Apple’s iPhone hangover, Tesla dumping Nvidia for AMD, Google’s hardware play and Netflix’s $1bn fight with a drug lord

This week we saw Apple’s share price suffer a hangover from the launch of the iPhone 8 and iPhone X. Tesla surprised the market with the rumour that it is partnering with AMD for an autonomous driving chip, knocking Nvidia’s shares. Google bought HTC’s Pixel hardware team. And amusing (and perhaps serious) is the threat from Pablo Escobar’s brother to Netflix to pay $1 billion for the rights to Narcos trademarks.

Apple launched its latest iPhone lineup last week – the iPhone 8, iPhone 8 Plus and the ‘real’ upgrade, iPhone X. In the lead up to the launch there was the typical hype from the technology and investing community – I don’t think a day passed over the last few months where I didn’t receive another broker report talking about the iPhone ‘super-cycle’. Apple used to have a major upgrade every two years, but this time it has been three years and should be the biggest yet.

So far the launch has followed the usual pattern of ‘buy the rumour, sell the news’. Apple’s share price reached a record high of $164 at the start of September, but since then has fallen 6.5% and 7.5% relative to the market. The share prices of Apple’s suppliers have also been weak, though investors are starting to differentiate between commodity suppliers and those exposed to the upgraded features in iPhone X.

The negative investor commentary is focused around three themes:

  1. “This was it, the next upgrade is three years away so get out now at the peak”
  2. The iPhone X is too expensive, with a starting price of US$999 (or A$1,579, implying an exchange rate of $0.63 it looks like the Australian premium is back!)
  3. Early indications of weak pre-orders for the iPhone 8 and poor reviews of the Series 3 Apple Watch

Those defending the stock point out that the iPhone X is the real upgrade so weak iPhone 8 orders shouldn’t be a surprise, and the Apple Watch sales are insignificant.

I agree that sales of iPhone X is what really matters. If it is a hit then Apple has succeeded in increasing the selling price of iPhones by about 30%. If it isn’t successful, perhaps because it is too expensive, then Apple has failed. It is too early to tell as iPhone X pre-orders don’t start until the end of October and we won’t have a good read until well into November.

But it is interesting how Apple’s sentiment has changed. Two years ago you could buy a share in Apple for $113, with analyst’s estimates of its 2017 earnings at $10.88 implying a 2017 PE of 10x. A year ago you paid the same price, $114, with 2017 estimates lower at $8.95 and a 2017 PE of 13x. Today the the share price is 35% higher, but the estimates haven’t moved so you are paying 17x 2017 PE. The sentiment pendulum has certainly swung in its favour, with the share price improvement not justified by increased earnings expectations. Its ambitions for driverless cars and TVs have also been scaled back, so there are fewer reasons to think that Apple might become more than a smartphone company. Over the next few months any news about iPhone X demand will be critical to sustain this improved perception of value.

Source: Bloomberg, Alphinity.

Tesla is working with AMD to develop an AI chip for self-driving cars according to GlobalFoundries CEO Sanjay Jha and quoted by CNBC. This would be a blow to Nvidia who won the slot in Tesla’s Autopilot 2 version. GlobalFoundries has since issued a statement walking this comment back, saying he was just citing examples, but the market has reacted as if it might be true. AMD’s shares were up 5% on the news, but fell 2.5% the following day. The battle is interesting for investors as it is hard to find three stocks that have performed better recently: over the last year Tesla is up 80%, AMD up 110% and Nvidia up 180%.

CNBC article – (VIEW LINK)

Alphabet (Google) is paying $1.1 billion for 200 of HTC’s hardware staff that worked in partnership on Google’s Pixel smartphone, as well as non-exclusive rights to HTC’s IP. Its unclear whether this is the sign of a more aggressive move by Google into hardware or a necessary step to support a struggling supplier and continue development of its flagship Android Pixel phone.

Wall Street Journal article (Paywall) (VIEW LINK)

And finally the amusing (but possibly also very serious) story about Netflix’s $1 billion fight with Pablo Escobar’s 71 year old brother for IP violations. In 2014 Roberto De Jesus Escobar Gaviria founded Escobar Inc and registered rights for his bother in California. In July 2016 he demanded $1 billion from Netflix for unauthorised usage of content. There are many amusing quotes, but my favourite is from Escobar Gaviria about the legal battle: “They don’t know life and would never dare to survive in the jungle of Medellin or Colombia. I have done that. Their mothers should have left them in the womb. That is what we tell people like this if they come to Colombia.”

Do you really want to mess with these guys?

Hollywood Reporter article – (VIEW LINK) article – (VIEW LINK)


Author: Lachlan MacGregor, Portfolio Manager