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. 

Smart Speaker Satisfaction High, but It’s Early Days

We recently surveyed 520 US consumers about smart speakers and found that 89% of respondents were satisfied with them. A closer look at the results reveals the reason for this high satisfaction; early use cases are simple (Music, weather, general questions). While questions remain simple today, we expect what users demand from their smart speakers to become more complex. The survey covered smart speaker ownership, satisfaction levels, and common uses. Here are the key takeaways:

  • 31% of respondents own a smart speaker.
  • Amazon Echo dominates the market with 55% share, followed by Google Home at 23%. See more below.

  • 89% of smart speakers owners are either satisfied (59%) or very satisfied (30%) with their device.
  • Music, weather, and general knowledge questions dominate smart speaker usage. See more below.

In line with expectations. At roughly 1/3 of the U.S. population, smart speaker penetration is in line with our current estimations. Other than Cortana being slightly over-represented and Echo being slightly underrepresented, we believe the market share in the survey data also resembles the current landscape. In terms of smart speaker use cases, our survey finds the most common activities to be listening to music, getting the weather, and asking general questions. This is consistent with studies like the one from Quartz here.

It comes as no surprise, consequently, that 89% of respondents were satisfied or very satisfied with their smart speakers. This is due in large part to the relatively simple tasks that the majority of users demand of their devices. For example, Cortana scores a 57% on our comprehensive smart speaker test. On a standard report card, this is a failing grade, but Cortana is well suited to play your music from Spotify, tell you the weather, and answer any simple question you have, so it’s easy to see why the typical user would be plenty satisfied. Put simply, people aren’t using their smart speakers for anything all that smart. But we expect that to change.

Changing use over time. The top use cases for smart speakers today make sense because they are well defined and they work consistently. Benedict Evans put it well in a blog post early last year: “You can now use an audio wave-form to fill in a dialogue box – you can turn sound into text and text into a structured query, and you can work out where to send that query.” This works really well for simple ‘google-able’ questions or fetching info from a weather app, but as the use cases broaden, it is not always clear where to send a query. Just because calling up a Spotify playlist is a well built-out process doesn’t mean the same is true for a YouTube video or Podcast. It takes a huge amount of human time and energy to make these processes run smoothly. AI assistants are a new technology, so this is not a long-term concern, but until the voice ecosystem is more robust, users will have to settle for somewhat simple use cases.

The reason we are excited about smart speakers, however, involves the much wider use of voice as a computing input to remove friction. We believe the preferred interface for countless smart home devices and software services is not countless apps or small touchscreens, but your voice. This will involve drastically increasing the number of defined places you can send those queries and the number of connected devices in your life. Music, weather, and general questions won’t go away, but other activities will increasingly take place via voice. The desire for the voice interface is there. Smart speaker adoption is outpacing that of the smartphone, and the majority of users say they wouldn’t want to go back to their life without their smart speaker. We think it’s only a matter of time until voice cements itself into our everyday lives.

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.

Key Questions on the Evolving Future of Transportation

Advancements in self-driving car technology will eventually result in full-scale autonomous transportation. Considering the level of investment from deep-pocketed tech and auto companies and the caliber of human capital that accompanies it, the space has become “too big to fail.” This note explores three key questions we’re working through as we consider the autonomous future:

  • What will an automaker of the future look like?
  • What will the future of transportation look like for consumers?
  • Who is going to win in the future of transportation?

What will an automaker of the future look like?

In order for an automaker to succeed in the transition to autonomy, we see three core competencies: manufacturing capability, autonomous systems, and services.

Manufacturing Technology

Despite all the work going into and the hype around autonomous systems, expertise in manufacturing cars can’t be overlooked. We’ve seen the challenges Tesla has had scaling their production. Technology companies are at a significant deficit here and will likely rely on partnerships with traditional auto to bring a product to market.

Tesla is trying to solve the manufacturing problem on its own. Elon Musk said, “The biggest epiphany I’ve had this year is that what really matters is the machine that builds the machine, the factory, and that this is at least two orders of magnitude harder than the vehicle itself.”

To tackle this problem, Tesla has made acquisitions in the manufacturing space and has chosen to develop software and sensors in-house. We’ve written a lot about Tesla’s efforts (and shortfalls) in manufacturing the Model 3 at scale. We think they’ll get there.

Autonomous Systems

Software is the brains behind autonomous vehicles. This is both the most complex element and where the true value lies in autonomy. The winner in this space will have a good chance at owning the operating system of the car.

A few notable investments in this space: GM’s acquisition of Cruise, Ford’s investment in Argo AI, and Delphi’s acquisition of NuTonomy. Autonomous software investments are typically the largest in the space. We expect this trend to continue as traditional automakers, who already possess manufacturing skill, attempt to acquire or partner with the tech that will keep them relevant as the industry transitions.

Sensors are the eyes and ears of autonomous vehicles. We break the sensor category into LiDAR, radar, and cameras. Most autonomous solutions today require all three, but Tesla thinks it can reach full autonomy without LiDAR.

Many auto manufacturers and tech companies have made hardware acquisitions. Above and below are some of the investments that major auto companies have made in autonomous software and sensor companies:

Services

A significant part of current automakers’ revenue comes from servicing and maintaining the vehicles they have sold. As EV and autonomy play out, and ride-hailing fleets reduce car ownership, these service revenues will need to be replaced by software services. Down the road, connected cars will resemble a platform much like a mobile device. Owning the operating system and/or providing software services through that OS could more than make up for lost maintenance revenue.

One of these services could be in-car entertainment. With steering wheels, and eventually the need for driver attention, going away, the interior of a car will look much different. Seating arrangements and space will not resemble the current layout, but more importantly, we’ll be free to spend our time differently while in transit.

Tech companies will all be vying for the opportunity to provide in-car entertainment to consumers. Similar to smartphones today, there will be those that own the operating system (Apple, Google) and those that build on top of it to deliver content (Netflix, Snapchat). Outside of these opportunities, companies will also leverage the connected car platform to deliver targeted advertisements to riders. Imagine being prompted with a coupon for Starbucks while on your way to work. Companies will be able to target individuals with location-based advertisements much easier than through smartphones.

What will the future of transportation look like for consumers?

There are three themes that will impact what the future of auto will look like for consumers. We’ve written in-depth about these topics here: Auto Outlook and Detroit Auto Show.

Electric Vehicles will be prevalent. Electric vehicles currently account for ~1% of all vehicles today, but will reach 35% by 2030. As battery technology improves, range anxiety decreases for consumers. We’ve also learned that EVs can be fast.

Cars will drive themselves. Today, 99.9% of all vehicles have little to no automation. By 2040, 90% of vehicles sold will have Level 4 or 5 autonomy. Our transportation experience won’t change dramatically until autonomy becomes more prevalent.

Car ownership will decrease, giving way to more ride-hailing. Today, the current household has an average of 2.0 cars. We think that over the next 15-years, this number could go down to 1.25 cars per household and, longer-term, decrease even further. While some individuals may not like the idea of giving up ownership of a vehicle, there are plenty of benefits. For starters, people would not have to pay car insurance, worry about maintenance, store a vehicle, or for those of us in less favorable climates, scrape windows in the winter, or worry about parking during a snow emergency.

As ride-hailing networks become more reliable with autonomous vehicles, more people will be willing to decrease or give up household ownership of vehicles. Traditional auto and tech companies are making large bets on it, as outlined above and below:

Who is going to win in the future of transportation?

If the connected car is a platform like the smartphone, who will be the Apples and Googles of transportation? Waymo, Uber, and Tesla are early candidates for winning the operating system of the car, with each taking their own unique approach. Waymo has focused on building autonomous systems first and will seek to launch or partner with a ride-hailing network second. Uber has built a ride-hailing network first and is now racing to catch up in autonomy. Each will seek to partner with existing car manufacturers for producing vehicles. Tesla decided to manufacture vehicles first and is narrowing in on autonomy second; believing that a ride-hailing network is the last hurdle that needs to take place.

There are plenty of other entrants that could compete in this space including OEMs, who have invested large amounts in autonomy and certainly have the manufacturing scale component already solved, as well as a host of tech companies that could provide autonomous systems or software services to manufacturers. The bottom line is that the value chain in the transportation industry is being disrupted, and the massive opportunity to capture value in an industry transition will create a number of new winners.

At this point, it’s clear that one winner will be the consumer. With access to more ubiquitous, clean, and affordable transportation without the burden of car ownership, mobility will be more accessible than ever.

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.

We Ran HomePod Through the Smart Speaker Gauntlet

Conclusion. Yesterday, we put HomePod through the smart speaker gauntlet which included 782 queries along with comprehensive tests of sound quality and ease of use. Our methodology was comprised of 3 HomePods being tested throughout the day by the Loup Ventures team. Here are four key takeaways.

  • HomePod is hands down the best sounding smart speaker.
  • As a smart speaker, it answered 52.3% of queries correctly compared to recent tests of Google Home at 81%, Alexa at 64%, and Cortana at 57%.
  • The user experience of HomePod is measurably better than its competition (setup, communication style, listening ability).
  • We have added HomePod to our Apple financial model. For CY18, we’re expecting HomePod unit sales of 7 million (12% global smart speaker market share) with a $349 ASP, which adds approximately 1% to revenue and earnings. In CY19, we expect unit sales of 10.9 million, which adds just over 1% to our model. While only factional revenue contribution, we expect HomePod units to grow between 40% and 45% per year over the next 3 years. Link to model here.

Query results. Siri understood 99.4% of queries and answered 52.3% of them correctly. This places HomePod at the bottom of the totem pole in terms of AI assistant performance. Siri is particularly strong in Local (where can I find a good cup of coffee around here?) and Commerce (help me buy some new shoes.) queries, handily beating Alexa and Cortana, but still falling short of Google Home in those areas. Overall, Siri performed above our expectations given the limited scope of HomePod’s music focus.

Adding domains will quickly improve Siri’s score. Some domains like navigation, calendar, email, and calling are simply not supported. These questions were met with, “I can’t ___ on HomePod.” Also, in any case that iPhone-based Siri would bring up Google search results, HomePod would reply, “I can’t get the answer to that on HomePod,” which forces you to use your phone or give up on the question altogether. Removing navigation, calling, email, and calendar-related queries from our question set yields a 67% correct response, a jump from overall of 52.3% correct. This means added support for these domains would bring HomePod performance above that of Alexa (64%) and Cortana (57%), though still shy of Google Home (81%). We know Siri has the ability to correctly answer a whole range of queries that HomePod cannot, evidenced by our note here. Apple’s limiting of HomePod’s domains should change over time, at which point we expect the speaker to be vastly more useful and integrated with your other Apple devices.

Other observations

  • HomePod has superior listening skills to other smart speakers. This is partly due to a noise cancellation feature which allows you, even at a volume where you would have to raise your voice to talk to others in the same room, to use your regular speaking voice with Siri. This was HomePod’s most stellar feature.
  • Wireless setup was super easy. In fact, it was the easiest of any of digital assistant we have used (Alexa, Google Home, Cortana, etc.). You already have a companion app and don’t need to wrestle with wifi networks.
  • Siri’s voice sounds smoother and more human than it does on your iPhone.
  • Her communication is also more human-like. Specifically, after asking a question, she does not repeat the whole thing back to you as is the case with Google Assistant and Alexa, which makes for a subtly smoother process.
  • The tap UI on the touch-sensitive display requires a small amount of instruction, as it is not immediately obvious that you tap to play.pause, double tap for next track, triple tap for previous track, and touch and hold to bring up Siri.
  • HomePod’s packaging is a new level of perfection for Apple. The perfectly fitted box requires you to open it at “reveal” pace, and even the external plastic wrap is pleasing to remove.
  • As a speaker, it sounds incredible – mission accomplished. As a digital assistant, whether it is a direct competitor or not, it is better than what we expected for version 1, but still lags behind Alexa and Google Home.

Survey suggests demand for HomePod similar to Apple Watch. Last week we surveyed 500 people in the U.S. and found 3.3% said they would purchase a HomePod in the next year. Among those surveyed who already own an Apple product, 5.2% planned on buying a HomePod. This is similar to 7% of Apple product owners planned to buy an Apple Watch ahead of its launch in Spring of 2015 (survey was conducted in December of 2014, four months ahead of the Apple Watch launch). While Apple does not disclose Watch unit sales, we estimate in its first 12 months Apple sold 10.2m Watches at an ASP of $475. This compares to our first 12 months of HomePod sales estimate of 7m units with an ASP of $349.

Smart speaker market share. We see Google Home as the long-term smart speaker unit share winner, but Alexa and Apple as the two other key players. In 2018 we expect HomePod will capture 12% of the global smart speaker units, compared to our estimate of Alexa at 52% share, Google Home at 32% and others at 4%. In 2022, we expect HomePod will hold a similar 12% market share (HomePod ASP estimate declines to $149 from $349 today), Google Home at 48% and Alexa at 37%.

Apple’s grander vision around HomePod.  Don’t be fooled by HomePod’s sound quality-focused first step into smart speakers; Apple has a grander vision than delivering a better sounding Echo. While not present in the first version of HomePod (i.e. you can’t even make a phone call with HomePod), we believe Apple’s goal is to make Siri a ubiquitous, ambient presence that connects and controls all your connected devices and services – and to make a leap forward in the transition to voice-first computing.

The way humans interact with computers is changing. Today, we use our keyboards, mice, and touchscreens to interact with computers, but in the future, we’ll simply rely on our voice, gestures, or even our thoughts. Voice is quickly becoming a preferred interface. Apple’s device ecosystem delivers a frictionless experience, which will only get better with the adoption of voice and with the addition of HomePod supported domains (9 supported domains today). Interestingly, Apple has included an A8 chip in its HomePod, the same chip included in an iPhone 6. The A8 chip is much more powerful than the chips competing home assistants run on, which poses the question: what else is Apple planning with the HomePod?

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.