The Critical Path #131: How Big is iCloud?

Apples Services business is growing by leaps and bounds. How much of that can be attributed to iCloud? Horace and Anders consider how big the iCloud business is for Apple, as well as Apples recent stock price rise in this “rolling show” on the way to the airport.

via 5by5 | The Critical Path #131: How Big is iCloud?.

  • David Stevenson

    A minor point about “there are a thousand reasons to sell [a stock] and only one to buy”: my interpretation is that most of those thousand reasons have little or nothing to do with the fundamentals of the company having changed; for example you need to raise money to pay for a child’s tuition and decide to sell some AAPL because it’s become overweighted in your portfolio due to its recent performance.

  • On Apple’s iCloud business, in my anecdotal experience something like the following distribution seems more likely to me: Far less iCloud take-up, far more iTunes Match take-up and far more AppleCare than estimated.

    (1 Match customer is worth 2 iCloud 20GB customers, of course. On (very rough) average 1 AppleCare customer is worth about 12 iCloud customers.)

    On AAPL. People love to point out Steve Jobs’s “reality distortion field”. Well, it had nothing on the reality distortion field surrounding Apple. Pure and simple, Apple has always made otherwise reasonable people go out of their minds. Apple’s a rare example of a company that has almost always been misunderstood by the majority. This, despite the fact that their mission is rather simple and its financial reporting is really quite transparent in relative terms.

    Just as the company freaks people out, so does its stock. AAPL rarely seems to move on facts directly tied to Apple’s business activities.

    For example, while Apple’s explosive iPhone growth admittedly ended, AAPL’s move over the last 18-36 months was tied to the perceived strength of its competition.

    That’s to say that the trumped up _threat_ – not real accounting – posed by Google, Amazon and Samsung over the last three years influenced Apple’s share price far more than anything Apple “did or didn’t do” during that time (with the exception of the passing of Steve Jobs).

    Now, three years later, we’re seeing the beginnings of a shift of investment back to AAPL as a result of quarter after quarter of disappointing results from Apple’s competition…not because of something Apple is – and has been – getting right all along.

  • rational2

    Horace I enjoy listening to your podcasts as I exercise (exercise for the mind and body at the same time). They are very insightful and analytical. Couple of items of feedback if I may:

    1) it’s futile to get into analysis of apple stock moves. The psychology and mechanics behind its price movements are not that different from those of hundreds of companies – tech and non-tech. The stock price will track profits over the long term. There isn’t much value in stock price analysis compared to the immense value provided by your analysis of Apples business.

    2) Catching up on Asymcar podcasts and was shocked to hear you call Motorcycle riders “organ donors”. That was totally unnecessary. There are some who would choose one of many high risk activities and habits to ruin their bodies and health, but those of us who carefully balance risks and rewards and take great care to mitigate risk do not fall in that category of reckless risk takers. In the U.S., a Motorcycle Safety Foundation course is a widely used course to get introduced to the hobby. The course emphasizes the risks involved and teaches a variety of hands on techniques to mitigate risks. Those of us who take those lessons seriously and incorporate the safe riding techniques go on to enjoy the hobby for many decades. Considering the energy it takes to produce a m/c and the mph of an average m/c, they are a great way to get around.

    That said, thank you once again for the wonderful podcasts.

    • Thank you for your kind comments. My concern with motorcycles is that they are on the same roads as cars. If they were isolated from cars, they would be a very fine mode of transport, and quite comparable with safety standards set by bicycles. The problem is that roads were built for cars and motorcycles were grandfathered into the system.

      • rational2

        Thank you for your thoughtful response.

      • Space Gorilla

        Exactly. As a long time rider I know the problem isn’t the motorcycle, it’s sharing the road with cars and trucks, low visibility, exposure, and a false assumption (by vehicle drivers) that motorcycles are more maneuverable than they actually are. I stopped riding years ago because the risk is simply too high.

      • Walt French

        Years ago, I sold my motorcycle after several incidents when car drivers looked right through me—I could see their heads turn my way but saw no recognition of me, even with my headlight on—and pulled out into my path. Always needing to have a Plan B for such incidents turned a very fun ride into hard mental work and I was always aware that no level of alertness and attention could reduce my risk to that of a car driver.

        MANY other motorcyclists I see are cavalier about these risks. It’s practically suicidal to thread between cars on a 5-lane bridge with narrow lanes and drivers constantly jockeying for a few seconds’ less driving. As I have a sib and a couple of acquaintances working in hospitals, I’ve heard “organ donor” to label motorcyclists MANY times.

        OTOH, I’ve just now taken up a bicycle for my commute. Oakland and Berkeley are a LOT friendlier to bicyclists’ safety—there are bike-only lanes on much of my trip—and I time my riding during sunny daylight hours outside of others’ peak commutes. I hope the partitions keep me healthy.

      • Space Gorilla

        I should mention, I’ve found off road dirtbiking to be a healthy alternative, loads of fun, and a lot safer. I wonder if it is statistically safer, I’ve never checked, but it sure feels safer.

  • Ncgo4

    Horace, as always thanks for your thoughts. I always find them stimulating.

    As others have posted the figures you have developed seem intuitively suspect. But this is true about much of what we know about Apple and as I have reviewed your development of the numbers I cannot find a hole in the logic.

    This just may be THE most important “find” about Apple in some time. There is way too little discussion about the value of Apple’s horizontal integration vs the vertical integration of someone like Samsung or the complete lack of any integration of other smartphone makers.

    The iCloud is the ultimate golden handcuff in the tech field. As iCloud gets filled with thousands of photos and music, medical, fitness, home security and other parts of our daly lives it will become difficult then impossible to switch operating systems. I now understand why Apple has made iCloud so cheap and so difficult to not use. It is the most brilliant and unrecognized marketing ploy, perhaps of all time. The long term value to Apple is immeasurable.

  • Sacto_Joe

    Why is the price of AAPL going up? Because the institutions believed the disinformation that Apple earnings growth had plateaued and sold. Apple then (1) bought back a huge number of the shares they dumped at bargain prices, and (2) proved those spreading the disinformation wrong by continuing to grow earnings. Result: AAPL had an institutional ownership of only 62% at the end of fy 2014. In the present mad dash to get their hands on more AAPL, the institutions are now driving the price higher by the day.

    BTW, while AAPL’s P/E ratio is finally becoming decent, recall that the real earnings per share number is being hidden from view. Net income in fy 2014 equalled $39.5 billion. As of the beginning of the quarter, 5.87 billion shares were remaining. Divide shares into net earnings and you get EPS of $6.73. Divide that into the price ($116.31 at the close today) and you get a P/E ratio of 17.28 – NOT the 18.09 that is being reported by Google and the rest.

    Ergo, there is more room to “grow” the stock price than the general public thinks. However, I strongly suspect that the institutional owners are well aware of this little discrepancy.

    What’s behind it? Buybacks on a massive scale. Traditionally, the P/E ratio is calculated by summing up the last four quarter’s EPS numbers and dividing by four. Problem is, that ignores the impact of three quarters of buybacks on the earnings in the present quarter. Bad math.

    Watch the numbers for institutional ownership at the end of the quarter. If I’m right, they’ll have gone up markedly. Thing is, they’ll have to go up a lot to bring AAPL into synch. And with Apple actively competing for those shares, that means those shares are going to be heading a LOT higher!

    • Good points. Thanks for explaining how the trailing P/E ratio for a company buying its shares is not correct.

  • Mordechai

    Horace, enjoyed the podcast. One “no-brainer” reason that I saw to sign up for more storage was iPhoto in the Cloud. I have lots of family photos on my home Mac that I back up to a time capsule. That still leaves me with a major failure mode in the event of a fire or some such major disaster in the house. Storing the photos in the cloud (at full resolution) would be worth a lot to me.

    The current iPhoto in the Cloud is not there yet, it only stores photos from iOS devices and any that I manually upload. When Apple releases iCloud support for iPhoto on OS X then I would probably sign up for the 200GB plan. $48 would be cheap backup and would cost less than a Carbonite subscription (as well as providing more functionality in terms of synchronization). I bought the 20GB plan merely to experiment with iPhoto in the Cloud. BTW, iPhoto in the Cloud has a long way to go in terms of functionality. The ability to organize photos is de minimus, but once iPhoto features such as facial categorization are added to iPhoto in the Cloud it would be a great product.

    My next storage upgrade would come when Apple supports Video in the Cloud. At that point I would consider the 1TB plan. I’ve got a lot of digitized home movies that I would hate to lose.