28 BARRON’S September 16 ,20 19
revenues from that end market. This bleak
view was reflected inafalling share price and
lowly multiple.
My independent research led me toavery
different, non-consensus conclusion.
Forstarters,Ilearned that the company
had been developinganew Windows operat-
ing system that would not only work on PCs
but also on laptops, tablets, and phones.
This unified operating system would enable
aseamless computing experience for users
across various devices and reduce develop-
ment costs for third-party software develop-
ers, making itawin-win proposition. In ad-
dition, the company was leapfrogging from
the desktop to the data center by offering a
cloud computing platform called Azure.
Since the latter was expected to grow at a
high double-digit clip,itwould more than
offset the decline in the traditional desktop
market.
More importantly,the company was pivot-
ing from a product-centric offering to a ser-
vice-centric offering which would provide
more recurringand resilient revenues and
commandahigher multiple. Moreover,this
transition to a software as a service (SAAS)
business model would not only enhance its of-
ferings but also expand its addressable mar-
ket, allowing it to grow insteadofbeing can-
nibalistic.
The market anchored on the unsuccessful
launch of Windows 8 phones and tablets as
evidence of permanent failure.Iwas less con-
cerned becauseIknew from long experience
that Microsoft has a history of initially wan-
ing but eventually winning.Forinstance, the
company had missed launchingabrowser in
atimely fashion, givingNetscape an early
lead. But they madeastrong comeback with
Internet Explorer.Inthe early days, Xbox
was viewed as the poor cousin of the more
popular PlayStation 2, but over time, it nar-
rowed the gap.
The consensus view was that Microsoft
would stagnate or decline, whereas my re-
search showed many opportunities for profit-
able and lasting growth. When failure is
priced in but success is not, the risk/reward
balance becomes quite attractive. As the com-
pany’s strategy played out, earnings growth
far exceeded initial consensus expectations,
which forced the street to alter its negative
view to a more positive one. Unsurprisingly,
the stock has almost quadrupled from its 2012
lows of $28.50 to more than $1 10 in 2018, as
what was once priced for failure and disap-
pointing growth is now getting priced for suc-
cess and steady growth.
Excerpted fromNon-ConsensusInvesting:Being
RightWhenEveryoneElseisWrongby Rupal J.
Bhansali Copyrights2019 Contrarian Intrinsic
Value Investing, LLC. Used by arrangement with
the Publisher.All rights reserved.
TechTrader
Apple’sTVServiceCouldBe aFlop
ByTaeKim
NOTHING IN TECHNOLOGY
gets more coverage than
the annual iPhone un-
veiling. But this past
week, Apple had a
broader mission: Intro-
duce newphones while
demonstrating that the company’snew
services business could flourish, as well.
Apple(ticker: AAPL) kicked off its
Tuesday event with trailers for new TV
shows and videogames that will be part of
the company’sforthcoming Apple TV+
video streaming service and its subscrip-
tion-based Apple Arcade platform. The
first game wasaremaster ofa1981 clas-
sic,Frogger.One of the TV shows starred
Snoopy,the character that first appeared
in1950.
The shows and games looked fine, but
Apple’snostalgia seems odd given that it’s
aiming foracord-cutting, millennial (and
younger) crowd.
For investors, though, the only thing
that mattered was Apple TV+’sprice—an
unexpectedly low $4.99amonth. The com-
pany will also make the service free for
one year to anyone buyinganew iPhone,
iPad, Apple TV, or Mac.
Stocks of streaming rivals quickly fell
on the news, with investors sensing that
Apple’sstreaming commitment posed un-
foreseen risks to the competition.Netflix
(NFLX) finished the day down 2.2%.Dis-
ney(DIS), about to launch its own Dis-
ney+ streaming package, also fell 2.2%.
Netflix, is now up just10%onthe
year—lagging behind every major index—
while Apple has soared 39%. This isn’t
about the iPhone, which isn’t exciting any-
one these days. Rather, investors are in-
credibly bullishabout Apple’sservices
strategy. And that could end badly.
While the $4.99amonth price for Ap-
ple TV+ looks appealing, it may not be so
attractive once consumers consider the
number of shows the service will offer.
Apple’s news release listed nine shows to
be offered at launch.The company didn’t
answer my question about whether that’s
the entire slate, but it’sreasonable to as-
sume Apple would have mentioned more
shows if they were ready.
The small lineup actually makes Apple
TV+look pricey compared with the com-
petition.Netflix offers about 5,800 shows
and movies, according to Flixable. Its
streaming packages start at $8.99amonth
for the basic plan and $12.99amonth for
high-definition feeds. Disney+, which will
debut onNov. 12for $6.99 a month, will
have about7,500 TV episodes and more
than 500 movies in its first year,according
to Disney’s April investor day.
Rosenblatt Securities analyst Bernie
McTernan believes that Apple TV+’slack
of compelling content will limit its appeal.
“Disney has the content and the
brands. Apple TV+ doesn’t have that,” he
says. “We have low expectations for the
service to take wallet and viewing share”
from Disney andNetflix.
The low price of Apple TV+ and the
free trial for certain customers could de-
tract from Apple’s vaunted profitability.
Goldman Sachs analyst Rod Hall wrote on
Thursday that the Apple TV+ trial will
likely have “a material negative impact”
on profit margins and earnings per share.
Inarare move, Apple pushed back on the
claim: “Wedonot expect the introduction
of Apple TV+, including the accounting
treatment for the service, to haveamate-
rial impact on our financial results.”
But the larger point remains. Entering
the world of TV content could get messy.
Investorsshould recall that Apple’sfirst
forayinto original video didn’t go well. In
201 7, the company launchedashow for Ap-
ple Music subscribers calledPlanetofthe
Apps.Barron’scritiqued it asa47-minute
advertisement for Apple’sown products.
While other services’most buzzworthy
shows are mature offerings such asGame
ofThrones, Apple is focusing on family-
friendly offerings. “Each Apple TV+ orig-
inal offers its own unique story,fresh per-
spective, and powerful message—all meant
to entertain, connect, and inspire cultural
conversations,” ZackVa nAmburg, Apple’s
head ofWorldwideVideo, said in the news
release.
It’s anice sentiment. The problem is
that cultural inspiration doesn’t necessar-
ily lead to eyeballs.
Meanwhile, Apple’s financial prowess
may not be the difference maker in hiring
the best talent. On Friday,The Hollywood
Reporter said J.J. Abrams had signed
withAT&T(T) unitWarnerMedia, turn-
ing downalarger financial offer from Ap-
ple. The report said Abrams balked at
Apple’sweaker distribution model and its
lack of source material from whichtocre-
ate new content.
Apple didn’t respond to a request for
comment about Abrams.
The outlook for the all-you-can eat Ap-
ple Arcade doesn’t look much brighter.In-
dustry analyst SerkanToto ofKantan
Games is skeptical over the new business
model, saying most casual gamers play a
couple of games at a time. The industry
hascreated plenty of free-to-play high
quality games, as this column noted last
week.
If Apple’sservices offerings don’t take
off, investor focus will return to its core
smartphone business. And the prospects
for the new iPhone remain lackluster.
Apple’snew phone models—the iPhone
11,iPhone 11 Pro, and iPhone 11 Pro
Max—offer faster processors, improved
camera quality,and better battery life, but
the form factor and design are nearly
identicaltoprior models, likely limiting
upgrades this year.
NewStreet Research analyst Pierre
Ferragu believes the company will miss
Wall Street sales estimates for this year’s
holiday quarter.
“iPhonedemand today is extremely
weak despite the fact that Apple is being
extremely aggressive on pricing and pro-
motion,” he says.“A pple is likely entering
one of the weakest iPhone cycles in its
history. ”