WWDC 2016 Will Have Limited Impact On Apple Inc. Stock

  • Apple Inc. is set to unveil new software and perhaps an update to the MacBook lineup at WWDC 2016.
  • Of course, there’s room for surprises, but there wasn’t a whole lot of hype going into the event.
  • At this point, investors shouldn’t have to worry of a disappointing event, as sentiment has already waned.

The rumor mill for Apple Inc. (NSDQ:AAPL) going into WWDC 2016 has been relatively weak, and it’s no surprise. Companies intentionally leak information to journalists for specific reasons, and this year, Apple has gone silent. It’s really rare to see this type of dynamics going into Apple’s more premier public appearances.

Also see: Could Netflix Be In Apple's Crosshairs?

No MacBook Pro?

Furthermore, with enough supply chain data to prove massive build-up in hardware inventory, I get increasingly skeptical that there’s not going to be a summer launch debut of a new line-up of PCs. Especially in an environment where Apple’s PC segment is performing so poorly. However, the folks at Mac Rumor are somewhat convinced by some remarks by insiders that it will be “software focused.” MacRumors also believes that a new MacBook Pro won’t make an appearance at the show. Now obviously every WWDC event focuses on software, but there’s usually some sort of hardware introduction at these events as well.

This is one of the few times in the year where Apple can generate enough excitement for a Q3’16 release of a product. After all, Apple only holds three keynotes per year. I highly doubt Apple is going to announce a new MacBook Pro alongside the iPhone 7 and iPad Pro 2.  It just seems extremely unlikely that Apple would attempt something so stupid as to clump refresh across all three major hardware categories into a single quarter.

Apple is clearing its PC channel fairly aggressively, which implies the launch of a new MacBook. Usually, hardware cycles never lie, so I’m taking the latest batch of rumors with a grain of salt.

What about software?

While the developer conference does imply the usual upgrade cadence for iOS, Mac OS and Watch OS, there’s really not much else to work off of. Like I said, the rumor mill practically failed this year. No one really knows much about Apple’s upcoming software features, but we do know that Apple will respond back to Google’s AI efforts at this year’s conference. After all, we haven’t seen a whole lot of feature improvements to Siri, so something along this avenue should be announced.

That being the case, the company has made some incremental progress on the application front through lower revenue splits. It goes from 70%/30% to 85%/15% following the first year of a subscription. This should technically lower Apple’s revenue from subscription-based app-offering following the first year, but given the rapid growth of the app store, I believe Apple is willing to take a small hit, so it can on board more developers and generate higher revenue over time.

Apple will also introduce search advertising within the app store and allow developers to set auto-renewals and subscriptions. From what I’ve seen, apps are generally sold up-front without subscriptions/regular renewals, so it’s not really clear whether this is a needle mover. However, if Apple is going to monetize the app store with advertising, it does offset some of the negative impact from a reduced revenue split.

The sentiment among the analyst consensus was positive on software/services revenue:

We have argued that iOS is the master platform, in which Apple subsidizes developers and content on the producer site to entice and monetize consumers through hardware products. Part of Apple's job is platform governance. These changes are attractive to developers, essentially increasing developer subsidization whether by boosting their pay out or by Apple adding resources to speed app approval. – Steven Milunovich from UBS

We believe that the shift to a subscription-based model should result in a stronger sustainable recurring revenue stream from the App Store which we note is highly GM accretive at ~87% at the net level and should accelerate growth going forward. Based on our proprietary analysis, we believe the App business will make up $8bn-$9bn (~+40% yoy) in net revenue this year. – Kulbinder Garcha from Credit Suisse

At last year's WWDC, aside from the OS X El Capitan and iOS9, the major announcement was Apple Music. This year we expect the biggest announcement to be opening Siri up to developers for third-party apps and other Apple devices (Macs). We view this as Apple's answer to Amazon's Alexa and Google's Home/Now. While this is a major feature for developers to add to apps, we expect consumers to view it as more incremental to their near-term iOS experience overall. – Gene Munster from Piper Jaffray

Apple stock really hasn’t exhibited a whole lot of momentum prior to the event, as investors have low expectations going into the event. App revenue is important to the franchise, but it’s not exactly clear whether there will be enough feature additions to move the needle on refresh. iPhone refresh has lengthened from 2 to 2 ½ years. Furthermore, I believe software will play a much larger role going forward, as $8 to $9 billion in app revenue composes 37% of my projected services revenue. Assuming app revenue continues to grow at a similar trajectory, the app revenue alone will represent more than 50% of total service revenue by FY’17.

Conclusion

At this point, management couldn’t damage the stock any further (even if they tried). Everyone is expecting the company to perform poorly for the duration of the year, updates are incremental and new categories are unlikely to materialize. Even if Apple reveals a new service at the event, it’s going to be a huge yawner, as the company’s revenue base of $215-$220 billion has grown so large that the impact becomes unmeaningful.

With expectations set so low, it wouldn’t surprise me if the stock price moved higher following WWDC 2016. For all we know, Apple might have a magic bullet that will drive excitement coming out of the event.

I continue to reiterate my buy recommendation and $107.72 price target.

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