On Sept. 10, Apple (AAPL) held its annual product showcase, where the firm announced the launch of three new iPhone models: the iPhone 11, iPhone 11 Pro, and iPhone 11 Pro Max, with the latter two devices featuring an OLED display and the former an LCD screen. We note Apple modified its pricing strategy with the iPhone 11 (the upgraded equivalent to last year’s iPhone XR), starting at a price of US$699, compared with the XR’s starting price tag of US$749. We think the US$50 drop in starting price for the newest least expensive model supports our belief that Apple’s switching costs have a limit, thus meriting a narrow moat rating in our view. In all, we consider the improvements in the iPhone 11 series to be relatively marginal and we suspect many users will opt to wait for a 5G-compatible iPhone in 2020. Thus, we are not forecasting a rebound in iPhone unit sales this year (particularly in China where we believe 5G will be a bigger factor with many Android devices already including 5G modems). All in, we are maintaining our US$200 fair value estimate for Apple, and we view shares as overvalued at current levels.
The iPhone 11 Pro and 11 Pro Max will start at US$999 and US$1,099, respectively, in line with the starting prices of their equivalents from 2018. For all three new models, we think the primary attractions were the new camera systems and improved battery life. The iPhone 11’s dual camera system boasts a wide and ultrawide view camera along with added features such as Night Mode (which we note the Google Pixel has boasted for multiple iterations). The Pro and Pro Max add a third telephoto camera, which brings in 40% more light. The emphasis on camera features is consistent with other Android-based smartphone vendors that have been also adding additional cameras and claiming superiority to Apple devices in the picture quality department.
Battery life continued to expand, thanks to the new A13Bionic chip, which is manufactured on TSMC’s 7-nanometer-plus process technology that leverages EUV lithography. Apart from the normal performance improvements, Apple claims the iPhone 11 will offer an additional hour of battery life versus the XR, while the 11 Pro and Pro Max will last 4 and 5 hours more, respectively, than their predecessors.
Concerning other product news, Apple launched the next generation of the Apple Watch (Series 5), with an always-on retina display that is also low-power to maintain the watch’s 18-hour battery life as well as a built-in compass. The firm also gave a preview of upcoming Watch features associated with three new research studies on hearing health, menstrual cycle tracking, and heart and movement. The Series 5 offering maintains pricing levels from Series 4. We continue to view the wearables subset of Apple’s product portfolio favorably, as the Apple Watch and AirPods have both exceeded our expectation and help maintain stickiness for the iPhone installed base.
As the iPhone business has plateaued in recent years, Apple’s host of services have come to the forefront of its overall strategy. Two examples of this were the Apple TV+ and Apple Arcade offerings explained in greater detail during the event. We note the first Apple TV+ shows will be available Nov. 1, with a family subscription coming in at US$4.99 per month. This price undercuts both Netflix’s current offering (starting at US$12.99) and Disney’s upcoming platform (starting at US$6.99), though we note Apple has a much shallower content library. Beyond the lower price, Apple will attempt to convince users to entertain its offering by giving Apple TV+ for free for 1-year with the purchase of a new iPhone, iPad, or Mac. Although Apple’s initial slate will feature relatively high-profile shows such as “The Morning Show” starring Jennifer Aniston and Reese Witherspoon, we don’t think Apple will be anything more than an also-ran in the current streaming wars between giants such as Netflix (NFLX), Disney (DIS), and others, at least for the foreseeable future.
Similarly, Apple Arcade will also be US$4.99 per month, with access to about 100 games without ads or in-app purchases. We note the current market for mobile games is heavily ad-and in-app purchase-based, and we question the amount of traction Apple will be able to generate. However, the firm does have a deep chest of resources, and during the event it had game publishers such as Konami, Capcom, Square Enix Holdings, and Annapurna Interactive on stage to showcase games that will be featured in Apple Arcade. Ultimately, while no single service moves the needle for our investment thesis on Apple, we think the service business in aggregate will remain a vital cog in the firm’s ability to monetize and more importantly retain its highly valuable iOS installed base.
