From “A conversation with Katy Huberty,” a note to clients that landed on my desktop Thursday:
Adam Jonas: What do you think of Tesla?
Katy Huberty: There are parallels to draw between AAPL under Steve Jobs and Tesla under Elon Musk. The question for Tesla from here is whether it also needs an operational leader, as Tim Cook is to Apple, in order to become a trillion dollar company. In addition to maintaining Apple’s culture of innovation, design, and customer experience created by Steve Jobs, current leadership has navigated through an intense period of scaling revenue, social issues like data privacy, increased focus on shareholder returns, and intensifying geopolitical risks which have contributed to valuation growth from $354 billion at the end of FY11 to $1.36 trillion today…
Jonas: What’s Apple’s strategy around cars and transportation?
Huberty: The company hasn’t disclosed many details at this point but we believe Apple sees the car, along with other markets like health and payments, as a large market where Apple can contribute to a better solution… Historically, Apple is most successful when they’re vertically integrated and we don’t see any reason their approach to the auto industry would be different. In other words, they’ll need to have more control than they do today. The end game can’t just be a more advanced version of CarPlay in partnership with other auto makers. They need to control the design, the guts and the experiences and services on top of the platform.
Jonas: Long term, do you see Apple and Tesla as partners or competitors?
Huberty: Competitors. I see the end game as a vertically integrated solution and don’t expect Apple to partner with a company that sells a competing product.
My take: The comparisons between Musk and Jobs is always fun. More interesting to me, in this very interesting interview, was Huberty’s analysis of Apple’s valuation:
Jonas: What lessons can you learn from covering Apple with respect to valuation?
Huberty: Across tech, one of the important lessons is valuation alone isn’t a reason to like, or dislike, a stock. If the fundamentals are structurally changing for the better or worse… that is more important than the point estimate on valuation. For a long time Apple was seen as a single-product hardware company and as the market cap grew, investors worried that it could never trade at or above a market multiple. But one of the most powerful valuation drivers in technology is the emergence of new, more recurring revenue streams – AWS at Amazon, Office 365 and Azure at Microsoft, Instagram at Facebook, and Services and Wearables at Apple.
The rule of thumb in technology is that when a new segment becomes significant enough, typically 15-20% of revenue, that the faster revenue and/or higher margins can start to move the needle, investors will begin to reflect the opportunity by paying a higher multiple. We shifted to a sum-of-the-parts valuation framework in March 2018 right as Services was approaching 15% of revenue and that has served us well in reflecting the contribution from this more recurring, higher margin, higher growth revenue stream…
We used to say Apple was a 17x multiple, but with Services becoming 30% of profit we could map to 25x earnings. The lesson learned is that when a business model is evolving, the Street needs to be more creative and long term oriented in its approach to valuation. If you use standard valuation metrics you’ll almost always come out with the wrong answer.