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Apple: A Masterclass in Refinement and Innovation

Apple’s Fall iPhone event stuck to the company’s Playbook for Success. Take a loved product, progress its features and refine its look while maintaining its price point. I’m so familiar with the Playbook that I forget it has a tried-and-true track record of inspiring Apple consumers to buy more products as well as fostering new members into the family. Collectively, Apple’s newly announced iPhones, Watches and AirPods should be enough to deliver upside to the September numbers, despite one of the four iPhone models not shipping until October. Looking to FY23, I believe there were enough announcements for the company to slightly exceed the consensus estimate of 5% revenue growth.

The master of refinement

What impressed me throughout the event was that Apple continues to discover new features that enable them to dip into new markets. I’m not talking about the marketing for Watch Ultra with scuba divers and mountain climbers, or the iPhone 14 Pro’s professional-grade camera. Apple’s product marketing inspires the everyday customer to purchase more of its products, similar to a page from Rolex’s book on marketing. I’m talking about features like the expand the product’s reach, like the new Watch battery that lasts for three days, compared to the current less-than-a-day battery, opening the product to a market of people who don’t like charging their watch every day. Separately, the Watch’s new body temperature sensor opens the product to women who want improved cycle tracking. That same feature temp feature can open up a new market around wellness monitoring, letting users know when they are starting to run a fever—a use case the company did not mention. Lastly, the satellite feature in iPhone 14 that will make users feel safer, with emergency message in areas, sometimes urban, that have no cell connection.

It’s worth noting, these refinements are made possible partly because of Apple’s lead in hardware. The company noted that its new A15 Bionic chip is three years ahead of the competition. Even if it were only a year ahead, that’s still a sizable lead in tech, which makes it hard for competitors like Samsung and Google to catch up.

Another product refinement is the”Dynamic Island” feature within the iPhone 14 Pro models. The idea is to centralize the iPhone’s user interface into a smaller, more manageable window. This is a new feature that I’ll likely adapt to and love within three days — which also means that other phone makers will copy it and most likely do a slightly worse job at it. One clever aspect of “Dynamic Island” is it makes the display feel larger. Essentially, the layout of the display tricks the brain into believing that the forward-facing camera is a part of the display. This gives the illusion that the entire screen is a much larger display than it actually is. That’s an example of the attention to detail that makes Apple products great.

First, refinement. Then, innovation?

Some will exit the fall iPhone event thinking: Yet again, this year is just another year of marginal upgrades. Where is Apple’s legendary innovation? I see it different. The announcements today are more than enough for Apple to sustain and grow its $410B business next year at a pace ahead of investors’ 5% growth expectations. While the core business continues to refine and grow, it will fund the company’s next step into a new market, like wearables, health, or auto. Entering into a single one of these three markets would likely more than satisfy investors’ questioning about pace of innovation for the next decade. The auto market is clearly the largest opportunity, with the potential to account for more than a third of the company’s revenue in the next ten years. While we didn’t get any hints about new segments at the iPhone event, details of their progress toward these segments will likely leak in the months ahead, and those product leaks should move the multiple on shares of AAPL higher.

Maintaining price is the new price cut

The biggest surprise of the event was Apple maintained last year’s pricing for all of its new products. I expect the impact of this decision to be positive for revenue and neutral to earnings. For revenue, I believe maintaining prices will be viewed as a price cut by consumers who have been trained to expect and accept higher pricing. This should result in more unit sales and growing overall revenue. Ironically, the iPhone is one product that could weather a price hike because it’s a necessity, yet the company is maintaining its price which consumers will appreciate. As for the rising costs, I believe that Apple will be able to maintain margins despite the cost environment given that, over the past year, Apple maintained gross margins at 43% in the face of vertical increases in the cost of some components, shipping, and salaries. Apple has a way of successfully managing these costs and I expect that excellence will continue.

Recap of announcements

Watch Series 8

  • Pricing: Starts at $399, which is the same starting price for the Series 7.
  • New features include:
    • Temperature Sensor: Announced as expected. A material biomarker used to detect illness and to help improve tracking women’s health cycles. Every five seconds, the sensor measures wrist temperature and tracks it accordingly in the Apple Health app. My take: Third party apps will jump all over this feature in the years to come.
    • Car Crash Detection: If detected, emergency services will automatically be notified and emergency contacts will be alerted. My take: it’s going to save lives.
  • Now accompany pre-existing features: Heart Rate, A-Fib, Blood Oxygen, Gate Monitoring, and Fall Detection.

Apple Watch Ultra (new)

  • Pricing: $799, the Goldilocks price. It’s high enough that profitability will be better than Series 8, but low enough that consumers will still stretch to buy it.
  • If you want to hike Antartica, scuba in Borneo, or simply go shopping — it’s a must-have. My take: If you want to get it or gift it before the holiday, best to order soon. I expect this model to be in short supply this Fall.

AirPods Pro (new)

AirPods make up 5% of Apple’s revenue. This was the least exciting of Apple’s announcements. The product is less of a luxury and more of a necessity if you ask any gig worker. My take: They’re keeping AirPods relevant.

iPhone 14 and iPhone Plus (new)

  • Pricing: $799 and $899, respectively.
  • New features include:
    • Satellite Connection: Apple is pitching this use case as Emergency SOS, but we think it’s really for emergency texting and the Find My feature. This satellite comes without the bulky antenna which is next-level engineering, and it’ll be free for two years with the new iPhone. I’m betting there will be an annual $30 fee afterward. My take: Its appeal will reach beyond backpackers, to anyone who wants to feel safe.

iPhone Pros and iPhone Pro Max (new)

  • Pricing: $999 and $1049, respectively. They basically kept pricing the same, which should be a comfort to investors that iPhone growth will continue. For the September quarter, the Street is looking for 9.5% y/y growth. For December, 1.1%. I feel comfortable that Apple will meet (or exceed) those numbers.
  • New features include:
    • Dynamic Island: A micro-control and message window set at the top center of the iPhone. The idea is to centralize the iPhone interface into a more manageable window. My take: Dynamic island will change how we use our phones. Getting right to what we want faster. iPhone owners are going to love it.
    • 48MP Camera with Ultra Wide, ProRAW, and Action Mode: The next logical step up from last year’s camera. Apple’s approach: sell to the professional, win over the everyday user. Rolex uses a similar game plan. While camera geeks may point out that the 10X zoom camera on Samsung Galaxy is better, that doesn’t matter much. Apple sells their specs infinitely better than Samsung does. Even more than a decade later, Samsung still struggles to hit the nail on its smartphone marketing. My take: Another page out of Rolex marketing by focusing on the inspiring use case to make everyone want the product. After all, aren’t we all pros?


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