Autonomy & Apple as a Service

  • The New York Times reported that Apple has signed a deal with Volkswagen to manufacture electric T6 Transporter vans outfitted with Apple’s autonomous sensor suite to be used as self-driving shuttles for employees.
  • This is significant because it plays into the fourth pillar of our Apple as a Service investment thesis: optionality.
  • Autonomy is one component of optionality that is currently not reflected in Apple’s share price along with AR, original content, and health.
  • Coming soon: We’re working on a sensitivity analysis to frame up Apple’s opportunity in autonomous mobility.

As Apple’s market cap approaches $1T, it begs the question: can shares move higher? At Loup Ventures we believe the Apple story is well positioned for future appreciation based on a long-term, sustainable investing paradigm. We call this new paradigm ‘Apple as a Service,’ which includes four pillars: stable iPhone, Services, returning cash to investors, and optionality (AR, content, health, and autonomy). Yesterday’s New York Times report on Apple’s deal with Volkswagen to build autonomous vehicles gives us some clarity regarding the optionality component to Apple as a Service. Investors are currently not giving Apple shares credit, given it’s nearly impossible to model. Eventually, that tide will change, and we expect shares of AAPL to benefit from this opportunity.

What has been said? The Times report detailed Apple’s plans to build a small network of autonomous shuttles for inter-campus employee transport, now with the manufacturing muscle of Volkswagen Group. The report also said this project, which is long overdue, is taking up nearly all the attention of Apple’s car team, so it is reasonable to assume that the project will progress quickly. The T6 Transporter’s frame, wheels, and chassis will remain intact, but Apple will no doubt make serious changes to interior and exterior design elements, along with adding computing power, sensors, and an electric drivetrain (unclear from who).

Why Apple has an interest in autonomy. We believe Apple’s endgame is a software and services platform enabling autonomous mobility fleets. The concept of an autonomous service is a departure from Apple’s current hardware and content services business. Specifically, delivering their experience through third party hardware is a strategy that Apple rarely employs. That said, we believe, given the complexities of manufacturing a car (just ask Tesla) and the size of the opportunity, it makes sense for Apple to partner their way to autonomy.

The fruit of the Volkswagen/Apple partnership will likely yield an Apple-like experience based on the Times’ report that Apple’s talks with other automakers were ended due to disagreements on who would own the customer experience and data. This leads us to believe that Apple will have a considerable amount of input and control over the design and experience of the end product.

Tim Cook has said, “We are 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.” Today those efforts are manifested in an autonomous shuttle for internal employee transportation, but this undoubtedly serves as a controlled proving ground for broader ambitions.

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 as a Service Part 4: New Product Categories

  • Optionality around new product and service categories is the 4th and final pillar to our Apple as a Service thesis.
  • We expect a stable iPhone business (part 1), a growing Services segment (part 2), and capital returns (part 3) to move shares higher.
  • In part 4, we outline potential new product and service categories, including AR wearables, personal health, original video content, and autonomous vehicles, which represent additional growth drivers not yet reflected in investor thinking.
  • New hardware products generate new Services opportunities and the company will continue to develop both in tandem as it looks to expand its ecosystem.

AR wearables a great fit for Apple. Futurist Charlie Fink sums up AR best: “The world is going to be painted with data.” Tim Cook agrees, and in 2017 said, “AR is one of those huge things that we’ll look back at and marvel at.” Cook is doing everything in his power to advance the theme, as evidenced by three developments in 2017 including; releasing an AR development platform (ARKit), shipping dedicated AR optics in the iPhone X, and purchasing SensoMotoric (a wearable computer vision technology).

While the tech community believes in the long-term potential of AR as the future of experiences, most investors are understandably mixed about its potential, given the two most popular AR use cases today are Snapchat and Pokemon. Adding to investor skepticism is the failed consumer launch of Google Glass, released in 2014 and discontinued in 2015. As a society, we were not ready for people to wear cameras.

That said, we believe AR is real and Apple will be a beneficiary. We expect Apple’s AR theme to play out in three phases. First, this fall we expect 2 to 3 new iPhones to join iPhone X with advanced optics for AR (VCSEL arrays). Second, AR apps built using ARKit will slowly become the next gold rush for developers, led by games, ecommerce, and education. Last, we expect Apple will release Apple Glasses late in 2021.

This begs the question: are we ready for AR glasses? Not now, but eventually we will be. AR is better hands-free. We’re not made to experience the world holding up a tiny window. Our arms and eyes get tired. Glasses solve that problem, but they also create a problem by breaking a social dynamic around privacy. We expect minuscule wearable adoption until the utility of an AR wearable offsets the negative social dynamic. Simultaneously, the technology must advance to a point where the design of the glasses is not a negative factor (as we’ve seen with smart watches). Once that happens, wearables will likely go mainstream. We see the early flip phone as a helpful analogy. Around 2000, flip phones added cameras, and the privacy threat of a camera in everyone’s pocket created a negative social dynamic. Eventually, consumers got over it because the utility of the camera offset the negative social dynamic. In the future, we won’t be able to live without an AR wearable, and Apple will be there to sell us one.

We are pushing back our expected release of Apple Glasses from September of 2020 to December of 2021 based on recent meetings with several AR industry experts. While these people do not have direct knowledge of Apple’s plans, it is becoming clear that, as a category, AR glasses are a few years away. We’re looking for 10 million units in the first year, similar to Apple Watch’s first year. We’re using a $1,300 ASP, which yields a $13B business and should account for 3% of Apple’s revenue in CY22. See our updated model here.

Personal health and fitness Apple’s new hobby. Steve Jobs routinely referred to Apple TV as a “hobby” for the company. In 2018, the Apple TV business will generate an estimated $3-$4B in revenue. Apple Watch has well surpassed Apple TV; we estimate it will generate nearly $11B in revenue in 2018. Apple Watch is now the most popular watch in the world. And fitness is literally a hobby of Tim Cook’s. Lastly, we view Cook’s personal motivation to improve global health and wellbeing as an important factor here. The rubber meets the road with products like Apple Watch and AirPods along with software development tools including HealthKit and ResearchKit, but new wearables (and “hearables”) and new capabilities for existing products represent a significant potential growth driver for Apple in the personal health space. We estimate that Apple Watch, AirPods, and a new AR wearable (“Apple Glasses”) will generate over $71B in FY23, up from an estimated $12B in FY18.

The opportunity in original content. We continue to expect Apple to launch a rebranded, all-in-one Apple video and music offering in 2-3 years. As the company ramps its spending on original content at a clip of about 50% per year to more than $4b in 2022, it will need a new home for its video content (currently available through Apple Music and iTunes). While Apple’s original content spend of about $500M in 2017 is just a fraction of the $8B Netflix plans to spend on original content this year, we think they are committed to competing in the content space. That said, they already take a cut of subscriptions generated for HBO, Hulu, Netflix and others via Apple devices. This one-two punch in content will continue to drive consumers away from cable and satellite TV providers to a combination of over-the-top service providers, and Apple is well positioned to benefit both directly and indirectly from this shift. See more here for our thoughts on Apple’s original content strategy.

Apple’s plans in autonomy. Tim Cook has said, “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.” While he notes that transportation is just one segment of autonomy, it is clear that Apple is working on autonomous vehicles, as they have recently expanded their fleet of test vehicles registered with the California DMV to 55, up from 27 earlier this year, and just 3 last year. While the company’s ultimate ambitions in autonomy are unknown, their public confirmation is noteworthy, and it is clear they are taking the opportunity seriously.

There are two ways we see Apple potentially bringing its autonomous systems to market. The first option would be to partner with a manufacturer to build an Apple-branded car, 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. The second option would be to focus on developing software and 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 as it plays to a number of Apple’s strengths including voice, navigation, entertainment, security, and a developer ecosystem.

At the moment, Apple is likely pursuing both options under the R&D umbrella of Project Titan. The most near-term application of their efforts is an autonomous shuttle called PAIL (Palo Alto to Infinite Loop) that will transport employees around campus, likely to collect data in a semi-controlled environment. 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: 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. 

AAPL’s Paradigm Shift

  • We’re entering a new paradigm related to investing in Apple defined by 4 key themes that we call ‘Apple as a Service.’
  • 1. Greater visibility in the iPhone business (62% of revenue), albeit at a 0-5% growth rate. This stability is representative of a hardware business performing increasingly like a software business, a positive for AAPL’s multiple.
  • 2. Services. Building off of this predictable iPhone business, Services (now 15% of revenue) should grow at ~15% for the next few years.
  • 3. Capital return. Consistent annual share buybacks could approach $40- $50B per year. Assuming AAPL shares rise, that buyback alone could move shares 5% higher this year, 4% higher in 2019, 3% higher in 2020, etc.
  • 4. New products. Innovation will still be required for Apple to maintain its high iPhone retention levels (above 90%), but, in the new paradigm, new product categories represent optionality to the AAPL investment story. Specifically, we believe original content, AR (including glasses), and automotive autonomy are opportunities not yet reflected in Apple’s valuation.
  • Putting it all together, this yields a stable business that is growing at 5-10% per year and returning the majority of its profits to shareholders.

As Apple’s market cap approaches $1T, it begs the question; can shares move higher? At Loup Ventures we do believe the Apple story is well positioned for future appreciation based on a longer-term, more sustainable investing paradigm. The recent move higher in shares of AAPL is likely an early reflection of this emerging paradigm shift. Starting next week, we will publish a four-part series on each of these themes.

Apple investing paradigms. About every 10 years, there is a new paradigm that drives investor thinking on the Apple story. It started with the growth of the Mac (’80-’85), then post-Jobs and competition from the PC (’85-’97), then the iPod along with its halo effect which increased Mac market share (’01-’06), and most recently, the iPhone (’07-present). We define the next paradigm as Apple as a Service.

Drifting away from product cycle hype and disappointment. What will slowly go away (may take a couple years) in this new way of thinking is hype ahead of new product releases and the inevitable anxiety related to unit sales once a product ships. We still think anticipation around new products will influence shares, but that influence will be shorter-lived. For example, Apple will likely release a larger-screen along with a lower-priced iPhone this fall, which will be good for iPhone demand but unlikely to yield a super cycle (greater than 10% y/y iPhone unit growth). The Apple as a Service paradigm will not need a super cycle for the Apple story to remain favorable with investors.

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. 

Nvidia Posts April Results; Continues to Advance Frontier Tech

  • Nvidia reported April earnings after the close today. Shares of NVDA are down 3% in after-hours trading given the company missed Datacenter revenue by a fraction of a percent. High growth stories have high bars to clear, and the company failed to exceed expectations in the Datacenter segment. Keep in mind, shares of NVDA have appreciated 20% in the past month.
  • That said, the Nvidia story is intact, and remains one of the best-positioned tech names for the next decade, as its products are a foundational part of the future of technology, based on their use in data centers, autonomous vehicles, virtual and augmented reality platforms, cryptocurrency mining, gaming and eSports.

What’s New? First, we’ll start with the bad news. Nvidia’s Datacenter growth has continued to slow, growing at 71% y/y vs. 186% y/y growth a year ago. Analysts expected Nvidia’s Datacenter to reach $703M in Q1, while it only reported $701M in the segment.

In addition, Nvidia offered more clarity around the impact that cryptocurrency mining is having on its business. Nvidia’s OEM and IP business grew 148% y/y due to the addition of cryptocurrency mining specific products. Despite stronger than anticipated impact from cryptocurrency mining, Nvidia does not expect this tailwind to continue. Nvidia shared that it believes OEM and IP to be 1/3 it’s Q1 level going forward.

Our GPU prices are normalizing, allowing gamers who had been priced out of the market to get their hands on one. Cryptocurrency demand was stronger than expected but we were able to fill it with crypto-specific GPUs. – Nvidia CFO Colette Kress

Earnings and model recap. Nvidia reported Apr-18 revenues of $3.21B vs. Street at $2.89B (up 66% y/y), and EPS of $2.05 vs. Street at $1.46. Updated model here.

What’s Next? We are still believers in the Nvidia story and want to reiterate our belief in three key catalysts for Nvidia’s growth.

1. Gaming – Demand for core gaming business products remains strong. Tonight’s call highlighted the impact that the Battle Royale game mode has had on the gaming market.

Bottom line, Fortnite is a home run, PUBG is a home run… Battle Royale is incredibly social and sticky. More gamers play, and more of their friends join. It’s a positive feedback system. – Jensen Huang

Gaming demand remains strong for Nvidia. Jensen shared positive feelings that Nvidia would be able to continue to fill channel inventory of graphics cards, helping normalize the price for gamers.

2. Datacenter – Companies are adopting artificial intelligence in order to remain competitive. Nvidia’s datacenter business saw triple-digit growth for the seven consecutive quarters, and 71% in the April quarter. A big part of this growth is due to the expanding use of artificial intelligence by companies, specifically deep learning. On tonight’s call, Jensen expressed his pleasure with Nvidia’s Volta architecture, with it being the first GPU designed specifically for deep learning. Volta architecture chips shipped to cloud customers in the last quarter. While the Volta chips have been used internally for qualification, for the most part, they are beginning to open up to external cloud customers.

3. Automotive – The market for autonomous vehicles will be bigger than most people think. Nvidia’s opportunity in the automotive space is bigger than many anticipate. As stated in our Auto Outlook 2040, we expect 90% of vehicles on the road in 2040 to have level 4 or 5 automation, which would require a platform such as Nvidia’s DRIVE PX. On tonight’s call, Jensen Huang re-iterated his belief that everything that moves will be autonomous, or have autonomous capabilities. This includes cars, taxis, agriculture, and pizza delivery equipment. Jensen shared that he anticipates driverless taxis to go to market in 2019, with autonomous cars going to market in 2020 or 2021.

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.

XPONENTIAL 2018 – The State of The Drone Industry

Last week, we attended the AUVSI XPONENTIAL trade show in Denver, the largest global gathering of unmanned systems providers, robotic software developers, and industry experts. We spent time with 15 executives from some of the leading commercial drone companies and thought leaders in the space and, as we did last year, asked them a set of six questions to better understand the trends driving (and holding back) the commercial drone industry.

Similar to last year, the executives we surveyed believed regulatory policies remain the biggest headwind holding back the industry while challenges related to sense-and-avoid and battery endurance are the biggest technical challenges. In addition, the industry is still in need of an Unmanned Traffic Management (UTM) system to unlock the true potential of drones, but the timeline to commercial integration remains uncertain. While we left the conference believing it will likely take longer for the drone market to reach its full potential as we work through these headwinds, we came away incrementally more upbeat about the long-term market opportunity for drones: The drone market will be a multi-billion dollar industry opportunity that benefits both early-stage start-ups as well as multi-billion dollar tech companies.

Below is additional color on the responses to our six survey questions:

What’s the biggest limitation holding back the industry? Almost identical to the responses we heard at least year’s conference, the majority of drone executives highlighted regulation as the primary industry headwind. While favorable drone regulation has been introduced over the past few years, the industry needs more clarity on beyond-visual-line-of-sight (BVLOS) flights, as well as flights over populated areas. Product understanding, technological hurdles, such as battery life, and lack of understanding around aircraft certification requirements were also common answers.

What U.S. government regulation is holding back the commercial drone industry the most? The key regulation holding back the industry is around beyond-visual-line-of-sight (BVLOS) flights, which was indicated by seven executives. This compares to five in last year’s survey (also 15 participants). Pushback on Section 336, which limits the FAA from regulating hobbyists, was also identified as a piece of legislation causing the industry headaches.

When will flights beyond visual line of sight be broadly allowed with US government oversight? Almost everyone agrees that BVLOS flights will not be made commonly permissible in the next year or two. On average, most experts think the industry will see broad BLVOS allowance in 2020, which was in-line with last year’s result. That said, there is some early progress on BLVOS flight. PrecisionHawk announced the first Beyond Visual Line of Sight (BVLOS)-enabled drone platform at the conference. After 3 years of research, the company was able to develop an FAA-approved drone system to operate BVLOS. While the industry still has a ways to go for broad BVLOS flight deployment, this announcement marks a major step forward.

When will a UTM system go live in the US? An Unmanned Traffic Management system is critical to allowing routine BVLOS flight applications and key to enabling the true potential of drones. NASA, Amazon, Google, and a handful of start-ups are leading the initiative to build various UTM systems. We asked when the executives in our survey expect a UTM system to be commercially available in the US, and unfortunately, most were pessimistic about this occurring in the next 12 months. The majority expect UTM to be integrated between 2020 and 2022. However, once again we heard several people indicate they are unsure, and implementation is largely in the FAAs hands. For a deep dive into UTM, see our research note here.

What is the biggest technical challenge you need to solve? While drone tech has advanced significantly over the last 12 months, industry leaders identified several areas that need improvement. Those specifically identified were remote identification, sense-and-avoid in GPS denied environments, battery endurance, real-time data processing, and command-and-control communication links. The executives in the survey went on to highlight that many of these technologies also need to be certified to be used in advanced applications.

What is the biggest untapped market or use case for drones? The drone market is still far from being mature, and most executives still see the largest market opportunities in traditional industries such as agriculture, utility inspection, and security. However, once BVLOS flights are allowed regularly, drone delivery and air taxis are also seen as large market opportunities, although don’t expect to see either of those use cases broadly deployed in the next several years.

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.