The iPhone company

The analyses of adoption of smartphones in the US and EU5 are remarkably consistent with each other. They also turn out to be consistent with the valuation of Apple.

Screen Shot 2013-10-17 at 10-17-4.01.35 PM

I show the stages of adoption overlaid with the derivative of the Logistic Function and Apple’s enterprise value. The derivative of the Logistic Function shows the speed of adoption, peaking at the inflection point when adoption ceases to accelerate and begins to decelerate.

The peak in Apple’s enterprise value happens to fall at the exact point of inflection in the adoption curve and hence maximum growth.

It could suggest that the market perceives the value of Apple to be entirely reflective of the US market.

But I can’t imagine anyone would be so foolish as to believe it.

One can only conclude that it must be just a coincidence.[1]

  1. Apple’s revenues by region:

    Screen Shot 2013-10-17 at 10-17-7.18.56 PM


  • Chris Walter

    It is of my opinion that historical stock prices can be
    evaluated to fit a curve or function but it is impossible to predict long term future
    stock prices with this curve or function.
    Nothing short of a time machine is required for long term prediction.

    • JDSoCal

      Where in the article does Horace suggest his graph is predictive?

      • Jeff G

        Where in Chris Walter’s post does he suggest he was refuting something Horace wrote?

        I read it as… Here are my thoughts relating to the subject.

      • David Leppik

        What’s the point of fitting the data to the curve, if not to make a prediction?

      • JDSoCal

        If you think Asymco is a tech investing and advice site, you’ve missed the point.

  • It seems like you could get a pretty good fit to that data with a bunch of variants on that curve. And where’s the earlier data? Does it support the hypothesis, or does the idea require only fitting the near-linear part of the curve?

    • Actually you can’t get good fits which vary much from the result. Logistic curves can be fit with very few data points as you saw with the EU5 data published yesterday. Regarding earlier data, I’m not aware of any. If you are aware that comScore published earlier survey data, let me know and I’ll add it to the set.

  • MOD

    “It could suggest that the market perceives the value of Apple to be entirely reflective of the US market.”

    And the speed of adoption. Once the speed of growth is zero, the company value would be zero? Even though it owns 100% of the market and is making monopolistic profit?

    Warren Buffet made his fortune with those kind of companies, ie Coca Cola, by finding value where Wall Street did not see (until later of course).

    • mjw149

      It’s not monopolistic profit, it’s premium profit, a key distinction. Wall Street should listen to Cook about this. He’s right when he compares Apple to Porsche and BMW and points out that they have far higher market share.

      I think unfortunately the stock market is so predicated on baseball card type trading, that there’s nothing to do but stop worrying about stock value. MS is massively profitable, and it hasn’t mattered in 10 years, they want a growth story to cash out.

      At any point in time, most of the stockholders want to cash out. Add in the traders who short stocks and the worst thing for a company is to be reliable and profitable and do a good job in the long term.

      The genius of Bezos is that he has so managed expectations by just flat out ignoring profitability that he has a clear exit strategy, and speaking about his stock is easy – since the only stockholders are in it for the long haul.

      Obsessing about valuation in our daytrader/401k/trading bot world is probably pointless. Wall street cant’ make sense of MS, Apple or Google.

  • Chaka10

    Horace, the revenues by region numbers in your chart seem off for 2Q13. According to Apple’s 10-Q, Greater China was 13% (4,641/35,323) and Americas was 41% (14,405/35,323).

    • Yes, you’re right. I had the wrong data entered.

      • Chaka10

        Thanks for the very interesting analysis by the way. As I’ve been saying for a while, I think it’s very important to begin looking rigorously at the relevant markets for what might happen after adoption growth starts to decelerate. I hope my comments are understood as attempts to add to the discussion.

        EDIT TO ADD: I don’t think this is necessarily bearish for Apple (other than to anyone who thought Apple might sustain 50-100% growth rates…), but I do think it’s foolish to deny that the relevant markets have started to mature (I use the word relevant intentionally)

  • wangthony

    “It could suggest that the market perceives the value of Apple to be entirely reflective of the US market.”

    it’s not just that the market is only considering the US market… it’s also only taking into account the iPhone business — not iPad, iTunes, or any other products or services that Apple offers

    also, this would be assuming exactly zero repeat iPhone customers, which would indicate a complete lack of sustaining improvements, or by impending disruption by an external competitor (as opposed to self-disruption by a new Apple product line)

  • Interesting analysis.

    1. It’s more important to analyze the growth in free cash flow.
    2. Apple can no longer grow upwards, but more laterally.

    • marcoselmalo

      Pardon my ignorance, but could you explain the difference between lateral growth and vertical growth? Is this the same as diversifying? Thanks!

      • Vertical implies along the value chain (i.e. Samsung). Lateral implies diversifying (Gap = Banana Republic + Gap +Old Navy).

      • marcoselmalo

        Thank you

  • r00fus

    Why is Retail it’s own Region? Does anyone have an idea of why Apple would report revenue this way?

    • It reports “segments” in accordance to they way it receives meaningful income. The regions are arbitrary but retail is a specific, relevant channel.

  • Walt French

    Subtracting the cash — had Apple known exactly what its needs were, it could’ve paid it out as dividends — leaves the value of Apple as a going concern.

    The derivative of the logistics curve that is shown fits “market-value-less-cash” rather poorly—it’s way too high before 2012, for example, and so there should be too-low periods such as 2012. A more careful fit to this data would probably get a much faster ramp up and down of sales. There’d also be interesting “bubbles” of over-valuation in ’08 and ’12, paired with pessimistic under-valuations elsewhere. I will guess — I don’t have a good non-linear modeling pack at hand, nor the data — that the peak would end up a bit more to the right, too.

    Anyway, I think the problems more than anything else show that insisting on too tight an adherence to the model is to lose sight of what’s happening. The rapid run-up and breakdown of its stock price is a sadly familiar sight to growth investors, and at least one of this week’s Nobel laureates can say he called it many times before. (But Shiller would probably be the first to say that his CAPE methodology would likely misvalue the company, as it has so utterly changed over the 10-year evaluation window.)

    What I think caused the break in prices, however, was the perception that Samsung had cracked the code to duplicating Apple’s success without its expenses or mercurial founder. (I’ll let others comment on the relative transparency/integrity in reality.) Surely, if Samsung could create high-quality phones and tablets, why a host of others (maybe not Motorola, but HTC or some aggressive Chinese startup) could apply the same formula, and offer similar-quality phones for hundreds less.

    My take is that the above is a perfectly legitimate thought process, unfortunately detached from the reality of both Apple’s patent rights and sales in markets where anything besides rock-bottom prices matter. As the top chart shows, Apple is NOT losing the share that’d be necessary for the bottom Market Value / sales chart to fit to the logistics chart.

    By the way: interesting news on the IP front today: the touchscreen heuristics that Samsung (Google?) had challenged, survived a USPTO re-examination intact. Apple will probably move quickly to extend the ITC ban against “older” Samsung phones to any device that uses a similar approach to determining what the user is trying to communicate via touch, which I think is all of their devices; cases are already in court against Moto and it’ll be interesting to watch the Apple/Samsung dynamic closely in the next few months. Between this heuristics patent, the pinch-to-zoom and several other patents, the legal argument that Apple’s patents only apply to a small part of the user experience begin to look shaky.

    • Sacto_Joe

      Great points, Walt! And since Horace has made the point ad nauseum that AAPL is valued as if there were no growth possible other than what has actually transpired, he stands clearly in agreement.

      I also agree that the USPTO finding is going to knock the props out from under manufacturers that have not cut a deal with Apple. But while Samsung has clearly benefitted from the very, very long time it takes for justice to grind, it needs to be recalled that Samsung was not truly the target of Apple’s suits. Google has done an end run around intellectual property rights by claiming it does not profit from its “open-source” utilization of same, forcing Apple to go after those who clearly did profit, that is, Samsung et al.

      The long arm of the law seems to be finally catching up with Samsung. My question is, can the same thing be said of Google, who at base is the true criminal mastermind in all this?

      • Walt French

        Google could be forced to abandon Android and its share price ought to go up, for as little good — and by many accounts, harm —as Android has done them. Not that I normally advocate attributing a lot to share price anyway.

      • charly

        Google could be forced to pull Android from the American market. Something that Firefox OS and Sailfish already did. But that doesn’t mean abandoning Android in the rest of the world.

      • Walt French

        I meant “even if bizarrely Google were forced to withdraw Android…” —not that it was likely.

        There are three markets for Google revenues via Android: US, EU and the rest; I’ll bet the revenue shares are 60/30/10. And that their “mobile” revenues are more than 2X that, ie that they would suffer more immediately if iOS blew up than if Android disappeared.

        Right now it looks like Google’s best strategy is to get Android users to act like iOS users, and 2nd best is to convert them to iOS users.

        Caveat: all speculation w/o seeing details that’d confirm or deny my impressions.

      • charly

        More like 1/1/1
        EU GDP is about the same as USA but Google’s market share is much higher so i would expect around the same revenue. East Asia excluding Red China to be half of EU and the rest of the world to make up the other half.

        Problem with mobile use/revenue is that it is growing so fast so i wouldn’t doubt that it was recently true that they got twice as much revenue from IOS but i don’t think it is true anymore and with growth you must not only look at the market right now but also how the market will look in the very near future, especially with respect to what is already baked in.

      • Jonathan Mackenzie

        Except you need to be specific about what you mean by “use”. It is clear that Android has huge market share in China, for example. But it is not clear that these devices are used in a way that benefits Google much at all. The iOS user is an active user who delivers a lot of ad revenue to Google. The low end android device user in China? Not so much.

      • charly

        Google has a China problem but in the rest of the world you can assume Android == Google

        An S4 user is the same as an IOS user but with Android you also play the cheap market

      • dajhilton

        Damages for infringement of intellectual property rights are not limited to lawsuits against infringers who profit from the infringing activity. Statutory damages have been set by Congress, subject to judicial discretion, to make sure that infringers who are happy to give away the intellectual property of others can be enjoined from continuing to do that, and heavily fined as well. Regardless, as I say, of whether they have profited or not.

      • Sacto_Joe

        Interesting. And yet – Google has done exactly that, and gotten away with it.

        Or maybe not: Is it possible that Apple wanted to first settle the issue of infringement by users of Android? Maybe now that that’s been settled, Apple is free to go after Google.

    • obarthelemy

      “Maybe the fact that Chinese auto brands haven’t made the tiniest dent in developed world markets will sink in some day and people will realize that similar economics apply to phones, …”

      Or maybe people remember that the exact same thing was said about Japanese cars in the 80s ?

      • Walt French

        Heh, I was on the other side in the 70s, never owning an American nameplate since my Valiant gave up the ghost around 1972. The advantages to the “imports” were very clear in terms of getting what I wanted—and at a good price, too.

        US autos have taken about 40 years to come full circle and maybe now match the Japanese standards of quality and value.

        I don’t claim to understand how the incredible speed-up of business changes will impact individual brands. My gut feel is that the industry is changing too rapidly to settle into standardized, commoditized devices…yet, anyway.

        Horace retweeted a link to a story about the Firefox OS phones; methinks it relevant that FFOS is having some success as the carriers’ derrière-garde efforts against OTT services—since the user can’t install unapproved apps—in a couple of backwater markets.

        It’s not just ironic that some Venezuelan or Colombian carrier wants use an “open” OSS to control its customers’ usage; it’s a desperately dead-end business plan for Firefox—I’ll guess it fizzles out by 2015. I mention it as a reminder of my belief that people buy phones, and they’ll buy the ones that give them what they want at what seems a fair price; cost alone was never the consideration in autos nor, if the prices are close enough with the capabilities differentiated enough, will it be in phones.

      • mjw149

        The auto industry example is a case of overfitting. American cars weren’t as bad as we remember just because Japanese (and btw other more unreliable foreign cars) got popular. American cars for a long time had space, interior features and power and were unique in those features.

        The key is to look at the business model. The Japanese found a way to charge extra for something very affordable for them – reliability and small sizes. They figured out a premium approach that cost them less than Cadillac, which had to spend more money to make more money.

        So far, Apple still has that business model on their side. They charge more for less and it’s the ecosystem that makes up the value on the consumer side, an ecosystem they worked hard on and spent money on, but which is very affordable to run now.

        Apple is already charging a premium for reliability and cachet and small size and power efficiency. The usual ways to make premium money are covered. And Samsung has the less stable GM strategy of owning as much of the stack as possible and diversifying for the largest possible audience and charging a premium on the biggest products.

        So, for the keen observer, Samsung’s current advantages will become a weakness in a few years. Owning the whole stack makes it hard to respond to trends, no matter who you are. While Samsung is still very open about other vendors right now – supply Apple with chips while ironically chipping Intel chips in other hardware – this can’t last when their growth period is over. They’ll have to cut to grow, and that’s when the weaknesses always pop up, like MS in the last 10 years or GM in the 70s/80s. And culturally, they don’t have the base of support that Apple or the Chinese OEMs have.

        Samsung has been a tremendous success story, but if the market is reading Apple as a Detroit maker and Samsung as Honda, they have it completely backwards.

      • marcoselmalo

        Tangential, but Honda resale value tracks nicely with that of Apple products.