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Apple’s Key to Its Health Ambitions: Class II Watch Features

Apple’s Key to Its Health Ambitions: Class II Watch Features

The Wall Street Journal reported that Apple has an internal project codenamed “Casper,” which has explored the possibility of creating an Apple primary care network. A primary care network is a group of doctors and clinics that focus on delivering basic medical care (general practitioners). While Casper is still an active initiative, we believe it’s unlikely Apple ultimately builds a primary care network given it’s outside of their core competency. Instead, we see the company’s health ambitions anchored in devices and data that can be leveraged by clinicians for care. To achieve this, Apple must secure more Class II-grade medical device features for Watch and potentially AirPods. Class II designations give healthcare providers the legal confidence to trust and use the data these devices collect.

We think of Apple’s health initiatives as composed of three building blocks.

Building block #1: data capture. The foundation of Apple’s health offerings is data capture through the Watch, which today measures heart rate, Afib, blood oxygen levels, ECG, and fall detection. In the future, blood pressure and blood glucose monitoring are logical next features, showing Watch has room to grow as a data collection device. Apart from adding new features, Watch adoption has room to grow as well. We estimate around 13% of iPhone users are Watch users, and believe this can rise to more than 40% over time.

In our conversations with healthcare professionals, the obstacle for Apple is that from a clinician’s standpoint, the majority of data the Watch collects is primarily for “entertainment purposes.” We feel this perspective understates the value of the data these devices collect and validates the hard line between the data gathered from a Class I versus a Class II device in the eyes of a clinician.

It’s worth noting that today the Watch does have a Class II designation for its atrial fibrillation (Afib) feature, granted by the FDA in 2018. A Class II designation ensures that collected data is accurate and safe to be acted upon. Class II certifications have yet to be secured for other Watch features, including general heart rate and blood oxygen monitoring.

We believe one indication regarding Apple’s seriousness related to the health opportunity is whether the company achieves Class II designations for other features on Watch. If successful in winning more approvals, it would pave the road to unlock greater wellness, along with economic value, from Watch data. For example, a patient could submit years of Watch data upon entering the ER, which would be a significant, real-time advantage in diagnosis and treatment. The core question is whether Apple engineers can deliver FDA-grade data accuracy across the spectrum of Watch features.

Building block #2: data sharing. The second building block is data sharing, which we see as analogous to APIs and middleware, the mundane but essential layer that sits between the data capture device and third-party healthcare providers, such as physicians, insurers, and the broader primary care network. Apple’s expertise in devices, software, privacy and security makes this opportunity well within the company’s reach. This of course is predicated on rolling out more Class II features.

Building block #3: delivering care. The final layer in an integrated health stack is delivering care itself, which is essentially the interaction with a physician. This is what Apple’s Casper project aims to accomplish. Our view is that it’s unlikely Apple ultimately offers a primary care network given it rests outside the company’s hardware-software-services violin concerto. Undoubtedly, Apple has the resources to prove us wrong and successfully launch a care network. That said, we see an opportunity cost in going down the road of providing lower-margin services.

The overarching theme: Apple readying for an innovation wave

Apple’s aspirations around health are one example of three measurable revenue growth opportunities the company has over the next decade. In addition to health, there are of course untapped segments including augmented reality and transportation. While sizing the AR market is difficult given its nascent traction to date, the size of the transportation market is more easily estimated, at $7T plus.

We expect Apple’s overall revenue to surpass $400B dollars in 2023, so a combination of health, transportation and AR are foundational to the company growing revenue 5%-10% for the long term.

Disclaimer

Apple, Augmented Reality
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Zestimate Takes Logical Step Into AI

Zestimate Takes Logical Step Into AI

Zillow recently announced accuracy improvements for off-market Zestimates, which will now utilize neural networks to generate valuations. We believe historically the majority of the Zestimate used algorithms that were designed by data scientists. These algorithms are static in nature and therefore, have difficulty keeping pace with a hot housing market. Neural networks are essentially algorithms that have the ability to dynamically create new algorithms on their own, hence the phrase machine learning. The bottom line is the new Zestimate should be more accurate because it will be more agile.

Initially, Zillow has reported modest improvements in accuracy from switching to neural network-based outcomes. What’s more important than the initial accuracy gains is that Zillow has just put AI on the clock, given we can now timestamp the Zestimate’s accuracy pre and post addition of the neural network. If history repeats itself, we should see measurable improvements in the Zestimate’s accuracy over the next two years.

Zestimate accuracy inches forward

As a reminder, there are two flavors of the Zestimate: on and off-market. Off-market Zestimates are the most important Zestimate for the success of Zillow 2.0 because the majority of live Zestimate cash offers will go to homeowners whose homes are not on the market. While sellers who have already listed their home could pivot and sell to Zillow Offers, they would likely have to navigate a listing agent contract, which we view as unlikely.

The off-market Zestimate median error rate is now 6.9%, compared to 7.8% previously. In plain English, this means 50% of the 104m off-market Zestimates are accurate within +/- 6.9% of a home’s eventual sale price. The other 50% fall outside of this +/- 6.9% range. In short, the off-market Zestimate is still unpredictable and has a long way to go. That said, the important thing is that it’s getting better, which we believe is important for three reasons:

  1. Expands live Zestimate buybox. The tangible result of the Zestimate improvement is that the pool of eligible homes for a live Zestimate offer will “likely increase by 30%” from 900k to roughly 1.2m (a fraction of the ~105m off-market homes in the US). Increasing the box of addressable homes is key for acquiring inventory, something Zillow struggled to do in the March quarter, which led them to guide Homes revenue for the June quarter about 10% lower than expectations. The more homeowners that see a live Zestimate and the more accurate it is should increase seller leads and conversion, leading to more inventory.
  2. Builds trust with consumers. The reason a more accurate Zestimate builds trust is because pricing transparency is core to the iBuying experience, given homeowners initially anchor their decision to sell based on price. If the live Zestimate undershoots, Zillow won’t build inventory. Regardless of whether it’s a machine or a human, if you bid too low, you’re not going to get the house. If the initial live Zestimate overshoots and the company must materially lower its final cash offer after an in-person inspection, consumer trust will erode.
  3. Maintaining its lead in search. The Zestimate helps Zillow control of the top of the real estate search and discovery funnel because the Zillow surfing phenomenon is rooted in people’s curiosity to know the value of their dream home or their neighbor’s. The more accurate the Zestimate, the more valuable it is to users. Maintaining control of the top of the search funnel is important for Zillow 2.0 because it provides a huge organic audience (220m monthly visitors) to which the company can advertise its iBuyer offerings at no added cost. Over time, this marketing cost advantage should translate into better margins for Zillow and better offers to home sellers, leading to more inventory and selection for home buyers, driving the flywheel.

Putting it together, Zestimate accuracy is a key piece in Zillow’s iBuying puzzle. We are long-term believers in the power of AI and believe that machines will eventually be capable of consistently appraising the value of a home better than humans.

Disclaimer

Opendoor, Zillow
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