Adrenaline Shots for Apple AI

  • Apple has been criticized for not doing enough in AI. Two recent announcements show the company is closing the gap.
  • In the past two weeks, the company has announced the hiring of Google’s AI head, and an AI partnership with IBM.
  • Google’s AI head (John Giannandrea) brings credibility to Apple AI, critical in recruiting, and is likely work on AI-powered interfaces and Apple’s self-driving car program.
  • IBM partnership allows iOS developers access to IBM Watson’s enterprise machine learning, and use it to make smarter AI apps.

Core ML 101. At WWDC 2017 Apple unveiled Core ML, a platform that allows developers to integrate machine learning into an app. The AI model runs locally on iOS and does not need the cloud. At the time of the announcement, Apple outlined 15 domains for which they have created ML models, such as face detection, text summarization, and image captioning.

IBM Watson and Apple announcement. Two weeks ago Apple and IBM announced they will integrate IBM Watson with Apple Core ML. Previously, developers could convert AI models built on other third-party platforms, like TensorFlow (Google) or Azure ML (Microsoft) into Core ML, and then insert that model into an iOS app. Now developers will be able to use Watson to build the machine learning model, convert it to Core ML, and then feed the data back to Watson’s cloud. The reason why this is important is it allows iOS developers to leverage Watson’s capabilities and ultimately improve the AI in iOS apps.

Watson works locally on iOS and improves apps. What’s unique about Core ML is it runs locally on mobile devices, meaning it doesn’t have to send data back to a server. This is different than other mobile AI approaches. Running locally is an advantage when the speed of AI is important, like image recognition in AR or natural language processing. What’s new is Watson will be able to “teach” Core ML to run the AI model built with Watson. Basically, Watson does the hard work of getting a usable AI model built and then teaches it to Core ML, who can then run the model locally on its own. The app can then send data on the model’s performance back to Watson, at any time, to be analyzed for available improvements.

Recent history of Apple and IBM. In July 2014, Apple and IBM partnered to create enterprise applications on iOS devices, leveraging IBM’s big data and analytics and Apple’s hardware-software integration. IBM started selling iPhones and iPads to clients that came with software and applications for enterprise designed with Apple’s help.

Summary of big tech’s machine learning services. 

Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio.  Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

Apple’s AI Coup

  • Apple has hired John Giannandrea who formerly served as Google’s head of AI and Search.
  • Given the industry’s shortage of AI talent, Giannandrea brings expertise along with credibility, critical in recruiting.
  • Giannandrea will likely be working on AI-powered interfaces that will replace the touchscreen and iOS, like augmented reality wearable. Separately, AI related to Apple’s self-driving car program (PAIL) will likely fall under Giannandrea.

What this means for Apple, recruiting more AI talent. It’s a win. Talent follows talent, and John Giannandrea will no doubt help to build Apple’s AI brand and enhance future recruiting efforts. His shared vision on privacy is good news for a company who claims to be the vanguard of user security. In the meantime, Google will maintain its strength in AI, given they are still an “AI first company” and have tremendous AI and deep learning horsepower with their Google Brain and DeepMind teams. Jeff Dean, the founder of Google Brain, has taken over as the head of their AI department in a “reshuffling” making AI a more central part of their business. Will Google employees follow in Giannandrea’s footsteps? There will probably be a few, but the competition is fierce, and this will not be the last major AI trade.

Why did Giannandrea come to Apple? Most likely – projects, pay, and privacy. As one of the most senior experts in arguably the most in-demand field in the world, the conversation around compensation was probably short. Giannandrea may be given freedom to work on projects he is more passionate about and have the chance to build something new. In an email obtained by the New York Times, Cook praised Giannandrea saying, “John shares our commitment to privacy and our thoughtful approach as we make computers even smarter and more personal. Our technology must be infused with the values we all hold dear.” That affinity for privacy may have steered him to Apple at a time when concerns have never been higher.

What will he do? It’s easy to think about how Google uses AI (search, image rec., voice, etc.) but Apple’s use cases are more abstract. If you consider the user interfaces that will replace the touchscreen and iOS, like augmented reality wearables, it becomes more clear why AI is critical. Just as multi-touch was a core technology enabling the iPhone, AI will be a core technology enabling the operating systems of the future. For example, wearables like AR glasses or even AirPods will heavily rely on AI-driven functionality like image recognition, ambient listening, and smart notifications. In other words, these devices need to know what you want and when you want it. With our phones, we directly control the information that we want when we want it; in the future of computing, AI will anticipate the same information. We expect Giannandrea to address these opportunities as well as bolster Apple’s overall AI prowess, overseeing AI initiatives like Siri, Core ML, and the deliberately under-the-radar autonomy project.

Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio.  Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

How To Think About Recent Volatility in Tech

Market decline does not change the mega growth opportunities. The heart rate of the market increased the past week because of fears of a trade war, Facebook data privacy, and broken market technicals, but the health of the market is unchanged and the health is good. Core underlying tech trends including artificial intelligence, robotics, big data, and autonomous transportation, will support continued growth.

Hold tech for the long-term. We believe that tech is essentially taking over the rest of the economy; therefore, investors should hold tech long term. Just as every company is now an internet company to some degree, we believe that eventually every company will be an AI company.

Market undervalued. From a valuation perspective, our view is undervalued. The market has rallied back to the old highs, but the S&P is up only 3% per year over the past 17 years, compared to the previous 17 years (1983-2000) when it was up 17% per year.

Putting the size of tech into perspective. The tech sector’s growing clout is not just a U.S. story. Tech stocks have become so dominant in emerging markets that for the first time since 2004, the industry last year overtook finance as the biggest sector in the MSCI Emerging Markets Index. Tech had a 28% weighting near the end of 2017, more than double its level six years ago, according to data provided by MSCI. Facebook, Amazon, Netflix Inc. and Alphabet together account for a 7.8% weighting in the S&P 500, more than double from five years ago.

Company Updates:

Tesla. We remain positive on TSLA. Shares are down 20% in the past month mostly due to fears of another miss in Model 3 production. The recent stock dive is due to a combination of a Model X accident that is being investigated, Waymo’s partnership with Jaguar, which legitimizes a key competitor (the I-Pace electric SUV), growing concern among all companies testing self-driving vehicles amid the Uber fatality, and news that Moody’s has downgraded Tesla’s bonds to B3 from B2, citing significant shortfall in the Model 3 production rate and a tight financial situation. We continue to believe the Tesla story has the best risk-reward among tech companies over the next 5 years.

  • Model 3 production. We’re expecting another miss in Model 3 production in the March quarter but that does not change the story. There is more demand than supply for the Model 3 (about 400k preorders which is unheard of in automotive). It might take a year, but eventually, Tesla will get the Model 3 production right, and ramp output.
  • Model X accident. We see the recent Model X accident the same as accidents with gas cars. It is unlikely that the battery or Tesla’s advanced cruise control “autopilot” were to blame. Tesla disclosed that the autopilot feature properly functions 200 times a day on the same stretch of road where the accident happened.

Facebook. Limited upside to FB. Given the privacy issues, for the first-time advertisers have to think about Facebook as a liability. Separately, it’s unclear about how the recent privacy changes will impact Facebook’s ability to make money.

Nvidia. We remain positive on NVDA. Shares of NVDA dropped 11% in the past week following the announcement that they temporarily stopped autonomous testing, and in part because of the broader market sell off. While the company did not comment on timing, we expect testing to resume in the next 3 months. The big picture is the company is well positioned to capitalize on four mega trends, AI, autonomous cars, gaming, and blockchain through their dominance of GPU processors.

Apple. We remain positive on AAPL. Concern is emerging that iPhone demand in June will fall below Street expectations. We think iPhone demand over the next two quarters is not important to the story. What’s important is the share buyback, services, and the next iPhone.

  • Share buyback. Apple can add 4% per year to the stock price (assuming they use $40B of the $55B they generate in cash each year to buy back stock). Apple will give an update on the share buyback when they report the March quarter, likely late in April.
  • Bigger screen iPhone this fall. We expect Apple will announce a 25% bigger phone in the fall. This will be a positive for unit demand and average selling price.
  • Services. Services account for about 15% of revenue and are growing at 15-20% year over year. We believe this segment will continue to grow at a 15% or better rate over the next five years. This is important because the earnings multiple on shares of AAPL will likely increase as investors view the predictability of services are more attractive.

Google. We remain positive on GOOG. We expect the next six months to be rough for shares of GOOG as questions emerge about how the company uses data. Despite that negative potential, Google is too tightly woven into the fabric of the internet. The company is one of the best ways to invest in AI, given the company has a stated their intention to move from a mobile-first company to an AI-first company over the next several years. Lastly, the company has a stake in Waymo, the leading autonomous car company. We expect years of positive news to come from Waymo.

Amazon. We remain positive on AMZN. The company is best positioned for the future of retail. We see that future as a combination of both online and offline retail. Online sales account for about 15% of global retail, and in the future, we believe it will eventually reach 55% of sales. We also expect Amazon to do more with physical retail locations and we continue to believe the company will eventually acquire Target (TGT). The company’s AWS web hosting business is only 15% of revenue, but it is growing at greater than 30% for the next several years.

Twitter. Limited upside to TWTR. About 14% of Twitters 2017 revenue came from selling data, growing at 18% y/y, compared to Twitter’s ad business that declined by 6%. Selling private data is a toxic label, and this could limit the upside to shares over the next year.

Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we will write about companies that are in our portfolio.  Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make. 

Apple Education Playbook: Hardware, Software, Services… and Creativity

  • Apple announced an updated iPad along with a suite of programs that enable educators and students to pursue creativity, which is critical in the future of education.
  • We estimate education accounts for 10-15% of Apple’s business. We believe today’s announcements will have a small impact on their education business, but an immaterial impact on their overall business.
  • Apple emphasized augmented reality as an important aspect in the future of education. Greg Joswiak added, “there’s no doubt that AR is going to dramatically change the way this generation learns.”
  • Our research suggests iPad is strongest in K-5 and Chromebooks are preferred 6-12. We don’t think today’s announcements change that dynamic.
  • The new iPad is priced essentially the same as its predecessor but adds the A10 Fusion chip and Apple Pencil Support. This essentially now competes with the $649 10.5″ iPad Pro.

We attended Apple’s education event today in Chicago. It’s been 6 years since Apple has done an education-focused event, which means the company had a lot to talk about related to its efforts in education that we estimate to account for 10-15% of Apple’s overall revenue. The main takeaway from today’s event is that Apple has a suite of hardware, software, and services that can be used by students, teachers, and administrators to optimize the education experience. At the core, is Apple’s belief that creativity in music, video, photography, and drawing can be a framework for advancing learning in STEM. Apple’s initiatives in education have hit a headwind over the past five years as cheaper Chromebooks have gained more adoption in schools. We believe Apple and iPad are uniquely positioned toward creativity, while Chromebooks are better positioned for the utilitarian aspect of education (essays, spreadsheets, etc).

What was announced today?

  • 9.7″ iPad with support for Apple Pencil. Previously, the cheapest iPad with Pencil support was the 10.5″ iPad Pro for $649. We believe this will have a small impact on overall iPad demand. We are currently modeling for flat iPad unit growth for the next three years, and believe today’s news could inch iPad unit growth to 1-2% per year. The overall iPad revenue will likely remain unchanged given there will be a mix shift from the 10.5″ iPad Pro to the new, lower-priced 9.7″ iPad.
  • More free storage for education. Students get 200GB of iCloud storage instead of 5GB.
  • Everyone Can Create program. In 2014, Apple announced the educational Swift programming language. Today, Apple announced the Everyone Can Create program, which is a companion to Swift and focuses on creative elements ofmusic, video, photography, and drawing. Apple believes that nurturing creativity will help further education in the sciences.
  • SchoolWork. This app is essentially a dashboard for students, allowing them to see current to class topics, manage assignments, and message classmates.
  • Apple also talked about management tools for educators for teachers and administrators. These applications have already been available for several years.

Looking to the future with creativity, empathy, and community. One aspect of today’s event was Apple painting its picture of the future of education. Filling in the blanks, it seems that this future includes a combination heavy on science and creativity. We would agree and add that along with creativity, empathy and community are the human qualities that machines are unable to replicate. We’re encouraged to hear that Apple is, to some extent, preparing students for the future by focusing on our most unique abilities and using technology to foster them.

Are kids getting too much screen time? As we processed today’s news, which will ultimately lead to more screens in schools, we revisited our concern that kids are getting too much screen time. This is not an Apple-specific problem, given iPhone and iPad only account for roughly 20% of the world’s mobile screens. That said, given Apple’s dominance in tech, they are a natural target for the “too much screen time” narrative. It appears Apple shares parents’ screen addiction concerns and has dedicated a portion of its website to educating parents on managing screen time. See here.

Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

Apple and Amazon are a Privacy Safe Haven

Apple and Amazon are relative safe havens.

  • We expect over the next year investors will look favorably on Apple given the company’s privacy-first ethos in an age where privacy is becoming a more prevalent topic.
  • Amazon will also likely benefit from the Facebook blowback given Amazon relies less on data to run its business than ad-focused companies.
  • The biggest risk to Facebook is attrition and, to a lesser, extent regulation.

Attrition. People are upset that FB abused their trust, although it doesn’t seem that users are upset about social media in aggregate. The trend is #deletefacebook not #deletesocialmedia. The risk to Facebook is that user growth slows or even declines. At the end of Dec-17 quarter, the company had 1.4B DAUs, up 15% y/y. For 2018, the Street expects about 10% DAU growth. If Facebook misses those numbers, shares will likely be negatively impacted. While it’s still early to tell how serious this bout of outrage against Facebook will ultimately be, Twitter and Snap may have an opportunity to benefit if users do leave Facebook.

Regulation. The Cambridge Analytica news of the past week has extended the privacy topic beyond Facebook. Given the political nature of the scandal, it currently seems more likely than less likely that some sort of restrictions get placed on the use of online consumer data. Mark Zuckerberg’s comments yesterday on CNN suggested that Facebook will take additional steps to assure user privacy as well as being open to some level of government oversight. If the government does decide to regulate the use of online consumer data, it could negatively impact all companies that rely heavily on monetizing that data including Facebook, Google, Twitter, and Snap.

Apple’s privacy ethos.  Tim Cook has made privacy a religion at Apple. It impacts everything from secrecy around new products to Apple Pay‘s anonymous transaction framework. In fact, Apple has a section on its website that outlines all of the ways Apple protects user privacy across all of the ways one uses their devices. Some notable Apple privacy insights include:

  • Privacy is a fundamental human right
  • Apple doesn’t gather your personal information to sell to advertisers or other organizations
  • Every Apple product is designed from the ground up to protect personal information
  • If we use third-party vendors to store your information, we encrypt it and never give them the keys

Amazon is service-first. Amazon’s focus is on delighting the customer through the services they provide. While Amazon does sell targeted ad space on their website, the “Other” revenue segment, which mostly constitutes advertising revenue, was less than 3% of total revenue in the Dec-17 quarter ($1.7B out of $60.5B). Advertising has never been a focus of the company, and it’s inconceivable they would abandon their current core businesses to pivot to an ad-first model that leaves them exposed to the risks we’ve highlighted in this note. Amazon’s real use case for user data is on their own site, targeting users with product suggestions.

Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.