Motley Fool Hidden Gems Investing - Apple Sends a Message

Episode Date: March 9, 2022

The hour-long event gave Apple the chance to highlight multiple upgrades to their devices, but some were more noteworthy than others. (0:20) Tim Beyers discusses: - How the new iPhone SE indicates Apple's unwillingness to cede market share to anyone - Pricing the Max Studio desktop for a small consumer base - The "super chip" powering the Max Studio - Live sports being added to Apple+ - Netflix taking a "never say never" approach to ads on their platform (13:00) Rickey Mulvey moderates a "bull vs. bear" debate between Matt Frankel and Jason Moser over Block (aka, the company formerly known as Square). Stocks discussed: AAPL, DELL, NFLX, DIS, SQ, UA Host: Chris Hill Guests: Tim Beyers, Jason Moser, Matt Frankel Producer: Ricky Mulvey Engineers: Rick Engdahl, Tim Sparks Learn more about your ad choices. Visit megaphone.fm/adchoices

Chris Hill. Today on Motley Fool, money will help you make sense out of all the headlines from Apple's big event. We've got a debate over one of the leaders in fintech, that and more coming up right now. I'm Chris Hill, joined by Motley Fool Senior Analyst, Tim Byers. Thanks for being here. Tim Byers. Thanks for having me, Chris. Apple had their event yesterday and as typically happens, a lot of, if not most of what we heard was not new products, it was incremental upgrades. But a couple of headlines on the product front, the iPhone SE, which I guess is now the low-end version of the iPhone for $429, and the Mac Studio Desktop, which appears to be aimed at professionals, and I say that based on

the price point. I mean, this is a new desktop with a 27-inch monitor and depending on how many bells and whistles you want, you could very easily drop $6,000 on this thing. We'll get to both of them, but of the two, is one more significant to you in terms of Apple's business and the bottom line and what it means for shareholders. Through the lens of investors, what's the headline of yesterday's event? Okay. The iPhone SE is Apple throwing its weight around and saying, just in case you thought that we were going to seed any kind of market share in the smartphone market? No, we're not doing that. We're not doing that. Here's the thing, Chris, the iPhone SE3, I really think of the iPhone SE model line,

and you could make a strong argument against this, so this is the argument I'm going to make. I think of this as the mainline iPhone. I don't think it's the bigger models. I think this is the one because it is a reasonable size, it's not too massive, but it's very powerful, very compact, much more affordable, has a really great camera, takes all of the same apps. It's an amazing product. For the upgrade cycle, and Apple has this, Apple has a known iPhone upgrade cycle. every couple of years, they do a bit of refresh. This is one that I think is well-timed, well-priced, and packs a lot of features in it. This is the one that really matters for Apple's business, in my opinion, because the iPhone is still a massive driver of profit for Apple as

a company. It's going to be that way for a very long period of time. Creating a very accessible iPhone that anybody can get behind and have as their main iPhone for a lot of years, I think is core to Apple's business. Even though it's an upgrade, like you said, Chris, I would count this one as a fairly big win. I'll pause there because I have some things to say about the Mac Studio. Chris Hill So let's talk about this. this. Joanna Stern from The Wall Street Journal is probably the best out there in terms of consumer tech. She put together a great five-minute summary video of the event. I have to confess, when I was watching it, I had to pause it to look at this desktop, to really wrap my

head around what this device was, and once I did that, then all I could focus on was the price. The baseline price is $2,000. If you want the souped-up version, it's $4,000. The 27-inch monitor, $1,600, and if you want the higher-end version, it's $2,000. What is the addressable market for a $6,000 desktop computer. You assumed it was for professionals. I'll just go ahead and say supervillains, because this thing ought to come with a volcanic layer. It is ridiculous how powerful this thing is. We'll get into the Ultra Chip. Basically, this computer is the home for the Ultra Chip, which the Ultra Chip is absolutely insane. Apple has really been flexing its muscles around chip design. The M1 Ultra chip,

Tom's Guide calls it a new super chip, I think that's right to call it that. 20-core CPU, 64-core graphics processor attached to this, a 32-core neural engine. In other words, really, really fast, like way more power than most people really need. Yes, it will be for the enthusiast market. This will be for people who really want to do fancy things with their Macs. There's not going to be a ton of people who buy this. But I think there is such a thing in tech as a statement product. This is a statement product. The Mac Studio is a statement product. Again, just like the iPhone SE3, just in case you thought we were going to let others encroach on our market share? No. The Mac Studio is, just in case you thought that

there are some others out there who are making really supremely fast chips and they can build a faster, more functional desktop than we can, no. Now, that is not to say that there aren't really amazing desktops out there. Dell is a great example. Dell's Alienware desktops are immense. There are really impressive formatted Windows PCs out there, no doubt, but this one is going to be right up there with them. It is a statement product for Apple. I think what it's intended to do, Chris, is get people to notice like, wow, maybe I need to take a look at the new set of Macs. Maybe it's time for me to upgrade. It's a little bit like, you don't go to a car show, it's like, oh yeah, I'm going to buy the

new concept GT, but does it get you thinking about Ford? Yeah, it does. Before we get to the sports angle here, and I do want to spend a minute on that, just in terms of everything else at the event, did anything surprise you? I would say the Mac Studio did surprise me just at the scope of the statement that they're making here. The Ultra chip, I really shouldn't be surprised by that, but just the sheer functionality and sheer horsepower. Apple really is trying to establish itself as a dominant designer of chips and trying to get people to see that there are real benefits because of the sheer power of the M1 family and the Bionic family in the iPhone. There's real power in going with Apple hardware because it's self-contained

and it's incredibly powerful. So I really shouldn't be surprised how much Apple is throwing its weight around. But honestly, I was a little bit surprised. The only other thing I'll say is the iPad Air, the new iPad Air, that's another one that is just going to quietly do a lot of things that are incredibly impressive in a pretty small format. I think that Apple is just trying to remind people that we make some of the best hardware in the world. And ever since we decided to do it ourselves, our hardware got better. Now, you could argue that, but I think that's the argument that Apple is trying to make. So, almost as an afterthought, as a throw-in, Apple dropped that they are getting into live sports. Now, they're doing it

with Major League Baseball streaming games on Friday nights. That would be even better if the Major League Baseball owners hadn't locked out the players and there were actual spring training games being played right now. But to the larger point, we're finally here. That was one of my thoughts when I was reading through this stuff. I thought, oh, we're finally at the point that has been theorized for at least five and probably closer to eight to 10 years that Apple is getting into live sports yeah and you know i would be more excited about this first if there was actual baseball right now so that's number one but but number two um i would be more excited if it wasn't baseball which sounds terrible because it's not that i don't like baseball i do but i think that

Major League Baseball's ratings and its appeal has been a little bit on the decline. And some of that has to do with just the nature of the game. I don't think the way that games are, you know, like we had just this past season, we had the whole thing around, you know, what is a legal substance on the mound for a pitcher to throw? and there was just a whole bunch of controversy and a lot of madness, and nobody really had a clear answer. And so this sort of mess inside Major League Baseball makes it an interesting but really weird time for Apple to spend a lot of money on this. I think it's a bigger deal. I'll give you, let's say the NFL is off the table, but if it's like college football or the NHL

or Major League Soccer even. I think that would be a little more interesting because then you're picking up a niche audience and then doing testing, and you're allowing yourself to build around that. But I will say this, Chris, I mean, we're not seeing the end of this. A lot of companies will be watching very closely how Apple performs with a streaming deal for live sports, because that has traditionally been the purview of regular over-the-top or cable. Do the streaming providers start to own these deals? I don't know, but I think there's going to be a lot of people watching. Speaking of streaming video, late last week, Disney announced or rather confirmed that later this year they're going to

offer an ad-supported tier of Disney+, and now Netflix isn't ruling it out. CFO Spencer Newman was at Morgan Stanley's conference on media and technology. He was asked if the company was ever going to change its position on being ad-free, and he said, never say never. It's not in our plan right now, but never say never. If you're a shareholder, Do you want them to offer this? No, I don't. And I love that Spencer gave the Mike Tomlin answer. For those who don't know this quote, it was the Pittsburgh Steelers coach when asked whether or not he would take the USC job, he said, never say never, but never. And it was like that. I liked that it was the Tomlin answer. And I think there's good reason

for him to be skeptical and not try to feed the beast too much here. His additional comments were about like, it's a little bit hard for us to see others doing this, but essentially, the points he made was, we're not going to rush into this. I'm glad to hear that because I think there is a better model for Netflix that fits with their culture. This is what I mean by that. instead of an ad model where everything is essentially the same, you just have a lower tier price point and you still get all of Netflix, but you got to watch some ads, Netflix's brand has been a tailored experience for me or you as a consumer. If you want to mess around with this and have lower price tiers, then create lower content

tiers to go with those price tiers where you can start experimenting with what you know about me as a consumer and allowing what you know about me to give me options for subscribing at different price points without introducing ads. Just keep ads off the platform, but you just create other ways for me to engage with Netflix. They have all of the data to do that. They've just decided one price point for simplicity's sake, and then they tinker with it around the world. But they could do a lot more tinkering, Chris, before they decide to do any advertising model. I think that would be better for them. I really don't want them to go down this path. Tim Beyers, great talking to you as always. Thanks for being here.

Thanks, Chris. Back by popular demand, it's bull versus bear, debating the company formerly known as Square. All right, no more rhymes. To get things started, here's Ricky Mulvey. Thanks, Chris. This is Bull vs. Bear, where you hear the bull case and a bear case for a stock and decide who made the better argument. Today, the stock is Block. Our analysts, Jason Moser and Matt Frankel. Gentlemen, this is a stock that you already own, right? Yeah, I've owned it since just after the IPO. Jason, feeling a little pressure to make the bear case then? It is a little pressure. Listen, I appreciate the coin flip nature of it, but yeah, we got to reiterate, I do still own

this stock. Frankly, I've recommended it to members in a service too. Don't everybody jump the gun. This ought to be fun just to debate both sides of the case regardless. And if you're buying a stock, you also want to know why someone is selling it to you, so it's important to understand the bull and bear side of it. That's a good point. All right. So, we will get started. Matt Frankel has the bull case, and you have two and a half minutes. Yeah. I'm more excited to hear the bear case, because I always say, if you don't know the bear case, you haven't done enough research yet.

let me run down the reasons why I own Square. There are companies that do what Square does piece-by-piece. There are other companies that provide low-cost payment processing hardware, for example. There are companies that provide person-to-person payment apps. There are companies that allow you to buy Bitcoin. There are companies that facilitate projects on the blockchain networks and things like that. There aren't as many companies that have an ecosystem feel to the entire thing. Square has the Cash App ecosystem, which has 44 million active users, has functionality such as Bitcoin purchases, brokerage, you can buy stocks through the Cash App now. You can have a linked debit card, which Square has monetized the Cash App with.

There's a lot of future financial products that are likely on the horizon because Block just recently became a bank itself. They opened Square Financial Services, which is its commercial bank. think. We could see some more financial products come down the pike. The economics of the Cash App business is fantastic. Now listen to this, for a $10 average customer acquisition cost, the average active Cash App user generated $47 of gross profit last quarter. That's a really great return. The seller ecosystem, which still is called Square, the Square name didn't die entirely, has over $170 billion of annualized payment volume, which it gets fee income off of. It is a big lending operation, which was called Square Capital, but now is part

of the bank I just mentioned. And this could just be the starting point. Just to give you a number, PayPal has $1.3 trillion, trillion with a T, of payment volume through its network. It's estimated that the total payment volume flowing around the world is about $185 trillion when you consider things like person-to-person and business-to-business payments. And it's not just the seller and cash app ecosystem. I mentioned Bitcoin. Block recently acquired Tidal, the music platform, which it can really leverage in a bunch of different ways with both of its ecosystems. It has a blockchain business with a really complicated name that is escaping me right now. It just acquired Afterpay, the big buy now, pay later service, where it added

over 16 million customers and 100,000 retailers to its ecosystem, many of which were in Australia, which is one of Square's expansion markets. And because it bought it in an all-stock deal, once Square's stock price or Block's stock price dropped, it actually got a better deal on Afterpay, which I like. Very profitable, gross profit at a 50% annualized rate for the past five years. It's running at a net loss right now, but that doesn't really matter when you have growth like that. It's not really losing money. It's just a small net loss. Jack Dorsey recently resigned as CEO of Twitter, so now he is exclusively focused on Block, has a great leadership team board. Square's board has things ranging from former CEOs to the former Treasury Secretary

of the United States on the board. It's a really impressive company. Jason, the bear case or some of the risks for the company, if you will? Some of the risks, the bear case, however you want to phrase it. I'll focus in on three points here. I like a lot of what Matt said. I think that with leadership, first and foremost, I think with leadership and Jack Dorsey, you have to be aware of the founder leader, because that can be the sword that cuts both ways. And so Jack Dorsey still owns about 8.5% of the shares, co-founder of the business, CEO, as Matt said. He did step away from Twitter. So he's devoting his sole attention to Square, to Block now, which I like that. But I mean,

Dorsey is also a bit of a wildcard at times, right? I mean, he sees himself more as a talent finder and enabling leaders to run the company. And then he kind of goes off on tangents. He's got a little bit of a unique worldview there. Remember he was talking about moving to Africa for a year at some point. How does that impact the company? How does that impact your team? I just don't know. You know the old saying, out of sight, out of mind. We're seeing this push and pull of big tech wanting to go back to the office. Dorsey saying you could work remotely forever, his successor at Twitter taking a bit of a different view there. Bottom line, it's not to say Dorsey makes the bear case, but there's an unpredictability attached to him that could tilt

things in that direction. I would just remind listeners to think back to Under Armour and Kevin Plank. I think you get a very similar dynamic there. He was a big part of the bull case and also a big part of the bear case. I think Jack Dorsey assumes that same role here with Block. In regard to the business itself, the second point I'd like to make is just on diversification. That old Peter Lynch saying there, when a company starts going off all sorts of different directions and not really focusing on its core competencies. I love the Square and the Cash App sides of the the business. But then you see the titles and the spirals and the TBD, all the stuff focused on crypto and Bitcoin, it raises some questions. Is the focus solely on Bitcoin

the right way to go or does Bitcoin make this business look better than it really is? If you look at just this most recent quarter, Bitcoin revenue $1.96 billion, that was up 12%, but Bitcoin gross profit was only $46 million, so it's only 2% of Bitcoin revenue. Is the juice worth the squeeze there? I don't know. If you're a crypto skeptic, it's something worth keeping in mind. Then finally, I think regulatory risks are something to keep in mind. This is a much different company than it was five years ago. There are a lot of moving parts now, as Matt noted. But you've got the Square Financial Services, so they're essentially now subject to banking regulations. You've got the Cash App operating as a broker-dealer.

answer to the SEC and FINRA. It's just a bit of a different company today than it was five years ago, and that regulatory risk has ramped up a little bit. Matt, do you want to follow up on anything you heard from the bear case? Yeah, and I know I went over last time, so I'll be quick on this one. I've said before that Jack Dorsey's obsession with Bitcoin and cryptocurrency is my least favorite part of investing in Square. Not to knock anything about cryptocurrency or Bitcoin, I just think the other businesses are very promising in and of itself, to Jason's point, a de-worthification. I treat the blockchain, Bitcoin focus, all that as a bonus.

The business has enough by itself. If anything comes to the Bitcoin and blockchain area of it, great. But if not, I still think it's a great business. Jason brought up some very valid concerns, but I like the business regardless. Jason, do you want to follow up on anything you heard in the bull case? Yeah. The only thing really that comes to mind, and I guess I can thank PayPal for this because they brought it to the forefront here recently with their most recent quarterly report. I wonder if at some point we won't see Block talk more about the quality of the users in their Cash App ecosystem. That was something that PayPal brought up, they kept on growing these users to just these astronomical levels. But then they

came back a few quarters later and said, hey, you know what, it turns out that we have all these users, but only a few of them are really quality users. Essentially, the majority of the revenue is tied to a third of the user base. The focus more on higher quality users going forward for PayPal made sense. It makes me wonder if we won't see that same dynamic play out for Cash App at some point. I look to myself personally, I have Cash App on my phone, and frankly, I think I've I've got like a $20 balance in Cash App, but I've also not used Cash App in probably two years. So technically, I guess I'm a user, but there's no way I'm a quality user. And so I wonder if we won't see that same sort of dynamic play out with Cash App. That'd be something worth keeping in

mind, watching in the next several quarters. Question for both of you on that end. As a user, do you like using the Cash App or Venmo more? We'll start with Jason. Yeah, we're a Venmo family. We all use Venmo here, my wife, kids, myself, so we're Venmo PayPal. We tried Square Cash App, we did, just Venmo was what ended up sticking, and I think part of it has to do with so many of my kids' friends use Venmo, right? But yeah, it was just a little bit more of a familiar interface, and so we are a Venmo family. Got some network effect. Matt, how about you? I actually didn't adopt either of them until about a year ago. I'm the old guy of the group,

I guess in that sense, but I use Venmo more than I use Cash App, I will say that much, but I'm an active user of both. At Motley Fool Money on Twitter, there you can vote on who made the better argument. Matt, Jason, both of you are shareholders and block, correct? Correct. Absolutely. Like Ricky said, let us know what you think. Go to our Twitter feed, at Motley Fool Money, and cast your vote. That's all for today, but coming up tomorrow, a closer look at the industry in everyone's spotlight right now, oil. As always, people

on the program may have interest in the stocks they talk about, and The Motley Fool may have have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow. Thank you.