Apple Confirms Self-Driving Car Project

In an interview with Bloomberg, Apple CEO Tim Cook confirmed Project Titan, Apple’s car project. Cook referred to this as “the mother of all AI projects.” While the project hasn’t been a well-kept secret, Apple’s public confirmation is noteworthy. Cook referred to the three specific areas: self-driving technology, the electrification of vehicles, and ride-hailing as “three vectors of change happening generally in the same time frame.”

“We’re focusing on autonomous systems…It’s a core technology that we view as very important…We sort of see it as the mother of all AI projects…It’s probably one of the most difficult AI projects actually to work on.” – Tim Cook

We wrote previously about Apple’s self-driving car project, but there hasn’t been a public statement as clear as Tim Cook’s comments today about Apple’s efforts on the car front.

At the end of the interview, Cook shared: “Autonomy is something that is incredibly exciting for us. We will see where it takes us. We are not really saying from a product point of view what we will do. But we are being straightforward in that it is a core technology that we view as important.” So, how will Apple turn the technology into a product?

“Autonomy is something that is incredibly exciting for us. We will see where it takes us. We are not really saying from a product point of view what we will do. But we are being straightforward in that it is a core technology that we view as important.” – Tim Cook

How Will Apple Go to Market? There are two ways we see Apple potentially bringing its car technology to market. The first option would be to partner with a manufacturer to bring an Apple-branded car to market. The second option would be to focus on developing software and implementing it across as many car platforms as possible.

  • Partner with a manufacturer. Apple could partner with a manufacturer to bring its own branded car to the market, just as they do with the iPhone and iPad. By partnering with a manufacturer, Apple would have design control over the product, and would be able to customize the user experience as much as possible. On the other hand, manufacturing a car is very different than manufacturing a smartphone. Apple could even acquire a car manufacturer to do this. Some think it makes most sense for Apple to acquire Tesla, but we have already written about why this is most likely a fairy tale.
  • Develop software for autonomous vehicles. Another option is for Apple to license its technology to current auto manufacturers for use in their vehicles. Apple could be the OS of the future for cars. This may be the more likely option. In order for widespread adoption of fully autonomous vehicles, cars would need to have hardware and software integrated into their design that would not only operate the vehicle, but also communicate with surrounding vehicles at all times. In this scenario, Apple would expand its presence in the automotive market significantly and further expand the halo effect of their product lineup into autos.

At the moment, Apple’s is likely pursuing both options under the R&D umbrella of project Titan. True to form, they’ll watch this market emerge and enter when the time is right – from both a product and a market standpoint.

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.

Interest In Buying Next iPhone Higher Than Last Year

Survey Shows Interest In Upgrading to Next iPhone Higher Than Last Year. The weekend before WWDC, we surveyed 501 U.S. consumers regrading their intent to purchase the next iPhone, expected to be released early to late this fall (possibly delayed a month, see below for details). Of the 220 current iPhone users we surveyed, 25% plan on buying the next iPhone at release, up from 23% in our previous survey in early March 2017. This compares to last year when our survey found 15% of iPhone owners planning to buy an iPhone 7 at its launch in 2016. The iPhone 7 data point is based on a survey we conducted while at Piper Jaffray in July 2016. 

AR Interest High Among Expected iPhone Buyers. When asked about augmented reality features, interest is high among those expecting to purchase the next iPhone (even though this survey was conduct before Apple’s ARKit announcement on June 5th). We found that 54% of respondents that intend on purchasing the next iPhone indicated interest in AR features, compared to 26% percent in our March survey. Among those not planning on buying an iPhone, interest in AR was much lower at 14%.

AR Interest Low Among Android Users. Overall, just 20% of the 501 respondents indicated interest AR. The message that the next iPhone will have more AR features is resonating with loyal iPhone users but Android users have far less interest in AR. As expected, the 18-29 age group showed the highest interest level in AR at 26%.  

2017 iPhone Should Mark A Step Up In iPhone Growth.  The increase in iPhone growth from the coming iPhone cycle is already factored into shares of AAPL. We are modeling for iPhone unit growth to increase from 0% for the iPhone 7 cycle to 8% for the upcoming iPhone cycle. We expect iPhone revenue growth to increase from flat during the iPhone 7 cycle to 11% for the next iPhone cycle. Revenue growth outpacing unit growth is attributed to an ASP increase from $651 (current iPhone cycle) to $674 due to the addition of a new high-end iPhone SKU with 3D depth mapping which we expect to start around $1,000 vs. today the high-end entry level (128 GB) iPhone 7 which is priced at $869. This new high-end SKU should run about $47 per month on the iPhone upgrade program, compared to $41.58 today for the entry level iPhone 7.

Expect iPhone Announcement In September, Shipping In October. Previously we had expected Apple would announce and ship the new iPhone in Sept. 2017, maintaining their annual fall launch of new iPhone hardware (iPhone 5, 5S, 6, 6S, and 7 each shipped in Sept.). Based on a recent conversation with a component supplier, we now expect the new iPhone to be announced in Sept. and ship in Oct. given challenges with the OLED curved screen. This delay would result in a shortfall in the Sept-17 iPhone units of ~10m units (now expect 39m units compared to the Street at around 49m). We expect 6m units to be shifted to the Dec-17 quarter and 4m into Mar-18. We expect the iPhone will be at supply demand equilibrium earlier in the Mar-18 quarter.

Thoughts On The Name. We have been referring to the next iPhone as “iPhone X”; however, Apple has been simplifying their naming schemes across product lines (e.g., “iPad” and “iPad Pro,” dropping the numerical value to show its position in the lineup). All that to say, we now think Apple will refer to the new iPhone as “iPhone” and “iPhone Plus.”

Additional Survey Details.   

  • Total sample size: 501 U.S. consumers
  • iPhone 7 users: 63 of 501 (13%)
  • iPhone 6s users: 61 of 501 (12%)
  • iPhone 6 users: 64 of 501 (13%)
  • Other iPhone users: 32 of 501 (6%)
  • Total iPhone users: 220 of 501 (44%)
  • iPhone users planning to upgrade to next iPhone: 54 of 501 (25%)
  • More interest in AR: 100 of 501 (20%)
  • Less interest in AR: 80 of 501 (16%)
  • Unchanged in AR: 319 of 501 (64%)
  • 18-29 (19%)
    • iPhone users: 48 of 96 (50.o%)
    • Purchasing the next iPhone: 13 of 96 (13.5%)
    • More interest in AR: 25 of 96 (26.0%)
    • Unchanged interest in AR: 59 of 96 (61.5%)
    • Less interest in AR: 12 of 96 (12.5%)
  • 30-44 (27%)
    • iPhone users: 66 of 135 (48.9%)
    • Purchasing the next iPhone: 25 of 135 (18.5%)
    • More interest in AR: 32 of 135 (23.7%)
    • Unchanged interest in AR: 80 of 135 (59.3%)
    • Less interest in AR: 23 of 135 (17.0%)
  • 45-59 (22%)
    • iPhone users: 40 of 110 (36.4%)
    • Purchasing the next iPhone: 12 of 110 (10.9%)
    • More interest in AR: 22 of 110 (20.0%)
    • Unchanged interest in AR: 78 of 110 (70.9%)
    • Less interest in AR: 10 of 110 (9.1%)
  • 60+ (31%)
    • iPhone users: 64 of 156 (41.0%)
    • Purchasing the next iPhone: 20 of 156 (12.8%)
    • More interest in AR: 19 of 156 (12.2%)
    • Unchanged interest in AR: 101 of 156 (64.7%)
    • Less interest in AR: 36 of 156 (23.1%)
  • Male (48%)
    • iPhone users: 99 of 240 males (41.2%)
    • Purchasing the next iPhone: 44 of 240 (18.3%)
    • More interest in AR: 54 of 240 (22.5%)
    • Unchanged interest in AR: 153 of 240 (63.7%)
    • Less interest in AR: 33 of 240 (13.7%)
  • Female (51%)
    • iPhone users: 119 of 257 (46.3%)
    • Purchasing the next iPhone: 26 of 257 (10.1%)
    • More interest in AR: 44 of 257 (17.1%)
    • Unchanged interest in AR: 165 of 257 (64.2%)
    • Less interest in AR: 48 of 257 (18.7%)
  • Plan to purchase next iPhone 71 of all 502 U.S. consumers (14%)
    • iPhone users: 54 of 71 (76.1%)
    • More interest in AR: 38 of 71 (53.5%)
    • Unchanged interest in AR: 31 of 71 (43.7%)
    • Less interest in AR: 2 0f 71 (2.8%)
  • Not planning to purchase next iPhone 430 of all 502 U.S. consumers (86%)
    • iPhone users: 166 0f 430 (38.6%)
    • More interest in AR: 62 0f 430 (14.4%)
    • Unchanged interest in AR: 289 0f 430 (67.2%)
    • Less interest in AR: 79 0f 430 (18.4%)

Apple Will Become The Leading AR Platform Over Night

Here’s our take on the most important announcements from Apple’s WWDC 2017 keynote event:

  • New AR Developer Tools. ARKit is the single most important announcement from today’s keynote, enhancing iOS 11 devices for augmented reality. ARKit instantly creates a multi-100m user base for AR developers over night, which compares to Google’s Tango platform which we believe has well under 10 million users. We believe AR will be the core technology that eventually replaces the smartphone. Today’s announcement lays the groundwork for Apple to succeed in that future as ARKit represents the first tangible commitment from Apple to establish itself as the leader in the race to build a dominant AR-driven OS. The company will build AR-enhanced iPhones that include depth cameras and other additional hardware in the future, but they will also bring along the existing iOS device base to bring AR to all sooner than later.
  • New VR Developer Tools. Apple also dedicated a meaningful chunk of the keynote to introduce new technology, announcing support for SteamVR, Unity and Unreal. The company also announced Metal for VR, which supports VR content creation.  These announcements show that Apple views VR as an important computing paradigm in the future, a market they have been shut out of to date because of their focus on integrated graphics and downplaying the powering of external hardware. We believe that today’s announcements represent a small step toward eventually launching a VR platform for iPhone.
  • New AI Developer Tools. Apple showed an increasing focus on artificial intelligence across its product line. The company announced Core ML, a new machine learning API to make AI faster on mobile devices. Ultimately, this will enable on-device processing for AI with data privacy across iOS, macOS, watchOS, and tvOS. Robust AI requires: 1) broad understanding and learning across devices, 2) advanced natural language processing, and 3) advanced computer vision. Apple highlighted its strengths across all three of those requirements throughout today’s keynote.
  • HomePod. Natural language will be a key user interface in the future of computing and Apple is playing catchup today with HomePod. Based on the product demo at WWDC, HomePod clearly offers a premium audio experience. The company is differentiating the device from other home assistants by focusing on music, but make no mistake: Siri is the killer app on HomePod. Apple fully understands the importance of Siri for HomePod and we expect updates to Siri when HomePod ships in December. We expect Apple to gradually open Siri up to developers and create an Alexa Skills-like offering for voice based apps. Today, developers are only able to integrate Siri skills if their apps fall within nine app domains (ride booking, restaurant reservations, etc.), but that won’t cut it in the future.

And here’s our take on the rest of the announcements from WWDC:

  • ApplePay for person-to-person transactions. Apple is now the only company to integrate a comprehensive payments platform directly into the OS. The significance of OS integration will only increase as computing becomes more immersive in the screenless future. A clear negative for PayPal’s Venmo.
  • macOS High Sierra. Support for VR will excite some developers and Mac gamers who have avoided the Mac.
  • watchOS 4. We’re looking forward to the Siri watch face.
  • iOS 11. Classic Apple software updates to keep iOS ahead of the pack. New iPad features for iOS show that Apple is trying to push the limits of the iPad as a productivity device. We think it might be enough to bend the growth curve from negative to flat.
  • New iMacs and MacBook Pros. An unexpected price cut on the most popular MacBook Pro.
  • New 10.5″ iPad Pro. Makes sense given that Apple’s getting rid of the 9.7″ iPad Pro. Generally, the iPad line makes more sense now.
  • Amazon Prime Video on Apple TV. More of a negative for Netflix than a positive for Apple or Amazon.
  • Redesigned App Store. Unifying the UI across iOS.

Hinting Towards an AR-enhanced iPhone.

Today’s announcement of ARKit leaves us incrementally more confident that an AR-enhanced iPhone is coming this fall. The software groundwork has been laid for Apple to unveil new iPhones with dual cameras across all models (regardless of screen size), a new 3D mapping chip, and perhaps an edge-to-edge display with no hardware home button. Apple’s new Siri UI showed a Siri button that looks like it could be a Siri-specific home button on a home button-less iPhone. And the new design of the dock, which is now self-contained in iOS 11 (as opposed to the edge-to-edge dock design in iOS 10), makes more sense in a UI with display area below the button. The next iPhone continues to look like it will be the most important update to the device since iPhone 6.

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.

WWDC 2017 Preview

On Monday, June 5th, Apple kicks off its Worldwide Developers Conference (WWDC). We continue to expect Apple’s next iPhone, coming this fall, to offer advanced augmented reality capabilities including 3D mapping (a key for AR). At WWDC, we’ll be looking for signs of these these new AR features in iOS 11.

Our survey work on the upcoming iPhone suggests that 23% of iPhone owners intend to upgrade, which compares to 15% that intended to upgrade to an iPhone 7 prior to its launch. Among those that plan to purchase the next iPhone, 26% indicate an interest in AR features compared to 16% among those that don’t plan to purchase the iPhone X. While we’re confident in the addition of AR features in the next phone, we don’t expect Apple to reveal new AR-related iPhone features when it introduces iOS 11 at WWDC. Those announcements will come in the fall when Apple launches the new device.

Here’s what we expect at WWDC:

  • iOS 11 (100% certainty). Apple will announce iOS 11 and bring new capabilities to iPhones and iPads. The question is: how much will iOS 11 tell us about Apple’s ambitions in augmented reality? Here’s a fun wish list of iOS 11 features from MacRumors.
  • Siri Home Assistant (60% certainty). The rumor mill has focused on the possibility of Apple debuting a digital assistant for the home based on Siri technology. While Apple TV has brought lots of Siri’s functions from the phone to the home, an always-on digital assistant makes a lot of sense for Apple. We see these devices driven by natural user interfaces like voice as the future of computing. And Apple has ground to make up in the market for digital assistants in the home.
  • 10.5” iPad Pro (10% certainty). Another rumor involves the release of a 10.5” iPad Pro, falling between the current 9.7” and 12.9” models. Unless the company does away with the iPad mini, as rumored, a third iPad Pro size is a bit of a head scratcher for us.
  • Updated MacBook Pros (50% certainty). Apple may introduce updated MacBook Pros based on Intel Kaby Lake processors. The latest MacBook Pro models were introduced in Nov. 2016 but did not leverage the latest Intel processors, which could be remedied at WWDC.

We’re hoping to see Apple make a big push into more natural, more immersive computing with the introduction of new voice- and AR-based developer tools for Apple devices. We’ll be there on June 5th to report back from WWDC.

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.

Why Apple Deserves a Trillion-Dollar Valuation

Apple’s market cap crossed $800 billion for the first time two weeks ago. Not long ago, we predicted that Apple would be the world’s first trillion-dollar company. We’ve had ups and downs since then, but now we’re closer than ever.

We think Apple deserves the largest valuation of any company in history. Investors are finally giving the company credit for its defensible, recurring business of selling high margin hardware and software, layering in Services revenue growing in the high-teens. While not a traditional recurring business with quarter-to-quarter predictability, 600 million+ iPhone customers with 96%+ satisfaction rates generate predicable revenues over longer periods of time.

Year-to-date, shares of AAPL are up 32.3% vs the Nasdaq at 13.9%, as of this writing. A key reason for the stock’s outperformance is mounting expectations for the iPhone X coming this fall, which should reaccelerate growth in the iPhone business. We expect iPhone units to be up around 7% y/y for the iPhone X cycle (FY18) and flattish in 2019 and 2020. The stock currently trades at about 15x forward EPS, which is in line with historical multiples of ~16x heading into new iPhone cycle launches (iPhone 5 and iPhone 6). The stock only traded at around 11x forward EPS heading into iPhone 7, which was viewed as more of a stepping-stone to the iPhone X.

More importantly, the iPhone X will be Apple’s first meaningful step into augmented reality (AR) as the new phone will have the ability to map the real world through new cameras and sensors. Google did this first with its Tango smartphone platform, but Apple will take it mainstream and could have over 100 million AR-enhanced smartphones in the market by this time next year. As we wrote previously, Apple is well positioned to be one of the major winners in AR. Design remains their unique core competency relative to other competitors like Google and Microsoft, and they will also have an early-mover advantage in AR-enhanced smartphones through the iPhone X.

A note of caution from years of seeing iPhone product cycles: A near-term pull back in shares may happen as we get closer to the typical late September iPhone launch date. Investors notoriously ‘sell on the news’ as Apple’s product pipeline is well telegraphed at this point and the company typically does not announce unexpected products.

Beyond trying to time the public markets, which we’re avoiding now as venture capitalists, Apple remains in a strong position. The iPhone business should show growth this year and relative stability over the next several years. The company should be able to repatriate a meaningful amount of its overseas cash in the next year. The Services business should continue to grow in the low-double digits for multiple years, providing incremental high margin software revenue driven by growth in the iPhone user base. Plus, there is optionality in Apple’s development of AR glasses, AirPods as hearables, and the potential for an Apple car.

Bigger picture, large cap tech is a great place to be. Apple’s market cap makes it king, but Google, Facebook, Amazon, Microsoft, and, our current favorite, Tesla, have all performed well in the current optimistic market environment. These six companies are investing heavily in the core focus themes of our fund that we see as the future of computing: AI, robotics, VR, and AR. They, too, see the next wave of technology coming and Apple, in particular, is well positioned to benefit.

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.