Annual Apple Pay Review: Adoption Jumps, but Still a Long Way to Go

We completed our annual Apple Pay review and found year over year growth has been impressive with active users more than doubling (source: Apple), transactions more than tripling (source: Apple) and online merchant adoption increasing by ~50% (source: Loup Ventures). That said, we believe only 16% of global iPhone users have turned on Apple Pay. We remain optimistic that Apple Pay will gain widespread adoption over the next 3-5 years given integration OS and iOS makes it the easiest to use digital wallet.

  • We checked the Top 100 retailers in the U.S. for Apple Pay compatibility for online (desktop, mobile and apps) and found the growth of adoption has been high (9 to 85%), but off of a small base.
  • The total number of these retailers supporting Apple Pay online now ranges between 14-24% (details in table below).
  • The number of banks globally that support Apple Pay increased in the past year by 41% to 2707 banks.
  • We believe there are 127m global active Apple Pay users, up from 62m a year ago. This represents 16% of the active iPhone base.
  • We don’t have any data on Apple Pay peer-to-peer (Venmo competitor), which launched in December of 2017.

Putting the Top 100 retailers’ online offering under a microscope. Credit Loup Ventures analyst Mark Grangaard for working through our annual Apple Pay review, which includes conducting 300 transactions to test availability and speed of Apple Pay among the U.S. Top 100 retailers (as determined by eMarketer) across desktop, mobile and app . Growth was encouraging off of a small base. Apple Pay debuted in October of 2014, and U.S. online adoption among top retailers ranges between 14-24%, a small number considering it’s been available for over 3 years.

What Apple has said in past 12 months on Apple Pay. Apple periodically gives Apple Pay updates, here’s what they said over the past year:

  • Adoption and usage in international markets has been much more robust than in the U.S. (February 2018, shareholder meeting).
  • User adoption has also been slower than what had been expected at Apple Pay’s launch (February 2018, shareholder meeting).
  • More than half of all U.S. retail locations accept Apple Pay (February 2018 earnings call).
  • Transactions more than tripled y/y (February 2018), they were up 330% (October 2017), up 450%, (May 2017), and up over 500% y/y (January 2017).
  • Active users more than doubled (October 2017 earnings call).
  • Nearly 90% of NFC payment transactions globally are with Apple Pay (August 2017 earnings call).
  • 3 out of 4 of Apple Pay transactions happen outside the U.S. (August 2017 earnings call).

Putting a fine point on Apple Pay users. The following are Loup Ventures’s estimates on Apple Pay adoption.

  • End of 2016, there were 62m global Apple Pay users, or 8% of active iPhones had activated Apple Pay.
  • End of 2017, there were 127m global Apple Pay users, or 16% of active iPhones had activated Apple Pay.
  • 16% base, international accounts for 11%, and U.S. for 5%. Said another way, 89m people use Apple Pay globally, 38m in the US.
  • Between 20 and 30% of U.S. iPhone owners use Apple Pay.
  • ~30% of new iPhones are activating Apple Pay.
  • There are 795m active iPhones worldwide.

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

Apple is Flush With Cash, But Don’t Expect Big M&A

Don’t expect any big M&A. Everyone is asking who Apple will acquire. The answer is: nobody. At least nobody big ($5B+).

  • Apple announced they’re paying $38B in repatriation taxes, which implies they’re bringing $215B back to the U.S.
  • If there was no tax holiday Apple would have paid about $80B in repatriation taxes, compared to the $38B they actually are paying.
  • Apple also announced $30B in capex investment over the next 5 years, including a new Apple campus for technical support.
  • We don’t expect this infusion of U.S. cash to change Apple’s capital allocation strategy and believe share buybacks will be the primary use of funds.
  • We don’t expect any big M&A deals above $5B, but see the company continuing to do tuck-in deals and invest in their supply chain.
  • We believe 80% of Apple’s motivation related to today’s news is for economic reasons, 20% for political reasons, and both are good for the company long-term.

Potential uses of cash, by order of significance.

1. Returning capital back to AAPL investors. AAPL will increase its buyback over the next 3 years by about $70B. We also believe Apple will announce a one time cash dividend of $12B. Lastly, we anticipate a 15% annual dividend increase that will cost Apple about $10B over a 4 year period. We expect these three to be announced when Apple reports their Mar-18 quarter sometime in April. We believe most of this is already priced into AAPL’s stock price.

2. U.S. capital expenditures. As mentioned, Apple also announced $30B in capex investment over the next 5 years, including a new Apple campus for technical support. Separately, Apple increased its commitment to its Advanced Manufacturing Fund to $5B from $1B.

3. Invest in component suppliers. As they’ve done in the recent past (Corning, Finisar), Apple will continue to invest in key component suppliers, likely optics, displays, or processors, to lock out competitors and expand their lead.

4. Tuck-in acquisitions. This includes hardware, apps, and services. Hardware: Magic Leap’s AR hardware is a logical acquisition on the heels of Apple’s recent (summer of 2017) purchase of SensoMotoric. Magic Leap’s last private round was valued at $5.5B, suggesting this deal is slightly more than Apple typically would pay. Services: Apple Watch and its ecosystem would be bolstered by Peloton. This reminds us of Beats – hardware that adds to the lineup and, most importantly, a services play that would also expand the Watch/fitness data platform. Apps: We could see similar deals to the Lattice Data acquisition related to apps and AI.

5. Longshot: Auto. For starters, they should buy Tesla. But it will never happen because Musk won’t sell. Clearly, Apple believes in autonomy, through what appears to be a smart-shuttle approach. Since the shuttle initiative is early, it’s a high-probability M&A area for Apple.

6. Employee bonuses. Bloomberg is reporting that Apple will be giving to $2500 bonuses in restricted stock to most employees. We estimate about 100,000 employees will benefit, which implies a $250m liability that will vest likely in 2 years.

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

Apple Supplier Experiences Delay, but Believe iPhone Launch Unaffected

Special thanks to Austin Bohlig for his work on this note. 

We have updated comments regarding the upcoming iPhone launch following Finisar’s (FNSR) FQ1 earnings results, which we believe is one of Apple’s VCSEL array suppliers. Vertical-cavity surface-emitting lasers (VCSEL) are a key technology that adds 3D sensing capabilities and enables advanced augmented reality applications.

Finisar VCSEL Array.  Source: Laser Diode Source

What They Said. Finisar reported Jul-17 results today after the bell, and while they talked up the opportunity of VCSEL array demand from one of their customers (aka Apple), the company experienced a delay in customer approval for their VCSEL production units. Due to the delay, Finisar was forced to push out production shipments to Oct-17. That said, the company anticipates this problem will be solved by the end of Oct-17, and to begin shipping much larger quantities in Jan-18 and following quarters. Finisar expects VCSEL revenue to be in the low-single-digit millions in Oct-18, but believe sales can grow to “tens of millions” of dollars per quarter beginning in Jan-18 and beyond, which is in-line with management’s previous comments. We do want to highlight, the company indicated they do not expect revenues to be in the “hundreds of millions” per quarter, but once they are at full capacity they will see revenues reaching $30M.

We also would like to point out that Finisar and other VCSEL array suppliers continue to talk about one customer (Apple) driving demand for VCSEL arrays. We believe Apple has secured a high percentage of all VCSEL lasers created, which we view as a large competitive advantage that will make Apple a leading AR player in the smartphone space.

What This Means For Apple? If Finisar can resolve this problem in the upcoming quarter, we do not believe this will not affect the iPhone launch. Lumentum, which we believe is supplying Apple with 75 – 80% of their VCSEL arrays, announced a $200M order last quarter (more from us here). With Lumentum shipping everything they can produce, we believe Apple will have a sufficient supply of VCSEL arrays to support initial demand for the iPhone incorporating this technology. However, given how capacity constrained Lumentum is for VCSEL arrays, if Finisar issues extend beyond Oct-17, we do believe it could delay iPhone orders.

We continue to anticipate the iPhone Pro being the only phone incorporating these advanced VCSEL arrays for 3D sensing that will enable augmented reality applications. We expect Apple to ship 133M units in the back half of CY17, of which, 43% will incorporate 3D sensing. Looking into 2018, we believe Apple will ship a total of 239M iPhones and 67% of them will include 3D sensing capabilities.

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

Apple Results & Guidance a Non-Event; Clear Sailing to iPhone X

Expect Slight Upside In Mar-17 From Easy Comps and Typical Conservative Guidance for Jun-17. Apple reports Mar-17 quarterly results tomorrow, May 2nd. Despite shares at an all time high, investor optimism for an iPhone X super cycle this fall remains high, which should continue to push AAPL’s multiple higher into the fall. There appears to be little risk from the Mar-17 results or Jun-17 guidance that would change iPhone X anticipation. Fast forwarding to the fall, shares are setting up to enter a range-bound period as investors playing the iPhone X trade will likely unwind positions.

If Apple guidance midpoint is 1-3% below our Jun-17 estimates, we will likely maintain our estimates.

Mar-17 & Jun-17 Expectations. We expect Apple’s Mar-17 quarter slightly ahead of Street consensus numbers given the 17pps easier comp, vs the Dec-16 quarter, and the Street is generally looking for similar iPhone growth from Dec-16 to Mar-17.  As for the June quarter guidance, we expect a typically conservative outlook. This is understandable given investors are expecting a step up in iPhone growth from around 7% in Mar-17 to 13-15% in Jun-17. Part of the step up in iPhone Jun-17 growth is due to the 5pps easier comp in the Jun-17 quarter.

On The Call. We will be paying close attention to the following topics:

  • Super Or Typical Cycle? Investors will be tuned into any unlikely commentary from Apple to help answer the question of whether we are entering a super cycle with the iPhone X (reason for accelerated upgrades) or just a modest step up in iPhone growth. We’re not expecting much color from Apple, but are encouraged by our estimates that this fall the 2-year old or older iPhone base should exceed 300m units, a strong base of potential customers to fuel investor expectations of the  unit sales between 235-245m phones in FY18 during the iPhone X cycle.
  • Services Potential.  Apple will continue to be heavy on the services growth message. We expect CEO Tim Cook to reiterate comments from the Dec-16 call that he expects the Services business to double in the next four years, implying annual growth of about 19%. We expect services to grow from 14% of revenue in FY17 to 20% in FY22.
  • AR & Auto Ambitions. Related to AR, Cook has made six public comments in the past 9 months and we expect him to continue to emphasize that Apple will be a winner in AR. It’s been widely reported that one version of the iPhone X will have 3D mapping capabilities.  We see the iPhone as the AR device for the next 5 years. As for automotive, recent news of Apple’s permit to test self-driving cars in California should not have come as much of a surprise given the poorly kept secret of Project Titan. The permit does beg the question of whether Apple is building a car or just building software for a car. Our take Apple is almost certainly exploring how it could build an entire car, but as we learned the hard way with Apple television, exploration does not mean a product comes to market.

What To Expect With The iPhone X. Read our thoughts on iPhone X and the features we expect to advance Apple’s lead in AR-enabled devices.

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.

Google Earnings Reiterates AI, VR, AR Ambitions

Google CEO Sundar Pichai used tonight’s Q1 call to double-down on his “AI-first” mantra.  Several areas were highlighted, where Google will lead and define its mission to organize the world’s information with machine learning.  Beyond AI initiatives to enhance core consumer products like search, mail, maps, and Google Play, increased machine learning investment was highlighted in at least two segments of Google’s ad model.  These include ‘Smart Bidding’ where machines predict in real-time how an ad should perform in front of a particular target and adjust advertiser bids to maximize ROI.  Separately, in Google’s highly profitable app install ad business, namely Universal App Campaigns, machine learning is being used to best promote developer apps across Google properties including Search, YouTube, and the Display Network.

Management also made a couple of callouts on VR.  Google’s VR platform Daydream is seeing more than half its usage consuming video, with YouTube VR being its #1 app by time spent.  At a recent event, we heard from Google that people are using the Daydream headset to “hold the phone” for them as they watch video laying down.  While not an exciting VR use case, we heard that users are spending multiple hours in VR this way, so it is getting users comfortable with the experience.  VR investment near-term still appears focused on mainstream products like Daydream and accompanied VR produced content such as YouTube VR, Google Earth VR, and Tilt Brush.  We suspect Google is also experimenting with advanced VR and AR hardware, although no mention was made on the earnings call.  We continue to believe Google is the best positioned player to provide the AR operating system of the future, and the company’s leadership position in machine learning and AI only reinforces that view.

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.