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All About Apple: Wonderlust & iPhone 15
Checking in on Warren Buffett's biggest bet ahead of a pivotal holiday season
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Apple, still the world’s most valuable company, limped into last week’s much-anticipated Wonderlust event dogged by concerns over slumping smartphone sales and (reportedly) an iPhone “ban” in China.
What a difference a few months make. Back on June 30, Apple made history by becoming the first company in the world to close with a $3 trillion market cap — completing a three-peat of sorts after also being the first American outfit to reach the $1 trillion and $2 trillion mark.
Ever since that proud moment, though, Apple has been mired in a frustrating limbo of one step forward and two steps back. AAPL 0.00%↑ slid nearly 10% after its Q3 2023 earnings disappointed the market — with revenue declining for the third straight quarter and iPhone sales coming in below expectations.
Nevertheless, Apple clawed back most of these losses in the second half of August — only to get broadsided by the Chinese government earlier this month.
While no one yet knows the true extent of China’s iPhone “ban” — reports say that the CCP forbid employees of central government agencies and state-owned firms from bringing their iPhones to work — it’s certainly cause for concern in Cupertino. China remains a critical piece of Apple’s manufacturing puzzle and accounts for about 18% of the company’s worldwide revenue.
For its part, China denies that there is any “law, regulation, or policy document that bans the purchase and use of cellphones of foreign brands, such as iPhone”. That’s nice and all, but hardly enough to alleviate Apple’s worries.
If an unofficial whisper campaign convinces Chinese consumers that their government does not want them to own iPhones, then they’re probably not going to buy them. It’s that simple. And that type of chilling effect on a growing market would be very bad news for Apple.
The Wonderlust event on September 12 was Apple’s chance to stanch the bleeding and put the company on solid footing ahead of another all-important holiday season.
So, in honor of iOS 17’s release later today, I figured that this would be an opportune time to check in on Apple. The Cupertino-based tech giant is a fascinating company in its own right — though it takes on added significance around these parts due to its outsized spot in Berkshire Hathaway’s stock portfolio.
I’ve gathered together some recent news and updates about Apple that will hopefully connect the dots and fill in the picture a little more clearly…
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Wonderlust & iPhone 15
While the upcoming Vision Pro mixed-reality headset might be Apple’s future, the trusty ol’ iPhone is still very much its present. Case in point: the iPhone segment alone accounts for about half of Apple’s overall revenue.
In some sense, as the iPhone goes, so goes Apple.
Which makes last week’s Wonderlust event — where Apple revealed its new lineup of iPhone 15 and iPhone 15 Pro models — all the more important.
As expected, the new iPhone 15 Pro boasts extra bells and whistles meant to entice switchers and upgraders — including a titanium exterior (more on that in a minute), an optical zoom for better photos, and a cutting-edge A17 Pro chip to power it all. The only real surprise is that Apple held off on an inflation-induced price hike for its flagship smartphones.
The base iPhone 15, meanwhile, soldiers on its role as little brother, inheriting hand-me-downs from last year’s premium model. That’s no criticism — iPhone 15 smartly serves that wide swath of the market that doesn’t need such Pro features.
It was, by all accounts, an iterative moment for the iPhone. But that doesn’t mean the new models won’t sell like hotcakes. Dan Ives of Wedbush Securities told CNBC that “25% of the install base has not upgraded their iPhone in four-plus years”. In his eyes, this hints at strong sales for iPhone 15. Time will tell.
The early returns look promising, though. Pre-orders opened on Friday morning and the higher-end models quickly sold through their initial allotments — with many eager buyers relegated to a months-long waitlist. Reuters calls this “an early sign of strong demand” that is “likely to ease some worries about demand for Apple’s flagship device after a slump in the global smartphone market sapped iPhone sales in the June quarter”.
The iPhone 15 Pro’s titanium casing might be a bigger deal than most think. By all accounts, the 15 Pro feels noticeably (and surprisingly) lighter than the stainless steel phones of the past. Lots of chatter coming out of Wonderlust about how the titanium alloy in the 15 Pro provides a delightful quality-of-life improvement over past models. Something to keep an eye on.
Mark Gurman of Bloomberg, who is something of an Apple whisperer, expects the company to snap its losing streak in the holiday quarter. “Assuming the iPhone maker doesn’t hit supply disruptions like it did last fall — or run into serious sales issues in China — the company should have an easy path to clearing the $117.2 billion it rang up last holiday season.”
Even in the midst of a small sales slump, Apple’s smartphone dominance shows few signs of abating. On the eve of Wonderlust, Tripp Mickle of the New York Times dropped a fact-filled analysis of the iPhone’s seemingly impregnable position.
Here’s a few of the highlights:
iPhone currently holds over 50% of the smartphone market in the United States (up from 41% in 2018) and around 20% of the worldwide smartphone market (up from 13% in 2019).
Incredibly, 90% of American teenagers own an iPhone. 👀
iMessage and the stigma of the green bubble likely explain this remarkably lopsided margin.
94% of iPhone customers say they will buy another iPhone, which is better than Android’s 91% mark.
Customer satisfaction has long been one of Tim Cook’s favorite metrics, so this will surely make for happy reading in Cupertino.
Mickle also points out that any China-related decline could be offset by Apple’s strong foray into India. iPhone currently has 5% of the smartphone market there, though some estimates predict that could grow to 10% as soon as next year.
India’s soaring population should be fertile ground for Apple in the years ahead.
The Buffett Connection
Berkshire Hathaway’s massive $160 billion position in Apple will, in all likelihood, end up being one of the best investments of Warren Buffett’s illustrious career.
Even so, I don’t think he gets enough credit for taking the plunge on Apple:
Buffett shrugged off his lifetime aversion to technology companies and recognized Apple as the consumer brand powerhouse that it had become.
Buffett refused to allow his stagnating IBM investment (which he later exited in 2019) to color his opinion of Apple. A lesser man might have taken the IBM disappointment as confirmation that tech companies aren’t worth the hassle. Buffett, though, pushed past any doubts and saw Apple as the unique (and undervalued) opportunity that it truly was.
Buffett kept buying as the stock price moved higher. Averaging up is one of the hardest things for any value-based investor to do — and Buffett did it on just about the largest scale imaginable with Apple.
Buffett then held on tight as Apple rocketed to new heights. (Yes, he sold over 93 million shares of AAPL 0.00%↑ in the second half of 2020, but Covid was a crazy time for everyone. And, as he’s said numerous times, he regrets those sales.) As Buffett wrote in this year’s annual letter: “The weeds wither away in significance as the flowers bloom. Over time, it takes just a few winners to work wonders.” Apple is a prime example of that.
So what was it about Apple that caught Buffett’s eye?
Well, there’s that great Sandy Gottesman story that I’ve written about before.
But a recent example comes from John Gruber over at Daring Fireball, who perfectly encapsulates Apple’s enduring competitive advantage.
The formula Apple has applied to make the iPhone (and iPad) the unprecedented success that they are is remarkably simple … Keep iterating, tirelessly and continuously, to improve that product year after year. Focus on aspects that cannot be copied or imitated. In the iPhone’s case, those are things such as custom chips, superior hardware components and manufacturing techniques, software frameworks decades in the making, a culture that prioritizes great design, and an ever-expanding ecosystem that keeps customers in the flock by making them happy. Build a luxury resort they don’t want to leave, not a prison they can’t leave.
Has there ever been a better description of Apple’s moat than that?