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Morningstar | Apple’s iPhone Takes a Backseat at Firm’s WWDC Event, Though Remains Central to Narrow-Moat Rating

On June 3, Apple held its annual Worldwide Developer Conference, or WWDC, with its typical slew of operating system updates across its bevy of devices. Our overall takeaway was that Apple used the event to refine the user experience for its existing devices, versus a single massive innovation or new product. Perhaps the most interesting feature was the iPadOS to better support the tablet experience, but on the whole most of the announcements seemed incremental in nature. Although none of the new features or products move the needle for our valuation assumptions for Apple, we do believe they collectively underscore Apple’s services-driven growth engine and bolster the switching costs that support our narrow-moat rating. Although the iPhone wasn’t the focal point of the event, each product or service updated or referenced supports Apple’s crown jewel by keeping iOS users engaged with the ecosystem, which we think makes it less likely a user departs Apple’s walled garden. We are maintaining our $200 fair value estimate, and while shares are undervalued at current levels, we would wait for a wider margin of safety before committing capital to the firm, given the current U.S.-China tensions weighing on the market.

We don’t believe the Apple TV features or preview of “For All Mankind,” an alternative history show with the Soviets reaching the moon before the U.S., moves the needle in Apple’s bid against stalwarts such as Netflix, as many features (multi-user experience and personalized recommendations) aren’t novel and the initial Apple TV+ offerings will likely get lost in a sea of content from Netflix, Disney+, Hulu, among others. That said, one interesting tidbit was the compatibility of an Xbox One S or PlayStation 4 controller with Apple TV for gaming, which could unlock the gaming potential for casual users with an Apple TV.

We found the increasing independence for the Apple Watch a welcoming feature for enhancing the user experience. Specifically, independent apps and streaming music without an iPhone (as well as an app store for the watch itself) could allow further uptick for the Apple Watch, though we note the wearables segment continues to perform remarkably well in the midst of recent iPhone softness.

Addressing the privacy concerns that are currently shaking the technology industry (with increased scrutiny of firms such as Google and Facebook by the Department of Justice and Federal Trade Commission), Apple introduced a “Sign in With Apple” feature to log into new websites. This is juxtaposed with similar sign-in alternatives with Google or Facebook logins. With Apple’s solution, however, Face ID validates the user’s identity while the system hides the user’s email address and prevents data from getting shared with the app. Meanwhile, the firm’s new iOS 13 will feature more tools to prevent apps from tracking location data. When comparing Apple’s hardware and services offerings relative to peers, we believe the focus on privacy may offer it an edge, particularly for those users deciding between iOS-based versus Android-based devices.

On the iPad front, Apple announced a new iPadOS to differentiate the experience from that of an iPhone (versus replicating the user experience in a larger form factor). Specifically, it offers more multi-tasking, multiple windows of the same app, the ability to use USB flash drives to upload files and other ways to mimic a laptop experience. Meanwhile, the iPad can be used as a second screen for a MacBook. One of the most important announcements, in our view, was Project Catalyst, which helps developers port existing iPad apps onto the Mac, facilitated by the latest macOS (Catalina). We believe these moves in aggregate will usher Apple toward having its MacBook offerings running on its ARM-based A-series processors in lieu of Intel CPUs. However, we don’t believe this will meaningfully come to fruition for at least another 3-4 years, if not longer, given Apple’s 100 million Mac and MacBook installed base and the incumbent applications written for Intel’s x86 architecture.

Apple will also be replacing iTunes with discrete Apple Music, Apple Podcasts, and Apple TV apps, across all devices, which we believe better aligns with its broader services and content strategies. While iTunes remains a well-known product that was revolutionary for the music industry (along with the iPod), we view this move favorably as Apple focuses on modern apps to compete against Spotify, Netflix, and other pure-play offerings.

The primary new product included the new Mac Pro for graphics-intensive applications starting at $5,999. The firm also announced a Mac Pro display is a 32-inch 6K LCD display at $4,999. Collectively, while impressive from a performance and display perspective, these products are tailored to a smaller subset of power users.