- (2:55) - The Map of Knowledge: Scholars of the Dark Ages
- (13:10) - Clayton Christensen and Technology Disruption
- (22:00) - Apple’s 2019 Growth Slowdown: Buy or Panic?
- (25:35) - Dan Ives Calls Tech Rally, Says Much More to Come
- (28:40) - What Could Push Apple To $2 Trillion?
- (31:15) - 5 Big Tech Predictions for 2020: FAANG and More
- (38:50) - Google Playing Catchup With Amazon and Microsoft
Welcome back to Mind Over Money. I'm Kevin Cook, your field guide and story teller for the fascinating arena of behavioral economics.
Today on the podcast, I invited Dan Ives, Managing Director of Equity Research for Wedbush, to talk about two of my favorite topics: technology and investing.
Before my interview with Dan, I dive into a handful of other great topics including a great new book I’m reading on the medieval scholars of the Middle East and Europe who saved some of the most important works of mathematics, astronomy and medicine despite the Great Library at Alexandria being destroyed.
That book also prompts a discussion of "algorithms" as we discover the origin of the word and move on to Jim Simons and his fantastically successful trading firm, Renaissance Technologies. Simons is the subject of the new book The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution, by Gregory Zuckerman.
And I close the first half of the episode with a salute to the late Clayton Christensen, an early thought leader on all things involving disruption. From the New York Times on January 25...
Clayton M. Christensen, a Harvard professor whose groundbreaking 1997 book, “The Innovator's Dilemma,” outlined his theories about the impact of what he called “disruptive innovation” on leading companies and catapulted him to superstar status as a management guru, died on Thursday in a Boston hospital. He was 67.
Meet Dan Ives: Doing Diligence on Disruption
Dan has been on Wall Street for two decades covering the software and the broader technology sector, focusing on enterprise software/hardware including cyber security, cloud computing, big data technology, and the mobile landscape.
In our discussion, we look at why he remained very bullish on Apple (AAPL - Free Report) during the growth hiccup of late 2018 and early 2019, always maintaining one of the highest Street price targets (PT).
In fact, Dan raised his AAPL PT to $310 in late October of 2018, then the highest projection, right before the quarterly report that sent investors running for the hills and selling shares into mindless oblivion below $150.
We talk about that shock to the iPhone growth story and why he told his clients and followers in December of 2018 to remain focused on the "installed base" and build-out of the Apple ecosystem and its continuous innovations-- to say nothing of 350 million iPhone users who could be looking to upgrade in the next 12-18 months.
The Price of Panic
To me it's a great behavioral finance lesson in understanding your investment thesis and knowing if one or two quarters ofslowing demand -- for the greatest consumer products story of all-time -- really signal "peak iPhone" crossing over into permanent decline and panic.
Picture this scenario: You own AAPL shares from somewhere between $100 and $200 and the waves of selling hysteria to $150 make you take your profit (or loss) because you can't (or won’t) handle the uncertainty. Yet part of your brain is saying "Shouldn't I still own this for the long-term? What changed in my investment thesis?"
And so now you have a new dilemma... when do you get back in? Then the company delivers its holiday quarter results in January 2019 and it's not as bad as the "peak iPhone" crowd was wailing. Are you a "good enough" researcher and decision-maker to jump back in under $175 in February?
In other words, do you have a process to implement your thesis?
For many investors who weren't disciplined with research, process and decisions, they stood by and watched the stock go back above $200 by April. And even when they got another shot under $200 after the March quarter, and into the May stock market pullback, they probably didn't take the correct action based on their long-term thesis.
How a Pro Like Dan Ives Does AAPL
With a "this too shall pass" view of the long-term trajectory, and in the face of monotonous wailing and teeth-gnashing from short-sighted investors and journalists in Q4 2018, Ives revised his growth targets to account for the China slowdown but maintained price targets in the $200s and frequently upgraded his outlook throughout 2019.
On March 21, he bumped his target to $215 with shares at $190. On April 9, he went to $225 before the March quarter report. On May 1, the PT notched up to $235 after the company's improving outlook. To Dan, the May stock market sell-off was just another great opportunity to add shares.
On July 31, after the June quarter report, Ives boosted his PT to $245. Shares were still trading near $210 and even dipped under $200 in August. If anyone was listening, Dan was giving you the playbook to maintain or add to your AAPL position.
On October 11, with AAPL shares trading $230, Dan moved his target to $265. Once again, this was 2 weeks before their next report for the September quarter.
For the seven months from May 1 to Nov 29, AAPL rallied from $210 to $267, a 27% gain. I chose the start of May instead of June to show how solid this thesis was despite market volatility. And Dan's clients and followers were probably thanking him for his consistent and reliable process.
Then, as the potential of the holiday quarter for the new iPhone 11 came into visibility, Ives raised his PT on November 15 to $325 and then again on December 23 to $350.
But he wasn't done. Last month on January 23, Dan moved his PT to $400, just days before the company's next quarterly report delivered the goods. I told him "It seems you see things in your outlook that others are missing because they would rather wait-and-see what the company delivers. What's involved in a decision like that?"
In the podcast, Dan explains why it's always been his research model to be ahead of the crowd and to stick his neck out on his best technology ideas.
Cook and Cupertino Deliver Despite the Doom
And here was an excerpt from his January 29 research update after Apple blew the doors off, returning to growth with iPhone sales of nearly $56 billion on total revenues of $91.8 billion, and an installed base estimate of roughly 1.5 billion...
Roughly a year ago Cook and Cupertino were facing some of their darkest days since the iPhone launch, pre-announcing negative results with China revenue falling off the cliff. The skeptics were saying Apple's growth was done with the negative doomsday comparisons to Nokia and Blackberry omnipresent. Fast forward to today and Apple's iPhone business is back to the Rock of Gibraltar, growth has re-accelerated on the heels of a "home run" iPhone 11 launch, a 5G super cycle is on the horizon, and the stock has had a historic run with a $1.5 trillion market cap likely reached in the coming months.
As long term bulls on the story we emphasis it all comes down to the golden jewel installed base and upgrade cycle thesis as currently Apple has 350 million of its 925 million iPhones in the window of an upgrade opportunity. Coupling this dynamic with a services re-rating which we believe is worth ~$600 billion for this segment, has put more fuel in the engine for Cupertino and we believe last night just started the renaissance of growth in the story with 5G around the corner.
To this point, we believe a $400 stock is the next major step for shares with our bull case of reaching a $2 trillion market cap by the end of 2021 a very attainable goal given the underlying iPhone demand story. We reiterate our OUTPERFORM rating and view last night as one of Cook's crowning achievements which put the finishing touches on a comeback story for the records books.
Top 10 Tech Prediction for 2020
In the podcast, we also go over Dan's Top Tech Predictions for 2020, including insights on Microsoft (MSFT - Free Report) , Alphabet (GOOGL - Free Report) and Tesla.
One prediction of his from December has already been overwhelmed with success. On Monday December 16, he appeared on CNBC's Closing Bell and said that after the "tariff peace" on the prior Friday, the Tech sector had a green light to rally 5-7% into the new year. As of this writing on February 11th, the Nasdaq 100 (NDX) was up 12% to new all-time highs of 9600.
I also ask Dan "What drives Apple over $300B in sales next year? And is it reliable to think that investors will pay over 5X sales for this juggernaut to drive the market cap beyond $1.5T?"
His answer has a lot to do with Apple as the winner of what he calls the "5G Super Cycle."
For Tesla (TSLA - Free Report) , Dan sees the potential its "Giga 3" factory in China becomes operational fast enough to surprise with 100,000 car deliveries sooner than most expect.
Be sure to check out the podcast to hear what he thinks Google Cloud Platform (GCP) might do to catch up to AWS and Azure in data services. Maybe it will involve a relationship with my favorite little Big-Data "miner and modeler" Alteryx (AYX - Free Report) .
Dan also has an interesting take on the next battle in the so-called "streaming wars." He believes that Iger-led Disney (DIS - Free Report) is the juggernaut that will help disrupt 10%+ of Netflix's (NFLX - Free Report) installed base.
Getting the Big Trends Right... and Sticking With Them
I also mentioned in this episode that I would link to a special copy of my Tech Super Cycle report. Unlike Dan, I was late to understanding the ramifications and potential of Big-Data. But I finally woke up and did my homework in 2016.
The one thing I forgot to ask Dan Ives about was his view of the potential impact on Apple and other Tech companies due to the coronavirus shutting down so much economic activity in China, which hits both production and eventual demand.
But I can almost guess his answer. It might be similar to his take on the US airstrike against Iranian Quds forces that killed General Soleimani...
"It's a complicated question, but ultimately we continue to believe the scarcity of growth assets in the world keeps leading us to a unique combination of transformational secular growth trends in the tech space for 2020 that will drive stocks/valuations higher despite last night's events."
And that sums up one of the biggest behavioral lessons for investors: don't let the short-term news scare you out of good long-term ideas.
Kevin Cook is a Senior Stock Strategist for Zacks Investment Research where he runs the TAZR Trader service. Click "Follow Author" above to receive his latest stock research and macro analysis.
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