EBAY), and drop-ship customers, such as Overstock.com (OSTK), and other pure-play, exclusively e-commerce customers, such as Gemvara;
  • Traditional segment (62% of revenue), which consists of wholesale, retail, and television customers such as Helzberg Diamonds, Rio Grande, Stuller, and Boscov’s.

Only one analyst formally covers CTHR shares with a $2.50 price target, but there are no consensus expectations for EPS let alone revenue. Revenue for Charles & Covard has remained in the $25-$29 million bandwith over the last five years, and annualizing the company’s March quarter results suggests revenue near $27 million this year with EPS of roughly -$0.12.

There is some issue with that, which centers on the inherent seasonality within the company’s business that reflects the year-end holidays and gift giving. Odds are that means the company’s top and bottom line could be ahead of those figures.

Now here is where it gets a little cloudy. While forecasts suggest there are robust growth prospects ahead for laboratory created diamonds and other jewels, which could equate to a significant tipping point for Charles & Covard should reality match those forecasts, the company is facing a potential supplier issue.

Its sole supplier of SiC crystals is Cree (CREE) and Charles & Covard has a certain exclusive supply rights for SiC crystals to be used for gemstone applications. In December 2014, Charles & Covard entered into a new exclusive supply agreement with Cree that will expire on June 24, 2018, unless extended by the parties for an additional two-year period.

While the two companies boast being on good terms, the reality is Cree is a captive supplier that Charles & Covard rely on to for their products. This means watching the next few weeks for the deal terms for either a new supply agreement or ones attached to the extension as they could alter profitability expectations. Other complications include the company’s microcap status and its average daily trading volume of just 70,750 shares.

For those reasons, even though the lab grown diamond market looks to have favorable growth prospects, we’re going to keep an eye on Charles & Covard shares by putting them on the Tematica Investing Contender List.

  • We are adding shares of Charles & Covard (CTHR) to the Tematica Investing Contender List as part of our Affordable Luxury investing theme.
SPECIAL ALERT – Adding Nokia shares to the Tematica Select List

SPECIAL ALERT – Adding Nokia shares to the Tematica Select List

 

  • We are issuing a Buy on  Nokia Corp. (NOK) shares with an $8.50 price target.

  • At this time, there is no recommended stop-loss level and we would look to scale into the shares aggressively near $5.50.

 

Yes, you are reading that correctly. After recently adding Nokia Corp. (NOK) shares to the Contender List, we are now adding them to the Tematica Select List given continued progress in its higher margin, intellectual property (IP) business, Nokia Technologies. We’ve seen the power of this Asset-Lite Business Model investment theme before with Qualcomm (QCOM) and InterDigital (IDCC) and it has the power to not only transform Nokia, but deliver EPS  upside relative to expectations.

To jog people’s memory, in the most recent quarter the Nokia Technologies division accounted for 7% of Nokia’s overall revenue, but delivered 37% of operating profit. To be clear, we like the operating leverage in this business. In the coming quarters, we also expect Nokia to benefit from continued wireless infrastructure buildout from both existing 3G and 4G networks as well as eventual deployments on 5G networks.

 

So why add NOK shares to the Select List now?

Early this morning it was announced Nokia won an arbitration battle against LG Electronics, which follows recent deals with Samsung, Apple (AAPL) and Xiaomi Electronics, a Chinese smartphone company. From LG Nokia will receive both a one-time payment, which was not disclosed, as well as recurring revenue that is expected to be in the realm of $275-$300 million. This is a meaningful bump to Nokia’s IP, which had sales of 616 million euros in the first half of 2017, and gives far more comfort in the likelihood of the company hitting 2018 EPS expectations of $0.37, up from this year’s consensus EPS of $0.30. Also too, as Nokia continues to stack up licensees, it becomes increasingly easier to win over its remaining IP targets.

Our price target on Nokia shares is $8.50, which equates to 23x expected 2018 EPS or 1.0 on a price to earnings growth ratio (PEG) basis using the company EPS growth over the 2016-2018 time frame. Given the degree of upside to be had, we are adding NOK shares to the Select List with Buy. At this time, there is no recommended stop-loss level and we would look to scale into the shares aggressively near $5.50.

Over the coming quarters, we expect to see more movement in the company’s wireless infrastructure business as 5G moves from testing and beta to deployment. With Nokia Technologies, the company has booked some impressive wins, and it can turn its attention to Huawei, which according to data compiled by IDC is now the third largest smartphone vendor behind Samsung and Apple. Also, as Apple brings augmented reality into the mainstream with its new iPhone models and does the same with health applications with Apple Watch, this opens the door for other technology licensing opportunities at Nokia given its portfolio of connected health, augment and virtual reality as well as other technologies. What this will require is patience with the shares, but given we are not only thematic investors but ones that have a longer than the herd time horizon that’s just fine with us.

 

 

Here’s what we’ll be watching for at today’s Apple special event

Here’s what we’ll be watching for at today’s Apple special event

Several of the Disruptive Technologies investment theme companies currently on the Tematica Select List will play a key role in the Apple Special Event scheduled for Tuesday, September 12th. In all likelihood the companies themselves will never be mentioned during the event, but with expectations once again running high ahead the next generation iPhone, here’s what we’ll be watching for as it pertains to the Tematica Select List.

 

Early this afternoon, Connected Society and smartphone reliant Apple (AAPL) will hold its next special event that is widely expected to unveil a bevy of new products, including its latest iPhone models. Much has been made over the last few days of “leaked information” over these new models as well as new iterations for Apple TV and Apple Watch, but as exciting as those other new products may be because the iPhone is the majority of Apple’s revenue and profits odds are investors will focus their attention on those new models.

While we don’t own Apple shares, and we touched on at least one of those reasons yesterday, there are several companies on the Tematica Select List that will be affected by today’s special event – Universal Display (OLED), Applied Materials (AMAT), and AXT Inc. (AXTI) as well as USA Technologies (USAT) and Nuance Communications (NUAN).

 

Universal Display (OLED) 

As subscribers should be aware, Universal Display is a Disruptive Technology investment theme company that supplies needed chemicals and intellectual property utilized in the manufacturing of organic liquid crystal displays (OLEDs). Over the last few months, there has been much talk of ramping demand in an industry that is capacity constrained as Apple begins to adopt the technology in the iPhone while other applications (other smartphone vendors, TVs, wearables and automotive interior lighting) continue to replace existing lighting and displays with OLEDs. There are now indications that Apple is likely to introduce OLEDs in its new premium iPhone, purportedly the iPhone X.

The issue, however, is that it is being reported that the manufacturing of iPhone X device is currently capped at around 10,000 units per day and may not begin shipping until next month. This could be due OLEDs supply constraints, but if this speculation over the iPhone X turns out to be true, we could see a pullback in our OLED shares, especially following the more than 18% move in the last month alone that has the shares bumping up against our $135 price target. We continue to think that as the adoption of OLEDs continues to ramp up, we will see a step-function higher in our price target for Universal Display shares, but in the near-term, our concern is that rapid climb in the share price could hit a “buy the rumor, sell the news” wall following Apple’s event. If such an outcome occurs, our view is subscribers should continue to hold OLED shares for the long-term. If the shares retreated to the $110-$115 level, which would be a sharp pullback, we would view that as another bite at the apple for subscribers that have so far held off buying OLED shares.

  • Our price target on Universal Display (OLED) shares remains $135
  • For now, subscribers that have missed out on OLED shares should look to scoop them up between $110-$115.

 

Applied Materials (OLED) 

If the supposition that Apple’s iPhone X production is capped because of capacity constraints for OLEDs, we see that being a resounding positive for shares of Disruptive Technology company Applied Materials (AMAT). As a reminder, Applied not only manufactures semiconductor capital equipment (the machines that make chips) it does the same for displays, including OLEDs. Applied has been rather frank about the robust demand for OLEDs, and it remains one of the reasons we are bullish on AMAT shares. Others include rising memory demand as well as ramping in-country semiconductor capacity in China.

  • Our price target on Applied Materials (AMAT) shares remains $55.

 

AXT Inc. (AXTI)

We would be surprised to hear Apple talk about 5G wireless technology, which would require several additional layers of RF semiconductors, largely because most wireless carriers like AT&T (T), Verizon (VZ) and T-Mobile USA (TMUS) are still testing the technology. If, however, the Apple Watch is updated to include LTE wireless technology, that would be a source of new demand for RF semiconductors, like those from Skyworks Solutions (SWKS) and Qorvo (QRVO). In turn, that means those companies, as well as other RF semiconductor suppliers of Apple’s, would require additional compound semiconductor substrates from AXT Inc. (AXTI). While we still see the eventual deployment of 5G networks that will drive incremental RF semiconductor demand as the key driver longer-term for AXT’s business, incremental demand from devices like Apple Watch is certainly welcome.

  • Our price target on AXT Inc. (AXTI) shares remains $10.50

 

USA Technologies (USAT) & Nuance Comm. (NUAN)

Finally, during today’s presentations, we’ll also be watching and listening for incremental news on USA Technologies (USAT), an Apple Pay partner, as well as Nuance Communications (NUAN). In iOS 11, Apple will continue to expand the services offered through Apple Pay, and we expect to hear at least some usage statistics from Apple CEO Tim Cook today. With Nuance, voice continues to become the new interface of choice across new applications from smart speakers to chat-bots, like those being rolled out by Google (GOOGL), Facebook (FB) and yes, Apple, and that keeps us bullish on NUAN shares.

  • Our price target on USA Technologies (USAT) shares remains $6
  • Our price target on Nuance Communications (NUAN) remains $21.

 

 

 

Why we’re nonplussed on Apple even if the iPhone X is Awesome

Why we’re nonplussed on Apple even if the iPhone X is Awesome

While we too are interested in what Apple (AAPL) will be unveiling tomorrow, we’re not in the camp that expects the company to deliver a “shock and awe” presentation as it showcases its latest and potentially greatest iPhone model. Make no mistake, Apple’s iPhone business is impressive given its market share, margins, and cash flow generation, and it’s a device that many of us, including us here at Tematica, could not live without. The issue is the iPhone appears to be an increasingly iterative one in a market that is plagued by slowing growth and reliant on the upgrade cycle.

The reality is that while Apple will likely continue to enhance the iPhone, and pick up incremental share along the way, it’s no longer the disruptive device that redefined the company and the category. Rather, given the size of the iPhone business, relative to Apple’s revenue, profits, and cash flow, it’s one that it needs to fight and keep up with product upgrades, even as it has ratcheted up its R&D spending in 2016 and 2017. When we’ve seen such activity at Apple in the past, it has often led to new products and new product categories, which keeps us hopeful for the long-term. That said, Apple isn’t the only one that is ramping its R&D spending as our Connected Society theme continues to disrupt existing business models. We’d point to Amazon (AMZN) as the innovator to watch.

 

What We Can Expect to Hear from Apple

The excitement and rumor mongering over the last few months will soon be over tomorrow, September 12, as Apple will unveil it latest iPhone model or potentially models. Also, if the internet chatter is to be believed, upgrades for its Apple TV and Apple Watch products will be on presented as well.

Recent software leaks suggest the unveiling of several iPhone models, with at least one of them including new features in the device itself — things such as Face ID and augmented reality as well as an organic light emitting diode display (OLED). Aside from the hardware, there will be a bevy of new features associated with the latest version of the iPhone operating system, iOS 11. Candidly we’re not all that sure about the “Animoji” feature that uses the 3D face sensors to create custom 3D animated emoji based on the expressions you make into the camera. Our thinking is this feature could be like steroids for the selfie market. Rather than digress, we are very excited about the productivity features inside iOS 11 and what they mean for the iPad. We’ve been beta testers of the iOS 11 on our own iPads, and the improved split screen capabilities alongside true drag and drop, at least in our view, are going to make the iPad what many hoped it would be several years ago — a perfect device for working while on the go.

As great as the new iOS and other new products are likely to be — like the purported Apple Watch with built in LTE connectivity —, the big kahuna at the event will be the iPhone, and it is expected to come along with just as big of a price tag. While there have been many headlines discussing the potential $1,000 price tag for Apple’s new high-end smartphone, let’s remember there are a variety of financing mechanisms from mobile carriers like AT&T and Verizon Communications as well as Apple’s own iPhone financing program.

Yes, some will balk at upgrading to the iPhone X because of its price or lack of a “wow-factor”, but we also know there is a cohort of consumers that see owning the latest Apple device as the latest status symbol for our Affordable Luxury investing theme. We also expect Apple will once again under-produce relative to initial demand, magically once again leading to the latest and potentially greatest iPhone being sold out. Make no mistake, we here at Tematica love all the Apple products we have, and we have plenty of them, but there is no easier way to stock out a new product than to restrict its initial supply. Of course, this only adds to the allure of being an early adopter, much the way until fairly recently spotting a pair of  Apple’s Air Pods has been akin to seeing a unicorn.

We are not surprised to see Apple potentially bringing multiple models to market as it looks to target share gains with the rising middle class in markets such as India and China as well as other more price-sensitive emerging economies. With the iPhone, likely the first internet connected device to be had by a person in these geographies, the device is a beachhead in which Apple can leverage its sticky ecosystem of products and services, in particular, its Apple Pay feature. If Apple is as successful as it has been in the U.S. and other developed markets, it’s a large opportunity for the company as well as shareholders.

The issue with Apple’s global expansion plans for the iPhone is that larger adoption of products and services takes time, and this means that if Apple is successful with these new iPhone models it will continue to be a trapped by its own success. By this we mean consumers flocking to the latest model in droves during the first six months of its release, only to see sales fade as potential buyers wait for the next new model to be had. If this cycle remains, it likely means Apple remains a seasonal business tied to the annual introduction of iPhone models… at least until it introduces either a new product category or an existing business segment delivers a new breakout product that turns the business mix on its head. Given the size of the annual iPhone business relative to the sizes of the Mac, iPad, Services and Other Products business segments, the latter is a daunting task to expect.

Perhaps the greatest risk to the new iPhone is the possibility that between Apple iOS beta software program and the annual rumor mongering, not to mention a disgruntled employee or two, much of what’s been slated to be shared for the new model has already been leaked. This could lead to a meh reception of what has been touted as a “make or break product for Apple.”  In other words, without an unexpected new, new thing to further implant Apple in our Connected Society investing theme, Apple shares could fall victim to “buy the rumor, sell the news” following tomorrow’s special event.