This Time It Matters: Why Apple Is Falling

Apple Inc (NASDAQ:AAPL) is dropping hard after its event to announce the new series of hardware, in particular the new iPhone 8, 8 Plus and X as well as the Apple Watch 3.

It’s Different This Time
Normally when Apple stock dives on lukewarm product reviews we stand firmly in our position that the stock market reaction is over blown. Our simple thesis for that response is to look at demand, which is hypnotically strong, every time. That is not the case this time.

A New Risk is Not Obvious But is Enormous
Apple announced a more complicated lineup of iPhones this time around. It introduced the iPhone 8 series which is an upgrade to the iPhone 7, and then it announced the highly anticipated iPhone X (pronounced iPhone Ten).

Then the company made the iPhone 8 available this month, but pushed delivery of iPhone X to early November, which pre-orders stating in late October. That has created a risk.

It turns out that Apple hyped the iPhone X so much, and poured so much new technology into it, that it has left the demand for iPhone 8 lackluster in Apple terms. Here’s what we mean.

If you go to the Apple Store, and try to purchase an iPhone 8, the wait time is essentially 1-3 days for the smaller memory version. Here is an image:

That is for the iPhone 8, in Los Angeles, on Verizon’s (NYSE:VZ) network. The other networks are essentially the same. A normal wait time for a new iPhone release is usually several weeks, let’s say 2-4 depending on where you are in the world.

There are also reports that in store lines are much smaller than before, with one report pinpointing Sydney Australia, where only 30 people were camped out for the new release. Reports from China are similar.

Here are links to two stories:

Turnout for iPhone 8 Launch in Australia “Bleak” as Customers Hold Out for Upcoming iPhone X
The iPhone 8 launch in Sydney saw “a bleak turnout,” reports Reuters, with fewer than 30 people lining up outside of the Sydney Apple Store on George Street. In past years, hundreds of people have lined up for new iPhones on release day.

Apple Falls After Analyst Report Indicates Weak iPhone 8 Demand
Consumers pre-ordered about 1.5 million handsets on Chinese retail website in the first three days, compared with about 3.5 million for the comparable period of iPhone 7 orders.

Tim Cook just said he “couldn’t be happier” with the iPhone release (and Apple Watch 3). While sales are lower than prior models, there is one reason, a big reason, that he may actually be telling the truth.

Is There a Plan?
One of the headlines that surfaced from the Apple Event was that the iPhone X was very expensive, starting at $ 999 and climbing to $ 1,200 based on the configuration.

It’s possible, maybe even likely, that Apple decided to release the iPhone 8 for less to make it appear that it was not forcing Apple loyalists to buy a far more expensive phone by offering a reduced priced new model (iPhone 8).

In fact, it does appear that even in the bearish analyst notes, each tends to comment on the fact that demand reduction for the iPhone 8 is simply a reflection of the outsized demand for the iPhone X.

If that’s true, then Apple will have an average selling price significantly higher than in prior times, and if demand is in fact to the point where Apple also sells more units, then that would bring a windfall of profits larger than any company has ever seen in one quarter. If that sound overly bullish, it’s just the choice of words — Apple already has the largest earnings ever in one quarter, so this would be a breaking of its own record — also known more simply as, “growth.”

Back to Risk
While there is a rather bullish narrative to wrap around this odd iPhone selection, there is also, in earnest this time, a reasonable bearish thesis.

Apple won’t be delivering its iPhone X until well into November, and if demand is very strong, it might not even be able to deliver before the holiday season in the United States. And while, certainly, if all of those sales simply occur later in the year (or early 2018), then that’s fine, but to consider that a foregone conclusion is a step we are not willing to take with blind faith.

Some consumers, perhaps many consumers, will not wait. And while Apple loyalists may stick around for a later date, the all-important “Android switchers” (those smartphone Android owners that switch to Apple) may not — and that is a real risk and worthy of a stock drop, until proven otherwise.

Apple’s market share in the United States is jumping as Android loses market share — an under reported but critical phenomenon. On January 11th, 2017, 9TO5Mac wrote iPhone market share grows 6.4% in USA, takes share from Android in most markets.

Apple gained 9.1% in the UK, mostly at the expense of Windows phones.

The iPhone grew its market share in Australia, France, Italy, Japan, Spain, the UK and USA, with Android seeing its own share drop in all of these countries bar Italy, where its growth was less than half that of iOS.

Those are Android switchers and Apple may have just put that group, or at least that trend, in serious jeopardy.

Now What?
We believe the iPhone X is going to be a knock-down drag-out mega hit, and the elevated price will make it yet an even larger success. But, the risk that Apple took, as of right now, is hurting the company both with iPhone 8 sales, and potentially, with Android switchers. And that is not a false narrative — it is accurate.

That risk means the stock should drop, and is dropping.

But, we’re not done yet. What we did not show you, and is easily missed unless you are really looking, is how hard Apple is focusing consumers on the iPhone X over the iPhone 8 — in our opinion.

I recorded a 45 second video arriving on the Apple Store and looking at iPhones. I have turned to video to allow you to make your own decision, as opposed to snapshots, which are too selective and an be used to weave any narrative the author likes.

When you watch this video (below), decide for yourself if you feel that Apple is purposefully pointing people to the iPhone X over the iPhone 8. Here we go:

That’s hardly headline grabbing footage, but we found it noteworthy.

Apple Watch 3
There have been some pretty poor reviews of the Apple Watch 3 surrounding its LTE connectivity and its battery life. This is one of those times where the reviews are meaningless. Demand is strong and that’s all that matters.

Here is a snapshot from the Apple Store for that product:

We see the Watch becoming a runaway success as people learn to use that wearable device as a standalone product — leaving the phone at home on runs, meetings, swims, hikes, and whatever other times such a convenience could be desired.

We maintain our Top Pick status on Apple, but have certainly tempered our bullishness with an undeniable new risk. It might work out very well, but, it might not, and that is a new risk to Apple stock.

The author is long shares of Apple Inc (NASDAQ:AAPL).

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Disclosure: I am/we are long AAPL.


Stricken By Tragedy, an Immigrant Fights for Her Home

In February, a grizzled 50-something white man approached two Indian avionics engineers at a bar outside Kansas City. He began haranguing them about an all-too-familiar topic: their visas. After bar patrons kicked out the agitator, he returned with a gun, screamed “Get out of my country!” and shot both engineers, killing one of them, Srinivas Kuchibhotla. The alleged shooter, Adam Purinton, is now facing hate crime charges in federal court.

Police delivered the news to the victim’s wife, Sunayana Dumala, that night. (The story of the hate crime against Srinivas Kuchibhotla was chronicled in WIRED’s July issue). Even in her grief, she realized that her husband’s death would put her immigration status in jeopardy. “The same night I lost Srinivas, I knew,” Dumala said in a call from Kansas this week, where she has since returned to work as a database developer. Though the couple had already been waiting for permanent residency for seven years, she was dependent on her husband’s H-1B visa to stay in the US—and there’s no protocol in place for what happens when that person dies.

Dumala flew to her native Bangalore days later for her husband’s last rites. After the services, she began a process of bureaucratic wrangling to be able to return home to the US, where she had lived since 2007. Luckily, she was assisted by immigration attorneys from her workplace, Intouch Solutions, and her husband’s company, Garmin. Rep. Kevin Yoder, the Republican congressman from Dumala’s area of suburban Kansas, advocated for her case with immigration and customs officials, as well. Dumala applied for two different visas: an H-1B sponsored by her company and a U visa, which is reserved for victims of crime. She finally returned home to Kansas this spring on a temporary fix known as “humanitarian parole,” used in emergency situations to allow entry to someone is otherwise inadmissible. She’s on a 12-month work authorization while she waits for her visa to be approved.

But it’s likely Dumala’s immigration saga has just begun. Even if she receives one of those visas, she’ll be shunted to the back of the decades-long line of Indian tech workers waiting for a green card.

Soon after her husband’s murder, a programmer named Saicharan Manga, the vice president of the Midwest chapter of a national grassroots group called Immigration Voice, reached out to Dumala. The nonprofit, comprised largely of Indians, was formed in 2005 with the goal to speed up the employment-based green card process for high-skilled immigrants. The group’s latest cause: to remove the nationality caps on employment-based visas. Of the approximately 120,000 job skill-based green cards given out each year, no more than 7 percent can be awarded to any one nationality. That’s great if you’re a product manager from, say, Finland, a small country with relatively few immigrants. But if you’re Chinese or Indian—the nationalities of the vast majority of H-1B immigrants in US companies—the cap creates an epic bottleneck.

“‘Legal discrimination’ is how it has been described to me by more managers in the US than any other issue I’ve ever worked on on Capitol Hill,” says Scott Corley, executive director of Compete America, a DC-based organization that represents major tech companies like Facebook and Microsoft in immigration policy. Right now, the feds are still processing green cards for Indians with advanced degrees who first applied in 2008.

This month, Immigration Voice recruited Dumala to join more than 80 advocates on a trip to DC to promote the Fairness for High-Skilled Immigrants Act, a bill sponsored by Yoder. The bill, which has 271 bipartisan cosponsors, would phase out the country cap, eventually allowing the green cards to be awarded on a first-come, first-serve basis. (These immigrants check the boxes favored by Republicans: they’re highly-skilled and they’ve entered the country legally.)

At a reception in DC this month, Yoder took a picture with Dumala and posted it on his Facebook page, writing that she “had faced the threat of deportation.” While Dumala was never in deportation proceedings, the post was enough to evoke renewed interest in her immigration status. One of her attorneys, Susan Bond, fired back at trolls that leapt to the inaccurate conclusion that Dumala resides in the US illegally. “The couple were NOT here illegally,” Bond tweeted. “The maniac that shot him said those exact words. How are you different?”

Historically, legislation aiming to remove the immigration country cap hasn’t fared well: a similar bill introduced in 2011 passed the House but stalled, and subsequent attempts in 2013 and 2015 never reached a vote. The chances of removing the cap “as a stand-alone bill? Zero,” says Corley. “But as part of a package, I could definitely see it.”

Yoder is hoping that DACA, the Obama-era initiative that allows people brought to US as children to stay in the country but that President Trump now wants to end, can provide that package. He aims to combine a resolution for Dreamers, a border security measure, and his country cap proposal into one bill. “In some ways the president has broken up the logjam by flipping the DACA executive order to Congress,” he says. Industry behemoths like Google, Microsoft, Hewlett-Packard, Intel, and Texas Instruments have endorsed Yoder’s bill. Saicharan Manga from Immigration Voice says he’s not picky about how it gets passed. “We want to get this done, no matter how.”

Short of large-scale reform, Dumala’s immigration lawyers contacted Yoder’s staffers last week about pursuing a private bill to hasten their her permanent residency—a last resort measure pursued for exceptional immigration cases. While Yoder’s office says they’re considering it, both Yoder and Dumala say they’d prefer a larger fix. For that, they’ve formed a powerful alliance to boost the profile of the country caps bill. “Ideally, she would receive status outside of Congressional action, and we’d utilize the energy from her story to fix the issue going forward,” Yoder says. “It would be a tribute to her late husband if his murder somehow led Congress into action. It wouldn’t erase her pain, but it would give her some solace to know his death created a wave of positive solutions for her community—that he didn’t die in vain.”

It would also allow Dumala to stay in the US. She hopes to remain at her home in Kansas, but concedes that the speed of her permanent residency process will factor into her decision. “By sharing my story, I want others to be proactive and not wait until a tragedy strikes to react,” she says. “I need more than likes or shares on Facebook.”