Apple’s (AAPL) recent software and service efforts have focused on both fortifying its successful operating systems, and positioning iOS and the iPhone as a digital hub as the company expands into new end markets and applications.
We view Apple’s announcements at this year’s annual Worldwide Developer Conference as being slanted much more toward the former. We will maintain our $140 fair value estimate, narrow moat and positive moat trend ratings for Apple, and we still view Apple’s shares as modestly undervalued today.
Our initial takeaway is that WWDC hasn’t altered the Apple story or our moat rating. Apple announced many new improvements, but we view them as incremental. In general, we still think that new hardware and services like HomeKit, Apple Watch, and Apple Pay could build additional switching costs over time.
Yet Google’s revamped, and praised, Photos service with free and unlimited storage may just as quickly reduce some switching costs around iCloud for Apple. To us, Google Photos is a reminder that the battle still wages on against many other firms in services that operate independently of the underlying platform.
Features such as multitasking on the iPad, public transit within Maps and a low-power shortcut are unlikely to grow market share, in our view, but patch up o/s vulnerabilities against competitors. Although Apple didn’t spend much time on new areas like HealthKit, the company did move the ball forward in other ventures, such as a new watchOS, Apple Pay support for store and loyalty cards as well as an upcoming U.K. launch, and additional intelligence features around Siri and Spotlight Search.
Apple Music, at $9.99 per month and, more important, $14.99 for a family of up to 6, won’t move the needle on our valuation as it might only offset declining digital download sales, but the service will be interesting to us if Apple can bundle it with iCloud storage, video streaming, or other non-music services over time.
Nonetheless, we would not equate Apple’s WWDC announcements, which we saw as a bit more defensive than offensive in years past, as a sign that innovation at the company is dead. In our view, the most damaging blow to Apple’s long-term success could be an unforced error, such bugs in software that would lead to an inferior user experience.
In our view, the lack of flashy new features for iOS 9 won’t matter much as long as Apple continues to provide customers with a seamless, elegant user experience. Finally, Apple did not announce any updates to Apple TV or streaming video at WWDC, but we still suspect that the company is working diligently to roll out a revamped video service, and perhaps a more advanced over-the-top video box, sometime soon.