How can Apple excite investor beyond Q2 FY14's boring quarterly report?

How can Apple excite investors beyond Q2 FY14's boring quarterly report?

Today after the market closes AAPL will report Q2 fiscal 2014 results. Expectations are for a boring (read: very profitable, but no growth) quarter. Analysts forecast $43.5 billion in revenue and $10.18 in earnings per share (EPS), which is pretty much a repeat of last year's numbers. Unless Apple surprises us with something, the focus isn't going to be on the results, or even the guidance for next quarter. Apple investors want to know what's coming next. We all want to know — what will Apple do to become a growth company again?

I'm not much of a believer in smart watches, and even if Apple was to release a cool iWatch, I don't think it would have much of an effect on the financial results. In the past I've said I would like to see Apple dive deeper into gaming by letting developers bring games to an updated Apple TV. But perhaps even more awesome would be for Apple to drastically expand its line of hardware.

The Internet of Things (IoT) is only getting started. As you'd expect when a new industry is forming, most of the cool gadgets are not made by incumbents. Apple and Google are the mobile giants. Brief side note - when I say "Google" interpret this as "Google and Samsung" since they are so closely tied to each other given Android volume share. But outside of mobile phones and tablets, the cool stuff is made by third party companies.

Sonos makes the best wireless speakers. Apple distributes a free iOS app that lets customers control their music from a mobile device. Doorbot makes a smart doorbell with built-in camera so you know who's at your front door (even if you're away). Guess what? They have a freely downloadable app in the App Store. Nest makes a smart thermostat. The Nest team is made up of ex-Apple folks. Nest has a free app for iOS. Is this starting to sound repetitive? All of these awesome gadgets are enabled by mobile platforms like iOS but Apple makes no money from them.

Nest was acquired by Google last quarter for $3.2 billion. I don't think this is going to turn out to be an isolated event. Google is probably pushing further into our homes. I'd like to see Apple do the same.

Apple is among the best in the world when it comes to electronics hardware design and manufacturing. I'd like to see Apple dramatically expand what it offers. I think the best way forward is via acquisition and internal development.

If Apple built Sonos-quality wireless speakers I'd probably buy Apple's stuff. If Apple made a smart thermostat or a smart doorbell, I'd probably buy it too. If Apple controlled everything the integration would be better. My iPhone could prompt me to update the software in any Apple-made gadget that I run. My doorbell could play a chime through my phone, computer, or wireless speakers. Video images for security purposes could be locally processed in a Time Capsule and uploaded to iCloud in some cases.

I don't want this to sound like some crazy scheme where Apple has massive growth by getting into the market of selling doorbells, speakers or thermostats. I'm hoping to communicate a larger point. I think the Internet of Things will involve a big opportunity for old things (that are not networked) to be replaced by new things (that are connected). There is probably a subset of those things that Apple should go after to give users the best possible experience. That subset should, hopefully, include hardware that will be replaced often enough that it will help Apple's bottom line. At least that's my view as a shareholder.

If Apple doesn't want to or see the need to get into more diverse hardware, what they're doing with CarPlay could also be expanded. That way an Apple experience — potentially the best experience — could be made available on non-Apple hardware. There could be licensing fees involved in that, but it would also increase the overall value of Apple's iPhone and iPad as the nexus for the Internet of Things done best.

Either way, in my mind, the increasing interconnectivity of hardware is an opportunity for Apple. They already have a strong position in mobile. Now it's time to extend their range to include hardware that Apple's mobile devices will serve as the remote control (or dashboard) for.

Chris Umiastowski

Chris was a sell side financial analyst covering the tech sector for over 10 years. He left the industry to enjoy a change in lifestyle as an entrepreneur, consultant, and technology writer.

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Reader comments

How can Apple excite investors beyond Q2 FY14's boring quarterly report?

21 Comments

Lots of great points that I agree with. I believe that whoever make a huge and committed investment into this Arran will have a big advantage in this market space.

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Apple could do this but they are really limited on engineering. Every big thing they work on takes a lot of people off core projects that have to do with iOS and OSX. iOS finally is working like it should have been when iOS7 was released over 7 months ago and OSX looks out of date if you compare it to iOS7. For some reason this seems to be in Google's wheel house more than Apple. Apple makes great products from start to finish but doesn't seem to do well when they don't make the product from start to finish.

A lot of the talking heads seem to think Apple's play is further tie-in to the iOS ecosystem. Even with the "iWatch" they're expecting it to be a cheap iPhone accessory. My question is how much revenue does Apple generate from these third party devices that have hooks into iOS? I know there is the MIFI program but what accessories does that apply to and how much money is Apple actually making off of it? I guess I fail to see how opening up iOS ecosystem to the "internet of things" is going to generate significant revenue/profits for Apple. Doesn't Apple have to look beyond the iPhone for growth?

Yes, we are here. I was referring to what I call the "chattering class" that often shows up in my Twitter feed. On a recent MacBreak Weekly show (after Google acquired Nest) Rene Ritchie said that Apple wasn't going to start designing thermostats. My response back would be, 'why not'? Nest was a very popular accessory in Apple stores. No reason that a beautiful Apple designed thermostat wouldn't be just as popular. Obviously it's a question of resources, expertise and focus. But rather than having iOS users fork over $250 to Google why not have them give it to Apple instead?

Gotcha! Thanks for the clarification. I thought I was being totally misunderstood :) Yeah, I think the resource allocation issue is the big limitation. Apple can't do everything that would make sense for them to do.

I'd certainly be more trustful of spending several hundred on Apple branded speakers and other connected things. So I do agree that's their opportunity.

I still don't think they're done with the living room or just thinking of modest tweaks. If they can't get hdmi1 then they need to target perhaps as equally valuable user input, the remote. I wouldn't want to go without a Harmony remote for example but Apple could do it better. With every Apple TV purchase, it needs to smartly walk you through (or do it automatically) setting up such an Apple remote that controls everything.

I think the whole premise is wrong here. Who cares if the investors are "excited?" A company exists to do the work and produce the products it was created for. If the investors like what they see, they are free to invest their money, if not they can go somewhere else.

The whole concept of running a company for it's investors rather than it's professed customers is wrong. The whole idea that if the investors aren't happy, the company should do what it needs to do to please them is wrong.

It's classic "putting the cart before the horse" thinking and has been proven to be both incorrect and generally damaging to business overall at least a thousand times in the last few decades, but the market is still dominated by this kind of erroneous thinking. Proving, of course, that the capitalist free market dogma being espoused is more important than common sense and the entire history of business previous to the 1980's.

You're trying to correct something that doesn't need to be corrected. Nobody said Apple should run the company with the view of pleasing shareholders before customers. I'd say we both agree you please customers first, and if you do a good job then shareholders are pleased too. In that order. Wonderful. Nothing about waht I wrote changes. Pointless comment.

That's a pretty low-blow reply and not actually true, but I will just leave it there except to point out that you wrote an entire article about what Apple can do to "please the market," and yet you say that my comment (basically saying they don't *have* to please the market and shouldn't be thinking about it), is somehow "pointless." WTF?

“If Apple doesn't want to or see the need to get into more diverse hardware, what they're doing with CarPlay could also be expanded...it would also increase the overall value of Apple's iPhone and iPad as the nexus for the Internet of Things done best."

Yes! Products like CarPlay, AppleTV, iWearable or iThing mainly expand the capabilities of the core iOS devices. That makes the already loyal user base more committed to Apple products and will gradually grow that user base to the 1 billion mark within a few years. Apple is already selling 200+ million iOS devices per year with a 600M user base. Imagine iOS device sales in a few years. The iPhone is 7 yrs. old, iPad 4 yrs. old. There is plenty of growth potential in both product lines for at least a decade. iPhone & iPad are “boring” because pundits “analysts” and “reporters” perpetuate memes of “the next big thing” while ignoring the continued growth & improvements of existing products. Apple is playing a long game; investors should also look ahead a few years instead of focusing on short-sighted YOY quarterly comparisons. Does anyone really doubt that Apple will eventually sell 300M or 400M iOS devices in a year? The ancillary products will also add up to be significant, but the primary profit drivers will continue to be the iPhone & iPad.

It's not investors per se that Apple supposedly needs to appease... its the guano loco analysts that set unrealistic expectations who then turn around and go nuts when Apple meets or exceeds guidance but not the ridiculous expectations.

Apple knows better than to worry about Wall Street in the short term. But in the long term they do need to keep growing ... because Google will. This is a fight.

Apple will not make anything that they cannot do better than everyone else. The world probably doesn't need a much better doorbell, as it's not a tremendous friction point. By contrast, electronic payments are, as the incumbents exploit their regulatory protected positions. Apple will solve that, but only once they've perfected it. The same goes for delivering geographically contextual ads in a timely manner via iBeacon. Or general internet search with privacy. Or forcing the unbundling of marginal video content from the stuff people really want to see. These are the big issues that Apple's tech will solve. Let the Android OEMs fight for low margin hardware crumbs.

Some excerpts from the CC:

"We believe Apple will benefit as tablets continue to overtake PCs"

"Over the last 6 months, we've added over 60m registered users across 4 product categories."

"We've seen a strong halo effect over and over in our history. People happy with their first Apple product go on to buy other Apple products."

"Almost 800m iTunes accounts, most of those with credit cards."

I'm not sure that I agree that apple should start making other hardware to make integration better, but I certainly do think they could get together with manufacturers to start to work towards the smart home, which is why I believe google bought nest. But I don't think that'll pose to much problems for apple as thier devices are everywhere. I mean we're talking your music following you, your favourite TV programme coming on, your alarms waking you up earlier because you have to be somewhere, the lights and doors operating when you go outside, the heating getting controlled automatically, your shopping getting ordered and delivered according to what you running out off, emergency services being called automatically thanks to your I watch sensors etc

There's also the different screen sizes within the iPad and an iPhone mini, air and pro brackets themselves. An actual Apple TV, with VOD TV and games, cause they're already doing monitors so what difference would it make. Siri and Touch ID throughout the product line up. A proper adoption of the cloud, SIM cards inside MacBooks, A streaming itunes service, But it's nice to dream hey!

Investors are excited by predictable profit growth. And basically they are making "educated" (debatable) guesses on whether the trend in the products getting sold will be increasing profits or staganant or declining. If you want to excite investors invent some new product that shows a high likelihood of having consistent profit growth rates. Right now Apple is a solid company, with great products but i'd guess right now many investors think they've gotten all the upside in the stock they are going to get without a new product line that adds to the current. I don't think watches wow people enough for investors to guess that that is the new revenue stream. When you're business is a consumer electronics product sold to a pretty fickle consumer I think future profits/products are always gonna drive your stock. If they made bleach or toilet paper or some other good that everyone needs and doesn't really fall in a bad economy it wouldn't matter. It be more of a safety investment. You stick your money in it and it's safe. But it's tech related so I think investors will always ask, "what's you're next trick." That's not to say they can't keep selling iphones for profit. Just like Microsoft kept selling windows and xboxes for a decade. Microsoft made a ton of money. But as an investment it didn't excite anyone and the stock didn't move because they didn't have many new tricks. I think it's the nature of the space they are in. Now personally I think Appletv should have been the break through devices 3 years ago and they dithered and still haven't remotely made it the Juggernaut it could be and they've let Amazon & Roku surpass them. They may still release a solid box this year. But to me, 3 years ago they had the space for the taking and simply dropped the ball. They could have made a box that does everything not just sell some apple content but to stream and play everything, every service, every form of media, etc. I think instead they called it a "hobby" and roku and western digital etc filled in the gaps.

I know not what Apple is doing perhaps I may make a guess -
I believe the Apple TV will be their gateway for a SmartHome with the help of iBeacon and the remote controller for this SmartHome will be the iPhone.

Yes the Apple TV is much much more than just a gateway for what it is today. It is much more than that and I believe when they have finished with it it will blow our minds.

Btw Apple never worries except by the claims Samsung lawyers made, they have a healthy respect for their competition and seldom rush into things which they know nothing about or just because the pundits are claiming they should do this or that and otherwise they will lose out.

As I had mentioned I don't know their plans and I don't see Apple's competition being ahead why because one is looking for revenue and the other one is trying to survive. And in the mean time everyone is looking at what Apple is trying to do so they can copy instead of spearheading the innovation themselves.

That's all great but, nothing you've said shows a new product, it's iphones and appletvs. They already sell those. It's pretty much priced until they announce something new and different. As an investor i can't invest based on smarthome, or "spearheading innovation" or hope that i'll get my mind blown. Until they show product that actually blows my mind stock do what stocks do, go up or down according to whatever. Like apparently they just had a 7-1 stock split and raised the dividend. Well stock splits and dividends tend to do that.

Smarthome? That's a vague concept. That's not a product really. It's an idea. What is it? it turns on your lights or alarm thermostat? Ok. Is that the next killer growth industry that will generate profit? Maybe but i doubt it. As an investor i want certain things, stability of growth. For a long time apple was growth. It's now mostly a stability stock. And as an investor i'm picking where to allocate money based more on wether the company has growth potential than whether the company has better competition. Look Microsoft was better in the operating software space than apple was but you'd have been an idiot to put your money in Microsoft for that reason because it wasn't driving growth for Microsoft. I mean the stock barely moved for years. Good company, bad stock that wasn't gonna make you money. So that's not how i'd judge an investment. For example apple may be the bigger and better company, but maybe it's only growing at say 5% and it's better go buy like a Tiawan Semiconductor or some other chip maker that's gonna have chips in iphones and galaxys and tons of other phones and grow 10% and make you more money off a hot product. Yes in a slightly different market of semiconductors but still hypothetically a better place to put your money if you want growth. Mind you this is hypothetical. I don't know what these chip companies are actually doing in real life. But point is an investor isn't picking between just apple and it's other phone makers. It's apple and every other stock and no stock at all. Not buying stock at all is a very viable plan. Buffet says it all the time. From an investor perspective Maybe you park it in apple cause it's pretty safe. Maybe you park it in some other safer sector. Maybe you put it in healthcare. Or maybe you put in in some other company or sector that is growing at a better rate. Apple vs its competitors is relevant but too narrow unless you only invest in smartphone makers. Bottom line is it's about the numbers, the product is just an avenue to the numbers.