What Apple Really Revealed to Investors Last Week

In this segment from Market Foolery, producer Mac Greer is joined by Aaron Bush and David Kretzmann of Motley Fool Supernova and Rule Breakers to talk about what Foolish investors should really take away from last Tuesday's Apple (AAPL 1.27%) event. Most of what the tech titan revealed about its new iPhones was in line with the leaks and rumors. The Apple Watch 3 impressed Aaron and David, as well as the evolution of the whole Apple ecosystem. However, there was one iPhone feature that should make shareholders particularly happy.

A full transcript follows the video.

Editor's note: In the video, David says Apple's dividend yield is 0.5%. The yield is actually 1.6%. 

This video was recorded on Sept. 13, 2017.

Mac Greer: Let's begin with Apple. Guys, on Tuesday, Apple unveiling three new iPhones. David, they also introduced some whiz-bang technology, like facial recognition. As an investor, what stood out about Apple's event?

David Kretzmann: Those things weren't at the top of my list. I think a lot of those items were expected. Apple, as best as they try, they don't keep a lot of secrets these days. They're so big, they have so many eyes on them, that they don't have many secrets. I think a lot of the technological advances with these new iPhone models was generally what we expected. I don't think there are giant surprises there if you were following the different rumors there that were coming up from different blogs and stuff.

But I'm really impressed with the Apple Watch. As a device that over the past few years since it launched, people always rag on it for some reason. "Oh, it's a flop, it's not as big as the iPhone." Well, it doesn't need to be as big as the iPhone. It still captures over 50% of the smartwatch market, which is pretty incredible for a relatively new device. And [CEO] Tim Cook announced yesterday, it's actually the best-selling watch in the world, not just for smartwatches, but they're a better seller than Rolex globally. So that's a really impressive feat to me as well, and this new generation of the Apple Watch that now has built-in cellular technology where it doesn't have to be directly tied or tethered to your iPhone, I think that makes the watch all the more compelling for a user.

So Apple continues to really innovate where it needs to innovate with the Apple Watch, each version -- now they're on the third version. I think it's more impressive. I've never owned a smartwatch, but I think if I was wanting a smartwatch, the Apple Watch might be something that draws me into that Apple ecosystem. 

Greer: And I notice the new Watch is going to feature a heart-rate app, which will notify you when it detects an elevated heart rate. That can't be good for Fitbit, right?

Kretzmann: Yeah. If I'm Fitbit, I'm really nervous right now. Fitbit just announced within the past month or two their new smartwatch, but I feel like the features, the look, the design of the Apple Watch just blows Fitbit out of the water. The Apple Watch has a lot of compelling health cases as well. That heart-rate monitor, I think they mentioned yesterday that it's actually the most used heart-rate monitor in the world, there's just so many people using this device, and they're capturing that data.

The value proposition of Fitbit, I think, is waning bit by bit. The one thing Fitbit as a company has going for it is, I think 45% of the market cap right now is in net cash. So the company isn't going go bankrupt overnight or disappear overnight, but they need to figure out a way to stop bleeding cash, which they've been doing over the past year or so. And I don't think the smartwatch should be their main strategy, because I just think Apple will continue to be the clear leader here.

Greer: Aaron, what were the highlights for you?

Bush: I feel really bad for the iPhone 9. It's never going to get a chance. [laughs] No love at all. I think it's really interesting. I don't think any of this was surprising. What we're seeing is just iterative of everything we've seen before. I do think it will be good for the business, seeing how they're strategizing with the iPhones, seeing how they have the 8, which still is normal pricing. It's not a cheap version of the phone by any means.

Kretzmann: $700, that's a chunk of change.

Aaron Bush: Yeah, it's still significant. And then you have the premium version, which is going to start at a $1,000, the iPhone X. So I think what we're going to see what that is, it's probably going to push up the average selling price of those phones, which is a really big deal for Apple, because more than anything to Apple, Apple is all about margin and pushing up the prices as much as they can. It's not as much about market share; it's about what they can get out of what they sell. So I think that was really interesting.

And I agree with David on the Apple Watch. I think, if anything, what's most telling about Apple is just how good of a job they do on piecing together the entire ecosystem. You see the phone, which is still the central hub; the Watch, which is offloading some of those features with its own capabilities. And with cellular, that replaces the phone in some ways. Then you have AirPods, which connect. There weren't really big announcements with that, but that still connects. And then, seeing the face recognition, I mean, I don't really care about that too much. I think what's most interesting with that is the underlying camera improvements and the software improvements in the camera, and what that means for augmented reality.

I think we're starting to see the building blocks of this ecosystem coming together in a way in which augmented reality over time becomes a bigger deal and Apple becomes a big leader in that, just as they have with the Watch and the phone.

Greer: And what's amazing to me is, you just casually mentioned a $1,000 phone. If 10 years ago, or even five years ago, we were talking about a $1,000 smartphone, a lot of people would say, "That's crazy." And yet, Apple has the ultimate pricing power now, don't they?

Kretzmann: Yeah. This is a really interesting moment for tech in general, because consumers have generally been used to the average selling price of devices, whether it's computers, TVs, phones, laptops, tablets, to usually go down over time. That's been the expectation. Now I think we're at an interesting turning point where these phones are incredible, what they can do, compared to just three years ago, it blows me away what these phones can do. So it makes sense for the average selling price to go up.

But up to this point, consumers haven't really been used to that. But I think Apple will be able to pull it off, especially because they have this whole ecosystem, like Aaron mentioned. The software and the different devices that all tie together. If you're a diehard Apple user, that $1,000 price point probably isn't going to scare you away, because the phone looks pretty darn cool and technologically advanced, and it just plugs right into that ecosystem that you know and love. I think Apple can pull it off and it'll be really interesting to see how consumers will react.

Bush: My unpopular opinion is, I think the iPhone and these premium smartphones in general are actually one of the greatest values you can get out of any device. I think we see these prices go up, but if you think about the time that we spend using them, from a usage perspective, we're getting so much value out of what we spend on them. So I think it makes sense to me, and if Apple can justify it, that's awesome.

Greer: That's a good segue for my final question here involving Apple. How about the stock? Is the stock a good value? Because a lot of people maybe have been watching Apple for years, and if they did invest, they've just seen the stock go up and up and up. As we know, investing is all about the future. So what do you think of the stock?

Bush: Right now, the market cap of Apple is about $820 billion. This isn't the kind of company that can double overnight. I think they have some things going for it with the dividends and share repurchases. My personal opinion is that you can do a lot worse than investing in Apple. Apple is still going to be throwing out new, great products that make the company bigger, and it's going to return value back to shareholders in those other ways.

In my opinion, I also think you can do better than Apple, too. Just given how much the stock has gone up in the past year, and how big the business is today, that's not entirely a limiting factor, but it still is one.

Greer: That's a bit of a hedge, though. Does it beat the market over the next five years?

Bush: I'm going to say no, actually.

Greer: Ooh, wow, those are fighting words. 

Kretzmann: Bold.

Greer: David Kretzmann?

Kretzmann: Before I get to the valuation, just one quick thing on the average selling price. When you go back to the first cellphone that Motorola released in the early 1980s, the selling price was just under $4,000 for that phone, and the thing weighed practically 15 pounds, had a 30-minute battery life. So paying $1,000 for this incredible technological achievement isn't actually that bad in hindsight, and I think to Aaron's point, you might be getting a bargain on that device and how much you use it. I think that's a great point.

As far as the stock going forward, I think, yeah, you can do a lot worse than Apple. The valuation today, the P/E multiple is around 18, which is toward the higher end of the range over the past three years. The dividend yield is about [1.6%], which is the lowest it's been over the past three years. So I think, from a valuation perspective, people are more optimistic about Apple than they were a few years ago, when people were wondering what comes after the iPhone. I think people are now recognizing that Apple doesn't need to replicate the success of the iPhone. They have this incredible ecosystem. They can do more of the iterative innovation and do just fine.

Apple is not a growth stock; it's not a growth company. But I think as a cornerstone of the portfolio, as a core position of the portfolio, it's a good place to start. But at these prices, I'm not as excited as I was when the price-to-earnings multiple was closer to 10 or 12.