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.

The Future of Retail

It’s no secret that online retail is slowly killing offline retail.  In Q4 2016, 8.3% of total US retail sales were online (about $103 billion), up from 5.1% just five years ago (about $53 billion). Offline sales were 91.7% of the total, about $1.1 trillion. We don’t typically talk about the percentage sales that happen offline, but it’s powerful to see how large that market remains. The longer-term question is: how much of total retail will eventually happen online?  We looked at the breakdown of US retail sales by category excluding gas and restaurant expenditures. Based on our analysis, we believe that 55% of total retail sales will eventually happen online, leaving 45% of retail sales for the offline world. But how will brick & mortar retail defend its territory?

We believe the answer lies largely in a combination of artificial intelligence and robotics.  Where AI and robots are superior to humans in terms of efficiency, logic, and raw productivity, we believe humans will remain superior at creativity, community, and experience. Machine-driven retailers are uniquely qualified for convenience, speed and selection. Human-driven retailers are uniquely qualified to create personalized service based on empathy.

Human retailers are uniquely qualified to create personalized service based on mutual understanding – empathy.

The degree to which retailers are successful in leveraging creativity, community and experiences in their stores is the degree to which they will be successful in defending their businesses against online commerce and automated retail.

Given that backdrop, we see the future of retail delivered in three ways:

  • Online Shopping
  • Automated brick & mortar
  • Empathic offline retail

The Future of Online Shopping. Our analysis of US retail sales by category leads us to believe that 55% of total retail sales will eventually happen online. The consumer benefits of convenience, quick shipping and expansive product selection are too powerful to slow the gains that online shopping is enjoying at traditional retail’s expense. Amazon gets it, and they’re playing the long game, aggressively denying short term gains to establish itself as the owner of the operating system for commerce in the future. But Amazon also gets the fact that not all retail is best suited for the internet, which is why we’ve seen them dabbling in automated brick & mortar concepts. More on this below.

More immersive buying experiences will be a major driver of further gains for online shopping. Specifically, augmented reality and virtual reality will allow shoppers to experience a product in lifelike ways before they purchase it. Test out a new outfit in VR and get feedback from your friends. Show your significant other the new couch in your living room with AR before you order custom furniture. The likelihood of returns goes down, customer satisfaction goes up, and so too does the share of online retail.

The Future of Automated Brick & Mortar. We also expect a portion of retail to move to an automated model with few if any employees.  Stores will be monitored by computer vision systems. Shelves will be stocked by robots. Customers will be helped by service robots that understand natural language.  Checkout may resemble Amazon Go where customers simply walk out with their purchases. We’ll likely see the lines between online shopping and automated brick & mortar blur as some stores become more like warehouses for delivery personnel or delivery robots.

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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.

What Google I/O Means for Immersive Computing

This week Google hosted it’s annual I/O developer conference. On day one, the company focused on their innovation in the artificial intelligence space. On day two, they talked about new VR products. Here’s our take on what the latest out of Mountain View means for the future of AI and VR.

  • Day One: AI. At Google I/O, Google lived up to it’s commitment to be an AI-first company. The company announced a slew of AI innovations focused on making their platform easier to use with more natural interfaces including voice (Google Assistant) and vision (Google Lens). For example, Google Assistant now includes support for calendars, phone communication, and proactive alerts, closing a gap we identified in our work on home assistants. Proactive alerts for voice-based assistants is a big step towards a screenless future. Google Home now flashes when it has relevant and timely information. For example: [*Google Home flashes*] “Traffic is heavier than usual. Leave in the next five minutes to be sure you make it to Anna’s soccer game on time.” In the screenless future, friction-less information push represents the future of search technology. Google is still in the best position to own the category given its organization of the world’s information. Google’s progress in the fields of computer vision (Google Lens) and cloud-based supercomputing/machine learning (Google Compute Engine) positions the company for success as we transition to more natural and immersive computing. It’s no coincidence that day one ended with a tease for a standalone VR headset, untethered to a PC or a smartphone. For more, see the 10 min condensed version of all the day one announcements here.
  • Day Two: VR. The big news on day two was the announcement of a standalone VR headset untethered to a PC or smartphone for computing power. Google is partnering with Qualcomm to build a reference headset and announced partnerships with HTC and Lenovo to bring standalone VR headsets to market later this year. Google also addressed a common knock on VR: given the full enclosure of VR headsets, VR experiences are hard to share with others. Google is making VR more social with shared rooms and voice chat as replacements for the text-based comments familiar to PC users. These advancements will help make VR mainstream faster. The transition from PC- and smartphone-driven VR to standalone VR will take 3-5 years (we don’t expect real traction – 1m units – until 2019), but the transition has clearly begun.

Bottom line: Google’s investments in AI and VR will accelerate the transition from computing on PCs and touchscreen devices into the future marked by immersive computing.

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.

Snap’s Pain is AR’s Gain

On Wednesday, Snap reported earnings for the first time. Most investors saw Snap’s results as a disappointment, primarily because they missed on revenue and didn’t meet DAU expectations. Investors expected Snapchat to reach about 168 million DAUs, but they only reached 166 million DAUs. That’s bad news for Snap, but good news for the field of Augmented Reality.

Competition is Heating Up in AR. Facebook is going directly at Snapchat with Instagram Stories. Since launching in August 2016, Instagram Stories has eclipsed Snapchat in DAUs. Facebook and Instagram understand the importance of AR in the future, and made a commitment to invest heavily in the area.

At F8, Mark Zuckerberg threw down the gauntlet, making it very clear that AR was an important area for Facebook and Instagram in the future. Facebook has taken an open approach to its camera, giving developers a set of tools with which they can create apps that run on Facebook’s camera platform. By opening this up, Facebook will see more, and better AR content within its application. Snapchat will likely follow suit and open up its camera for other developers as well.

Ultimately, the increase in competition between Snapchat and Facebook will push AR forward faster.

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.