Apple searches for the next big thing
Capital Markets, one of the first on Wall Street to suggest its shares might rise that high. “But it’s not that unreasonable to think there’s an- other 20 per cent upside in Apple’s stock.”
Brian White, analyst at Drexel Hamilton, whose US$202 target price implies a US$1tn valuation, is betting that the next iPhone will prove more durable in its sales, after last year’s declines. “I don’t expect the boom-bust cycle that we saw in fiscal 2015, which really hurt Apple,” he said. “It’s still so cheap, for a com- pany that generates this much cash.”
Apple added almost US$30bn in market capitalisation in a single day on Wednesday - about as much as HP is worth and more than Dell’s price tag when it was taken private a few years ago. Its shares jumped five per cent, briefly hitting a new all-time high of US$159.75 and a valuation above US$810bn, after last Tuesday night’s forecast of acceler- ating sales growth.
To maintain this growth, some new inno- vations are already in the works. At least one model of the next iPhone is expected to in- clude wireless charging, and 3D camera sen- sors that will allow owners to unlock the device simply by looking at it. Some features were apparently confirmed this week when Apple accidentally posted source code on- line.
Some in Silicon Valley, however, believe these represent merely incremental improve- ments and that the leading smartphone mak- ers have become constrained by having to produce more than 200mn devices a year.
“As Apple and Samsung have optimised for profitability, consumer choice has gone down and innovation has gone down,” said Niccolo De Masi, president and chief operating officer of Essential, a new consumer electronics start- up co-founded by Android creator Andy Rubin. “When the grandparents have the same phone as the grandkids, the phone is a com- moditised utility.”
With Apple’s vast scale, though, comes vast resources. As the iPhone matures, Apple has begun to place bets on a wider range of mar- kets, from wireless headphones and speakers to the automotive and robotics technology.
While Daryanani believes Apple might reach that US$1tn valuation off the back of in- creased iPhone profits alone, White said it needs to look beyond the smartphone to new innovations. “There has to be something on the horizon that people can dream about,” he said.
Apple’s annual R&D investment has in- creased tenfold since 2007. At UD$8.6bn in the first nine months of the 2017 financial year, it is now five per cent of revenues, its highest ratio since 2005. In regulatory filings this week, Apple said the rise was ‘driven primarily by an increase in headcount-related expenses to support expanded R&D activities’.
Cook teased investors this week with a hint that its work on ‘autonomous systems’, being tested on the roads of California in its self-dri- ving car prototype, could be used in ‘a variety of ways - and a vehicle is only one’. Apple is making a ‘big investment’ in autonomy, he said. ‘We do have a large project going’.
That had analysts speculating about what the mystery new project might be, from flying drone cameras to domestic robots.
A walking, talking Siri may be hard to en- visage given Apple is seen as lagging behind rivals such as Amazon and Google in the trend for ‘smart speakers’. Nonetheless, Apple often works on many different projects - and is not afraid to experiment internally and then kill some ideas before they ever see the light of day.
Former employees liken it to a venture cap- ital company, rather than a traditional process-driven industrial conglomerate. While some worry that its increasingly broad prod- uct range risks diluting co-founder Steve Jobs’ imperative to focus on doing a few things well, others argue Apple has retained his ability to say ‘no’ to things in order to prioritise.
A particular area of experimentation, peo- ple familiar with the matter say, is a pair of AR glasses that might move cameras, sensors and screens from the smartphone to the face. Yet despite the excitement surrounding ARKit, in- ternally the company is still not sure what the most compelling application for such a head- set might be.
As a result, there are still several different kinds of prototype being experimented with, according to people close to the company. One group of engineers is said to be advocating for a pair of glasses that have 3D cameras but no screens, leaving the iPhone as the hub and main display.
Such a device might have more in common with Snapchat’s US$130 video-camera Spec- tacles than Microsoft’s bulky and expensive HoloLens AR headset, which shows digital holograms which can be manipulated using hand gestures. However, no final decision has been made on the product’s final formulation. Apple declined to comment.
“What Apple has is the capability to work on a certain type of product - now much more so than ten years ago,” said Benedict Evans, partner at Silicon Valley investor Andreessen Horowitz. “Glasses fit squarely into that capa- bility but the self-driving part of cars, some- what less so.”
Unlike the development of the iPhone, when there was a single team working in se- cret on its breakthrough touchscreen technol- ogy, today’s Apple has a broader distribution of the ‘computer vision’ expertise that under- pins both AR and autonomous systems, insid- ers say.
As it pours its resources into a wider range of core technologies, Apple’s designers and engineers are content to wait for the right mo- ment to launch a new product, rather than force it out to meet Wall Street’s quarterly earnings schedule - but then move quickly when the moment arrives for Apple to make what it describes as a ‘meaningful contribu- tion’. The team tinkering with a miniaturised hard drive, for instance, did not realise that it would one day upend the music industry as a key component of the iPod.
“Every handful of years, there is a window of opportunity,” one former employee said, re- calling a lesson taught at Apple University, its internal training scheme. “Our job at Apple was to be the best prepared, not to predict ahead of time what it will be. If you are the best prepared, you can dive into it.”
Research firm IDC predicted this week that spending on AR and virtual reality products and services will soar from US$11.4bn in 2017 to US$215bn in 2021.
App developers such as Walker are opti- mistic that AR could become the next big com- puting platform after smartphones. “I think glasses will be a new way of interacting like touchscreens were ten years ago,” he said.
However, Geoff Blaber, analyst at CCS In- sight, predicted it could take another ten years for AR glasses to become a mass-market prod- uct like the iPhone.
“I don’t think we can rely upon a ‘next big thing’ in the next 12 months,” he said. For now, Apple’s next big thing is still the iPhone. For some investors eyeing that trillion-dollar val- uation, that might be enough.