Motley Fool Hidden Gems Investing - Apple's Compounding iPhone Iteration

Episode Date: September 13, 2023

Apple’s iPhone development might seem iterative by year, but over time it compounds into huge improvements and reasons to upgrade.  (00:21) Tim Beyers and Dylan Lewis discuss: - Apple’s fall update and the details on the iPhone 15 and 15 Plus. - How the company is using phones to feed content for its future Vision Pro headsets. - Why we want to be hearing more about Slack during Salesforce’s Dreamforce conference.  (19:31) Motley Fool analyst Bill Mann joins Ricky Mulvey to break down the fundamentals of reinsurance and one misconception about Florida's home insurance woes. Companies discussed: AAPL, CRM, ARM, BRK.A, BRK.B, TRV Host: Dylan Lewis Guests: Tim Beyers, Ricky Mulvey, Bill Mann Engineers: Tim Sparks, Dan Boyd  Learn more about your ad choices. Visit megaphone.fm/adchoices

You've got to try breakfast at A&W. You've got to try breakfast at A&W. And what better way than with the delicious Pret Organic Coffee? Starting with just one dollar, all day, every day, now until December 31st. You've got to try breakfast at A&W. At participating A&W locations in Ontario. Dylan Lewis. Another fall, another iPhone launch. Motley Fool Money starts now. I'm Dylan Lewis, and I'm joined over the airwaves by Motley Fool analyst,

Tim Byers. Tim, thanks for joining me. Tim Byers. Thanks, Dylan. Fully caffeinated, ready to go. More iPhones, as usual. It's just the steady march and the constant truth of tech. There will always be more iPhones, Tim. We are talking today about the iPhone unveiling, which happened yesterday, and another tech event this week. We have Salesforce's annual Dreamforce conference going down in San Francisco. But we're going to start with a regularly scheduled hardware update. We got a look at the iPhone 15 and the iPhone 15 Plus yesterday. That took a lot of the headlines, Tim, with this Apple event. When you start digging into some of the details for these phones, what sticks out to you?

I'll go under the hood first here. I think a lot of things that we see in the iPhones, they're incremental awesomeness, if we want to be honest. The improved cameras, better battery life, the increased processing power. But I'll say, Apple should get more credit for how much work it does in silicon and building incredibly powerful chips. I think this is a heck of an advertisement, Dylan, for the ARM IPO. Whether you realize it or not, Apple builds its silicon, its newest silicon. In this case, when we're talking about the newer iPhones, the Bionic chips, on top of the ARM platform. It's highly power efficient, has a long history of being a platform of significance for mobile devices. Apple has taken full advantage of

that and done a lot of their own engineering to make incredible chipsets. A lot of the things that we're seeing in the iPhone 15, all of the iPhone 15 models, Dylan, are going to be based on that A16 Bionic chip. There's a lot of stuff in here. What they said was, two high-performance cores that use 20% less power, four high-efficiency cores. There's a six-core CPU, that's a lot of compute power. There's a five-core graphics processing unit that has 50% more memory. That's for streaming, that's for gaming. Then you have a 16-core neural engine, for computing up to... this is what Apple says, I'm quoting from the press release here, 17 trillion operations per second. That's a lot, Dylan!

Sounds like a lot! The silicon is very impressive here. I think Arm has to be very, very happy to see this announcement coming out. Yeah. I love that we had an Arm discussion earlier this week on Motley Fool Money. If you want a little bit of a mini-dive into that company, check out the episode from earlier this week. We have that there. Tim, looking at the details, you mentioned the incremental innovation. I'm someone who currently has an iPhone XR or XR, however you want to say it, whatever your nomenclature is. I feel like every year, the details feel incremental in what we get with these phones. But if you've been sitting on the sidelines

using the same tech for a couple of years, all of a sudden, the new phone looks like a spaceship. I was looking at what we had here compared to what I have in my pocket and saying, this looks like a much more powerful device, looks like some heavy investments in cameras. And you start to see that separate a little bit year to year to year over a three- or five-year period. There's no doubt. This is not a contest, so I'm not trying to one-up you here, Dylan. I have the original iPhone SE. I can't even upgrade to iOS 16, let alone iOS 17, which is what they rolled out here during the conference. But it's a very good phone. It does the work. It's very old. But yeah, if it looks like a spaceship to you with your iPhone X design,

it must look like an alien world to me if I get a chance to see this thing. But you're right, incremental innovations do add up. And I think the basics, when you're talking about a mobile device, it is important to remember that the basics really do matter. There are some basics that are fundamental to a mobile device like an iPhone. A great camera, a highly efficient battery so that you don't have to carry around a power brick, which I'll admit this, I have to do that. I have to run my iPhone on battery saving mode all the time because the battery is essentially dead, but I'm not replacing it because it's still a really great phone. But these things are important. And every new iteration, Apple makes improvements to make that camera just a little bit better,

to improve the software, to increase things like error correction, resolution, giving you more options as you use that camera. It is amazing what these little tweaks add up to over the course of generations. People will upgrade to them because they do like the way that it feels in the hand, the things that they can do with it. It doesn't take too many generations to feel like it's a seismic upgrade from, let's just say, the iPhone 12 to the 15. The population of iPhones out there is big enough that these incremental upgrades do become meaningful to a subset of these populations. For Apple, I expect this to be driving revenue and earnings for quite some time. While you might be sitting on the sidelines

very happy with an older phone, there are probably going to be some people that are tempted to upgrade based on what we've seen here. The pricing details here, Tim, iPhone 15 starts at just under $800, goes up to $1,100. The iPhone 15 Plus starts at $900, up to $1,200. There's going to be some money in it for Apple. We pay attention to this because it is the big portion of the top line. It's about half their revenue. It's nice to hear that you feel like there's a solid foundation for the company's meal ticket product. There's no doubt, in my mind, and I recognize I'm the outlier here, Dylan, honestly, but there are tens of millions of mobile device users. This is common now.

just try to take somebody's mobile device, whether you're talking Android or iOS, it doesn't matter, but just try to take somebody's mobile device for 24 hours. Just strip that away from them and see how they react. I guarantee you they will be more angry, more frustrated, more annoying to be around because it's sort of like an extra appendage. It really is. And because of that, because it is a new habit, that has resulted in what many, many years ago, the coining of the term paradigm shift, the introduction of a mobile device, a computer in our pocket that we use as a daily companion, like a co-pilot, that's a paradigm shift we are not moving away from. And so, we can continue to service that market

over a long period of time. Apple can continue to service that market. I do think this is something that we can look forward to. There's no pressure. Let me put it this way. There is no pressure on Apple to introduce massive breakthroughs. The one thing they don't want to do is introduce something that would break the habit. They want it to feel familiar, they want it to feel comfortable, and they want it to feel powerful and attractive. Those are the things that matter. A giant breakthrough isn't necessarily what you want. What you want is a better version of the familiar, if that makes sense. Yeah, I think it does. I do want to move us from the iPhone discussion to some of the other things they unveiled. iPhone

got a lot of headlines, but we also, I think, got a glimpse at how iPhone could play into some of the company's other product ambitions. One of the things that jumped out to me, Tim, was buried in the features for the new iPhone Pro was the ability to record 3D spatial video, which can be later viewed on the company's Vision Pro headsets, which will be arriving in 2024. I feel like we've all been wondering with these Vision Pro headsets, is the content ecosystem going to be there? It seems like Apple's maybe saying, we're going to put you in a spot where you can contribute to that content ecosystem? Everybody is part of Ready Player One now, right?

That's right. That's where we are, instead of one master creator. For those who don't know, I'd never seen Ready Player One, Dylan, but it's a popular science fiction book that was made into a movie in 2018. The idea was, the creator of a metaverse has died and has introduced a contest. The contest is to take over that metaverse and be the new master of the metaverse domain. It's a big, messy race to see who ultimately wins this. It's a good vs. evil battle and all this thing. But it's a metaverse, right? In this particular case, you're right. We don't know what the world that the Vision Pro, which is still to come in 2024, will introduce us to. And Apple has said, hey, why don't you tell

us? So you can map out the world that maybe you want to see inside of the Vision Pro when it does come out. I think that is brilliant. There are a lot of companies that have profited from user generated content. This is a way for Apple to get into the user generated content style. It's not specific. You may be recording things that are in the real world and maybe putting your own spin on it. I don't know exactly how this is going to work, but it does feel like a little bit of UGC. We all know the company that has profited from this more than any other and it's YouTube. This is Apple doing a little judo, taking a page out of the YouTube playbook and maybe seeding a little ground, let's call it, for the Vision Pro when it

comes out. And already, beta testers are giving the Vision Pro some really good reviews, so it'll be interesting to see. It'll be very interesting to see what it comes out with, now that we've got tens of millions of potential devices out there world-building for the Vision Pro before it even becomes a product live on the market. Tim, you mentioned Ready Player One. I read it on recommendation from David Gardner. It was written several years ago, before the metaverse really expanded and became what we know it to be today and part of the big ambitions for big tech companies. It is worth reading.

If you want to get a sense of what this world could look like extended out a little bit and imagined, it is not far off, it turns out, from where some of these companies are looking to go. Yeah, for sure. It's a fascinating idea, and how much we might value things that are not real, but are part of a world in which there are real stakes, which is kind of the message of Ready Player One. I definitely think it's worth diving into a little bit, because we are entering a time when the stakes in the metaverse are getting more and more real, and Apple is going to

play a part of that, for sure. How can they not? Largest company in the world. They have to have a place in that. Tim, from Cupertino to San Francisco, there's another big tech event this week. Salesforce has their annual Dreamforce conference, and that kicked off on Monday. It is being billed on the event page and in materials as the AI event of the year. Do you feel like it is living up to that hype so far? Come on! No, of course not! But that is Salesforce.

If you don't hear that from Salesforce, that's when you get worried. Those are the table stakes. If you are invested in or following Salesforce, you know you're going to get the hyperbole. If you don't get it, that's when you start scratching your head. You know that's what's coming, and then you decide, OK, I know what they've told me, but what's really going on here. It's definitely not living up to the AI event of the year. No, that would be insane to say that, because there's so much AI hype that I don't think you can really distinguish. However, there are interesting things that Salesforce is doing. The primary thing that I think is interesting is, they have talked up the Einstein AI platform,

which has been around for a while. The Einstein platform has been around. So, that's not new. What is new is that they're talking up Einstein AI as kind of a multi-layered platform that has a data cloud attached to it. And there are some interesting integrations that they're talking up with, both Snowflake and Databricks. So, in other words, your customers live across and your customer data lives across a huge number of applications. What if you could use AI to rationalize all that data and then be able to query it and get real insight and do real meaningful things with it? Creating this highly integrated data cloud does make some sense. Those partnerships might have some legs. I thought that was interesting, Dylan.

And then on the other part of it, on the front end of it, they talked about a thing called the Einstein AI Copilot, which this is something that I, for those who follow the This Week in Tech show that I do with Tim White, Tim and I have been talking about this for a long time, the idea that the ideal use case for AI is as a copilot to you do a thing, and then the AI helps you do the thing better by spotting errors or giving you some hints, something to automate and accelerate the work you're doing. Not replace it, but do it with you and alongside you. This idea of an Einstein AI co-pilot, I think, is completely fascinating to automate and accelerate the work that you do inside the Salesforce suite. That's great.

there is one thing that's missing from it, which is it doesn't seem, in the press release where they talk about this, Dylan, they mentioned Slack a grand total of twice. And I really expected, once you got to this co-pilot type of tool, I thought, that's the thing that's going to make Slack infinitely more useful. And that still may come, but I was really expecting to see that in the announcements and the rollout of this. The fact that I didn't see it makes me go, where is it? I'm glad you brought up Slack, Tim, because this is the 21st time that Salesforce has hosted Dreamforce. It is generally when they show both what is a priority for them as a business and the current state of the tech

landscape and what is most important there. Slack was an incredibly big, splashy acquisition back in 2021. I feel like we've all been waiting for some updates there to understand how it fits into Salesforce's business, how they benefit from what Salesforce can bring down to it, and how it plugs in. I don't know that we've really gotten that. Not yet. Well, I'm going to say, maybe we are starting to get it. I haven't seen any big red flashing signs that says, okay, here it is, Slack is materially improved, and here are the five ways it is materially improved and what it's going to do for Salesforce. That could be coming. It could be something that's in development. It could be something

we don't yet see. But I think you're right to say, I'd love to see where we're going with this, but for right now, what we see is that this was a very big acquisition. We're waiting for it to add all of the value we thought it was going to add. The fact that we're still waiting is a slight concern, but it may very well be, Dylan, that the AI strategy that Salesforce is pursuing will ultimately get us there, where Salesforce is using Slack as the gateway to all of its other suite of applications, and the co-pilot exists with Slack first, and Slack is your entryway. If that happens, I will eat my words and say, great job, Salesforce. This acquisition was absolutely worth it. But we're not seeing that yet. And I really thought we were going to see

a little bit more of it at Dreamforce. And the fact that we aren't seeing it, it just leaves me with some questions that I wish I didn't have to ask. There's still another day or two of content, so we'll see. But I'm with you, Tim. I'm a little impatient. That's all it is. Tim Beyers, thank you so much for helping me keep tabs on all things tech and tech events related. Always great talking to you! Thanks, Dylan! Tim mentioned This Week in Tech on the show. That's his weekly program on our premium members-only live stream.

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organization. That's r-i-p-p-l-i-n-g dot a-i slash f-o-o-l. Sign up for exclusive access today, rippling.ai slash fool. Coming up, we go from talking about Apple, one of Warren Buffett's favorite companies, to another, reinsurance. Motley Fool analyst Bill Mann joins Ricky Mulvey to break down the fundamentals and one misconception about Florida's home insurance woes. Bill, you were having a conversation on The Morning Show, which is on the Motley Fool live stream, which is available to members of any Motley Fool service. Just a quick plug there about property and casualty insurance. I thought it was interesting, so I wanted to talk about Motley Fool money. You're the one who thought it was interesting.

I'm serious. No, it's timely. You got the storms and hurricanes in Florida. You have insurance. insurers leaving the state, it's going to be a big deal, even if it seems a little boring on the surface. So we're going to make it interesting, hopefully. I guess I can't promise that, but we'll try. Send emails to... Podcasts at fool.com. Podcasts with an S at fool.com. So I guess now I can just kind of lean on you. Can you explain how property and casualty insurance generally works before getting to the Florida stuff? Yeah. So we can talk about the structure a little bit. A lot of people tend to think of property and casualty insurance companies as being really worried about claims. Obviously, in the continuum of pay money out and not pay money

out, they'd rather not pay money out. But the way that the insurance companies work is a type of balance, where they're trying to find risks across geographies, across types of claims, across types of properties, and they have a very broad set of risks that they are facing. That's the front line of the property and casualty insurance. Are we holding up? Are you still interested? I'm still interested, yeah. You're explaining the first part, and then you're checking in. I thought there was a second part. There is a second and a third part, which is this. When big claims come in, and they usually come in the form of natural disasters, you have hurricanes, earthquakes, tornadoes will sometimes get to be large enough. These are things that are

called supercatastrophes. When you have a supercatastrophe, and a supercatastrophe is not determined by the weather. It's determined by the size of the overall loss from an event. And so, when you have a catastrophe that's large enough, that's going to become a problem for the frontline insurers. So, the frontline insurers, they also have insurance. And very fancily enough, that's called reinsurance. One of the surprising things to me is Berkshire Hathaway, which owns GEICO, this is the big bit. Even though they do car insurance, which may be your experience with that organization, this is the bigger business for Berkshire Hathaway is the reinsurance stuff. Yeah. You can think of reinsurance as being

something where they don't pay out often, but when they do pay out, they pay out huge. And so, it would work like this. A frontline insurer, and let's call it travelers, just as an example, has exposure in an area that has suffered a catastrophe of above a billion dollars. So, beyond the billion dollars, the reinsurance company will pay their claims for them. So, it's a really high hurdle, but it doesn't happen very often. Yeah, I go to the image of picking up nickels in front of a steamroller for this. Yes, exactly right. But if you can do the math right, you might be able to pick up enough nickels.

Then there's the other side of this, which I think is now the third side, which is the reinsurance for reinsurers, which I didn't know existed until you're talking about it on the morning show. Yeah. Hurricane Ian, when it hit the West Coast of Florida last year, caused somewhere in the range of $60 billion in damages. If you can think about a reinsurance company, even one as big as Berkshire Hathaway, every dollar above that billion-dollar threshold, that's money going out very quickly. They, in turn, want a balance. That balance comes from a reinsurance for the reinsurers, which are called retrocessionaires. Most of them that

operate in the U.S. are based in Bermuda. They will be something like anything above $20 billion in damage for a reinsurer. We've got you beyond that. It could be on a one-to-one basis. You pay some, we pay some. It depends on the coverage. For the mega super catastrophes, there are the retrocessionaires. You can imagine for them, they pay out almost never. But when they do pay out, they pay out in huge dollar amounts. That's weird to me. If I were to just say, hey, we have an organization that pays out $20 billion on an unlikely event, where do you think it's located? We're going to give you three options, Chicago, New York City, or Bermuda, I wouldn't pick the third option. That's right. Bermuda is kind of like the

Hartford of the reinsurance world. That is, there are laws, there are reasons why so many of the reinsurance companies are based there, but a lot of the retrocessionaires are based there as well. Okay, Bill. What's going on in Florida? A lot of people point to the severity of damage that's happening in Florida due to climate change as being the issue. That's probably a longer tail issue. There are two very specific issues in Florida. The first of which is that Florida has 9% of the nation's insurance policies and 79% of the insurance lawsuits in the country. And it has to do with basically a loophole that was set up that allows contractors to sue on the behalf of homeowners. And it turns out when you allow them to do that and you have a law on the

books that requires the defendant to pay plaintiff's fees, that becomes a pretty attractive line of business. Yeah. You get Pareto's principle as well. Yeah, exactly right. It turns out if lawsuits are free, then somebody's going to figure out how to sue all the time. That's a huge problem. They did pass a law this last year that should make that a little bit better, but that doesn't change the structure of the industry in Florida. They had $1.7 billion in underwriting losses last year across the insurance companies that are still there. These aren't insurance losses that can be pushed onto a reinsurer. Each lawsuit is its own loss. That's one issue. The other issue in Florida is simply one of the structure of the state.

Earlier, I was talking about the balance that insurance companies have to try and hit to lay off risks from one to another. Almost all of the value of the real estate in the state of Florida is within five miles of a coast. Obviously, there's Orlando and there's Disney, but most of Florida is susceptible to storm surge, which is hugely impactful, and it is very, very high-value coastline property. I frankly don't know how you solve that. There's no other place. There's not a mountain range in Florida where you could lay off for a different kind of risk. That's a structural issue that people have known about for a long time, but it is now really raising its head. Well, the solution they've presented is basically bringing in a state-backed insurer.

That's right, but that's an insurer of last resort. Citizens doesn't want to be in the insurance business. I think that they're insuring about 2.7 million households now. They still require you to go out and get flood insurance on your own. I don't know if you might believe this about Florida, but a lot of their damage is coming from flood instead of wind. It is not a solution that brings pricing down that much for a lot of its more vulnerable citizens of the state. So, just so I can have a headline for this episode that's not the fundamentals of reinsurance, why is this one of Warren Buffett's favorite businesses? Well, because if you, and I started by saying that insurance companies and reinsurance companies are

not really worried about risk payouts. I think that that is something that is generally misunderstood about insurance companies. I mean, if they never paid anything out, the argument would be, why do we have insurance? What they are interested in is pricing risks correctly and then making sure that those risks are as uncorrelated as possible. It's all like a giant science fair experiment involving super catastrophes. They are not particularly focused on whether they have to pay. What they're focused on is, when they have to pay, do they have the risks priced properly so that it doesn't take the company out? It's one of those things. You know how they describe being an airline pilot as 99% boredom and 1% terror? That's exactly this business.

I think I need to get you on the phone the next time I have a car insurance claim, because it'd be good to remind them that they're not really worried about this small payout, so they can just take care of it. You're worried about the big stuff. These are not the droids you're looking for. Actually, these are the droids we're looking for. This is exactly the droid, and this is the check you're supposed to write, so let's stop screwing around. I think that goes into your test, though, of basically how you determine a good versus bad insurance company. Yeah, that's exactly right. Unfortunately, especially with the reinsurance companies,

Sometimes you find out after the fact. I mean, after Hurricane Katrina, which on an inflation-adjusted basis is still the largest single event of loss ever, that actually got into the retrocessionaries. And there's a very famous case of one called the PXRE Group, which didn't have enough money to pay off its claims because the claims just absolutely overwhelmed it. You could say because they poorly balanced out the risk, but I think Katrina was one of those catastrophes that defined the next generation of them. But in general, for reinsurance companies, you're looking for a rather low cost to provide the insurance itself. As always, people on the program may own stocks mentioned, and The Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on what

you hear. I'm Dylan Lewis. Thanks for listening! We'll be back tomorrow.