Fortnite Launches Ranked Play, Commits $100M to eSports

Fresh off of Fortnite’s first foray into ranked play on May 17th, Epic Games has committed $100M in prize pool money for Fortnite competitions in the 2018-2019 season. The ranked play ‘Solo Showdown’ game mode was available to players from May 17th through May 21st as a limited time mode (LTM). Players were given points in each of their first 50 matches in the game mode, earning 100 points for a win, down to 25 points for finishing in the bottom 25% of a match. Winning 50 games in a row (a near impossible task) would earn a player 5000 points.

Fortnite has yet to announce the winner of Solo Showdown. First place earns 50,000 V-bucks, Fortnite’s in-game currency, a value of about $500. We’ll update this note as soon as we find out the results.

Despite Fortnite’s popularity and financial success, there is still not a large eSports presence for Fortnite, or the battle royale game mode itself. NewZoo, a gaming market researcher, tracks hours watched on Twitch and Youtube. Below are the hours for April 2017.

Fortnite and PUBG, the two most popular Battle Royale games, are seeing a lot of success for total hours watched. On the eSports side, however, Fortnite and PUBG are far behind multiplayer online battle arena (MOBA) games, Dota 2 and League of Legends, as well as first-person team-based shooters (FPS) game, Overwatch, and CS:GO. This makes sense, as Battle Royale games are relatively new, and there isn’t much structure in place as it relates to eSports.

Seeing the success that Fortnite has had overall, and their introduction of ranked gameplay, it’s clear that they are gearing up to further develop eSports around the game and the genre. On Monday, Epic Games announced that they will provide $100M in prize money for competitions. We think eSports popularity for Fortnite will help bring eSports more mainstream. The Battle Royale game mode will bring a unique format to eSports competitions, as multiple teams will compete in a single match, which is different than the typically head-to-head team matchups for MOBA and FPS games. Fortnite’s financial commitment reiterates their belief in the long-term outlook for eSports surrounding the Battle Royale game mode.

While other game developers are adding Battle Royale game modes to their existing franchises, we don’t think that they will generate the same authentic interest that Fortnite has. Over the past few months, Fortnite has become a cultural sensation, as demonstrated by its total viewership hours and presence on social media platforms, sports celebrations, and pop culture references. While adding Battle Royale is a positive move for existing developers, it will be hard to replicate the same level of success that Fortnite has achieved.

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.

Feedback Loup: Oculus Go’s Baby Steps for VR

Source: cnet.com

  • Facebook announced the release of their Oculus Go standalone VR headset at the F8 developer conference on May 1st, and gave every attendee at the conference a free device.
  • The Go is an easy access point for getting into VR with its $199 price tag and built-in software eliminating the need for wires or other devices to power the device.
  • Though not a breakthrough, it is a step toward the mass adoption of VR. Still, we believe the much more important test comes with Oculus’s Santa Cruz project.

A proof-of-concept product. Facebook’s F8 giveaway reinforces the objective of the Oculus Go: to make VR more accessible and get the technology in the hands of more users. Unlike the Gear VR or Google Daydream, the headset doesn’t require a compatible smartphone to work, opening the door for other Android and iPhone users to get into VR at an accessible price point. The reason it must be “other Android and iPhone users” and not “anyone and everyone” is that a smartphone app is required to get the Go up and running. Fortunately, once the registration is done the app is unnecessary. The visuals and overall experience are pretty much the same as the Go’s smartphone-based cousins, but, while this means no new fancy bells and whistles, it also means that the quality of the experience is preserved in the leap from mobile to standalone VR. The controller, being one-handed with limited functionality, hinders the Go’s gaming capabilities, making video and other interactive experiences the most compelling apps available. As time goes on we believe developers will begin to get the hang of creating for this new platform and the experiences will improve. Nonetheless, the novelty of standalone VR is well-demonstrated with the Go – pull the headset over your eyes, and you’re in VR. No need to fumble with your smartphone or the outright daunting hardware of PC-based VR that makes the technology inaccessible. The Oculus Go is a great entry-point into virtual reality, and will hopefully expose many more people to the technology. Despite this fact, the Oculus Go comes up short in producing true ‘wow’ moments that can sway VR skeptics’ minds.

A promotional image for the Oculus Santa Cruz.

A promotional image for the Oculus Santa Cruz.

Santa Cruz in sight. Successfully replicating the Gear VR/Daydream experience on a standalone device bodes well for Oculus’s more ambitious standalone VR project, the Santa Cruz. Announced in 2016, the Santa Cruz is the standalone version of Oculus’s high-end Rift VR system, just as the Go is the standalone version of Gear VR (and Daydream). The Santa Cruz headset will have six-degrees-of-freedom through inside-out tracking and two full controllers for a much more robust experience. It is a logical progression to make the less intensive smartphone-quality VR content work on a standalone device before trying to replicate what high-end PCs are capable of. Providing a PC-quality (or better) VR experience anywhere will be far more effective than the Oculus Go in convincing people that VR is for real and here to stay. While this first generation of standalone headsets isn’t exactly a watershed moment, it is a positive and important step in VR innovation.

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. 

Apple as a Service Part 3: Capital Return a Lever to Move Shares Higher

  • Apple’s capital return framework is the 3rd of 4 pillars to our Apple as a Service thesis.
  • It’s understood that Apple is committed to a $100B capital return over an undefined number of years. What’s not understood is that the company has the ability to return $40-$60B every year in perpetuity (Apple did $47.7B in FY17).
  • We believe Apple can fund the $100B capital return over a two year period with cash from operations alone. That still leaves an additional $145B to return to investors if they intend to make good on their promise to be net cash neutral.
  • At the current share price, that incremental $145B, if dedicated to a buyback, would conceptually increase shares of AAPL by 16%.
  • Apple generated $64B in cash from operations in FY17. This compares to 10 of the largest tech companies that, on average, generated $25.7B in FY17. This gives us comfort that Apple has the ability to be one of the most generous companies in history in terms of giving back to its investors.

Apple can return $40-$60B to investors annually in perpetuity. Based on the stable iPhone business outlined in Part 1 of this series (here) in combination with the Services business outlined in Part 2 (here), Apple generates enough cash to return $40-$60B per year. In FY18 we expect the company to generate $64B in cash from operations. As a point of reference, the company returned $47.7B in FY17.

Apple wants to be “net cash neutral.” On the Dec-17 earnings call, Tim Cook first indicated Apple’s plans to become “net cash neutral,” maintaining equal cash and debt balances. For example, Apple currently has $267B in cash and $122B in debt. To become net cash neutral, the company would have a to distribute $145B either to investors or through investments/M&A to achieve a cash balance of $122B. While Cook reiterated Apple’s goal of net cash neutrality on the Mar-18 earnings call, the time frame is unclear; it is also unclear what the mix of capital return vs. investment will be. Historically, Apple has steered away from special dividends, but we view that option as a lever to more quickly achieve net cash neutrality. If Apple was to dedicate the entire $145B to a buyback, it would effectively repurchase 16% of the company at the current share price, which would, conceptually, increase the share price by the same 16%. Importantly, Apple can fund about $50B per year of its $100B capital return target with cash from operations. The company did not give a time frame during which it expects to complete its capital return commitment.

A lever to inch shares higher. Setting aside broader market uncertainty, the company appears to have a measurable and systematic lever to inch shares of AAPL higher. Specifically, assuming $50B in annual capital return over the next few years and 75% of the capital return is in the form of buybacks (in line with the FY17 buyback/dividend mix), implies $37B in share repurchases. At the current market cap, that would require Apple to repurchase 4% of the company in 2018. In 2019, that $37B share repurchase would likely buy back 3% of the company, and in 2020, 2% of the company. While the impact of the buyback diminishes as the stock goes up, it is a lever that the company has used in the past to impact share price.

Comparing Apple’s capital return to other tech companies. Since the inception of Apple’s capital return program in FY12, the company has returned $275.2B to investors. CNBC recently observed that Apple made $13B of net income in 2017, more than Amazon’s total net income since inception of $9.6B (Loup double-checked and their math is correct). This comparison helps illustrate Apple’s ability to generate cash. The table below compares Apple’s cash generation and capital return framework to 10 of the largest tech companies.

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.

Posted in Apple  • 

Apple as a Service Part 2: Services Offer Growth, Visibility, and Profitability

  • Apple Services is the 2nd of 4 pillars to our Apple as a Service thesis. It consists of the App Store, Apple Music, iCloud, iTunes, Licensing/Google, Apple Care, and Apple Pay.
  • Critical to Services visibility is stable iPhone growth, which we believe is achievable (see note here).
  • In CY18, Services should account for 14% of revenue, growing to 20% by CY23.
  • Services has grown, on average, 22% y/y over the past 8 quarters and grew 31% in Mar-18, compared to iPhone units, which were flat during that period.
  • In 2018, we estimate the annual Services revenue per user to be $34.76, up from $30.16 in 2017.
  • Assuming an average SaaS multiple of 10.1x on CY18 revenue implies an Apple Services valuation of $381B.

The DNA of Apple Services. While Services differs in nature from a typical software business, the segment performs like a software business, given it has a diverse lineup of revenue categories.

Services has been a stable business for the last 12 years. It’s not about quarterly iPhone sales. Since 2006, Services revenue has averaged 23% y/y growth, a similar average growth rate to the 22% recorded over the last two years.

Apple Services is more profitable than hardware. We estimate the hardware operating margin to be 25% vs Services at 38% operating margin. This yields an overall Apple operating margin of about 27%. Looking forward, we believe overall Apple margins will be stable over the next few years as higher margins in the Services segment will be offset by lower margins in the hardware segment.

Current average revenue per user and where it goes in the future. At the end of CY17 Apple reported that they have over 1.3B active devices. We estimate the average Apple user has 1.3 Apple devices, suggesting the company has just under 1B active users (995M to be specific). We estimate the current base is growing at 5% per year. This implies the average Apple user will spend $34.76 per year, up from $30.16 in 2017. We’re modeling for that to increase to $54.58 by 2023. See details below.

What would Apple Services be worth if it were a standalone business? Most investors don’t feel comfortable applying a SaaS multiple to Apple’s Services revenue given the correlation between the active iPhone base and services growth. The fear is based on the premise that a competitive smartphone will emerge causing iPhone to lose market share, resulting in a deteriorating iPhone base that becomes a drag on the Services segment. Given our thesis that iPhone has become a stable business, we feel it is appropriate to illustrate the value of the Services business in terms of other SaaS companies. The table below summarizes what we think is an appropriate comp group. Applying the group average multiple(10x) on Apple Services 2018 estimated revenue implies a $381B valuation. Apple’s current overall market cap is $925B.

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.

Posted in Apple  •