Foolish Analyst Nathan Hamilton traveled to Thailand recently, and returned with a newfound appreciation for Apple's (NASDAQ:AAPL) role in the region and what many U.S. investors are getting wrong about the prospects for high-end products like the iPhone 6 in Asian markets.
Next up, the FAA has announced some drone regulations, and they don't sound like good news for Amazon (NASDAQ:AMZN). Will the retail giant scrap its drone delivery aspirations, or could a solution yet be reached? Tune in to learn more.
A full transcript follows the video.
Sean O'Reilly: Will you have to upgrade your Apple Car every year? All that and more on this tech edition of Industry Focus.
Greetings, Fools. I am Sean O'Reilly with the one and only Nathan Hamilton, who is back from his Thailand trip, joining you from very, very, very, very cold Alexandria, Virginia, outside of Washington, D.C., at Fool Headquarters. How are you, Nathan?
Nathan Hamilton: I'm good. What have we got, single digits today?
O'Reilly: Yes. You're obviously factoring in the wind chill, or not? Either way!
Hamilton: Yes, either way it's nothing compared to what I was seeing in Thailand about a week ago!
O'Reilly: I definitely let my car warm up for about 15 minutes this morning.
First up, we wanted to talk about your trip to Asia, in particular how it gave you a newfound appreciation for everybody's favorite almost-trillion dollar company!
Hamilton: Yes, a new appreciation for Apple, but also I came away with a pretty important investing lesson, which I think is actually the more important thing from my trip. I actually flew through Japan, different parts of Thailand, and so forth. I think there's really a lot to talk about with what it means for shareholders and investors.
O'Reilly: A big part of the bear argument against Apple is emerging markets and their positioning there because it's way more competitive over in say Asia, compared to here. What did you see?
Hamilton: On the competitive side, definitely see a lot of low-end Android devices; it's expected.
But I think the thing you have to look at is when you take into account the incomes in any of these emerging or developing markets, of course at a steep discount to what anyone has in a developing market.
For example, the median income in the U.S. is just above $40,000 -- about $43,000 per year. China, that's $10k. Thailand, $7k. So, when you look at it and you see the average selling price on an iPhone 6, which runs ...
O'Reilly: $650, all the way up to ...
Hamilton: More than that, actually.
Hamilton: The base model iPhone 6 sells for 25,500 baht, in Thailand. Now, most people don't know the baht conversion ratio.
O'Reilly: That's like a month's income, isn't it?
Hamilton: Yes. That is approximately $780, whereas in the U.S. it's about $650. Putting it all together, we know they're lower incomes. Then we know that the phones are priced at a premium to what they are in developing markets.
Really, if you look at the investing takeaway for it, the implication is when an investor looks at the situation, there's a lot of bear arguments. Apple, can they keep the same ASP? Are there going to be pressures in the future? When you look at it and see these incomes, the only assumption is, "How can they not?"
O'Reilly: The only way they can go is up.
Hamilton: Exactly. Looking at it this way, how can the actual ASP maintain at a premium for Apple, knowing that the incomes are lower?
But what you see on the ground in Asia -- and the people that I've visited there can see it in the last few years and so forth with Apple -- consumers are infatuated with American fashion, American products, and so forth.
My wife, who's from Thailand -- that's the reason we went there, of course -- she put it pretty succinctly. She said, "Thai people, Chinese people, are all obsessed with American fashion and devices."
O'Reilly: Don't quote me, but I'm pretty sure that the world's largest Coach (NYSE:TPR) store is in Beijing, for this reason.
Hamilton: It very well may be.
O'Reilly: They're status symbols, and as long as Apple stays a status symbol, they're fine.
Hamilton: Yes, and that's the big thing about it. If we look at, say the price of Levi's jeans in Thailand and China, it's at a huge premium to what they are in the U.S. We look at it, "Okay, Levi's jeans. Who cares?" But it is a completely different market.
When you look at it as an investor, you hear the bear arguments from many on the sell side, or just investors in general. They say, "The growth is coming in emerging markets for Apple and a lot of these companies, but how can they actually maintain those ASPs -- the Average Selling Price -- at such a premium, when the incomes are considerably lower?"
Now, this has kept a lot of people on the sidelines from investing in Apple many times before. What we're seeing in the most recent quarters is that's not necessarily the truth for Apple, because there is that fascination with the fashion and devices and so forth, and that really drives a lot of the sales in these countries.
China, specifically; Apple in the most recent quarter, 90% of iPhone revenue growth came from China. This is a market that has, as we saw before, much lower incomes than what would be expected in the U.S., so you really have to look at what the reality of the situation is.
We look at it, you and I -- we're in the U.S., many other Apple investors or investors as a whole are in the U.S. -- and they say, "There's no way that Apple can maintain these sort of trajectories, or maintain this growth." But in reality that's not the case.
Definitely, when you're on the ground, when you see it for yourself, when you get beyond what you see immediately in your existence or around you every day, you start to see that, "Okay, maybe these bear arguments aren't so true. Maybe they don't hold as much water."
O'Reilly: Yes. It's just a back-of-the-envelope kind of calculation there, because the population of the United States is 350 million, but that's going to be the Chinese middle class here, real soon -- and they all want an iPhone!
Hamilton: And it's grown fast. If you look at the median household income in China, when you compare it to suburban versus urban areas it's actually growing faster in the suburban areas, where there is a big concentration of the population.
No matter what, it's growing 10%-plus for incomes. That's huge growth, and that's a long-term tailwind.
O'Reilly: This is actually being aided by China's 4G rollout, you were talking about.
Hamilton: Yes. China Mobile (NYSE:CHL), approximately a year ago, started rolling out 4G and of course Apple phone works pretty well on 4G, with many other devices, and so forth. I believe that is definitely part of the growth that we've seen for Apple in China.
We also have to look at, as well, all the other carriers and manufacturers. This is the first full year that we've seen Apple with China Mobile, and you can see that the company is seeing some huge benefits, huge tailwinds, from it.
O'Reilly: When you were over in Thailand, you said that "phablets" are everywhere.
Hamilton: Yes, they are. Big phones.
O'Reilly: The big thing ...
Hamilton: Taking pictures like an iPad.
O'Reilly: I'm sure they're using it as their computer as well, and that's one of the reasons.
O'Reilly: But one of the big things about the iPhone 6 was it's way bigger than the 4 and the 5. Did Apple do what they did in making the iPhone 6 bigger, because of Asian demand?
Hamilton: I don't know if they specifically based it upon Asian demand, but I can say this; it's very heavily influenced.
I don't think that's really a surprise to many people that follow the company somewhat closely, because for the last year or two, I'd say, consumers and investors have been calling on Apple, "Hey, why don't you guys release a bigger phone? What's the reason you're not doing it? Oh, Steve Jobs wouldn't have done that."
But in reality, there is the demand there. Apple did finally come to the table and say, "Okay, we're going to bring out the 6. We're going to bring out the 6 Plus as well." That's essentially what leads to the highest ASPs on record for Apple, which happened in the most recent quarter, so the demand's there. It's definitely happening in Asia, and the iPhone 6 and 6 Plus are definitely the tailwinds.
O'Reilly: Is this why you didn't see any 5s over there?
Hamilton: It is. I was surprised. For people that watch our show or see the videos sometimes, you'll see me actually flash my iPhone 5C. I think I'm the only person with a 5C.
O'Reilly: You're the last person on earth with a 5C.
O'Reilly: There's a Twilight Zone episode about you!
Hamilton: But if you look in Asia, I was expecting, when I was going there -- the assumption is, "Okay, most people can only afford a lower price point phone. It's going to be lower-end Android devices," which you see a good number of.
But throughout my trip, about two and a half weeks there, beyond my phone I only saw one other person with an iPhone 5C, but plenty of other people sporting iPhone 5s, 6s, and so forth.
O'Reilly: When you were over there, did they take pictures of you with your iPhone 5C because you were so rare?
O'Reilly: Moving on, this is actually a topic that we've talked about a couple of times before because it's so interesting and sparks the imagination. The FAA finally came out with some drone regulations, and we have some thoughts on how that pertains to Amazon.
Hamilton: Yes. Essentially, ever since Bezos got on -- what was it, 60 Minutes?
O'Reilly: "Oh yeah, we're working on drones."
Hamilton: "Yes, we're working on drones, and we're going to deliver a five-pound object to your door within 30 minutes." It's something pretty enticing, I have to admit, and it would definitely be useful for me.
Bezos, in the interview said, "We've got to see what's going to happen with the regulations." Unfortunately, the regulations that came out recently are not very positive. If we look at the stipulations within, or the verbiage for the actual regulations, I think there are two important things to focus on.
Specifically, it says, "The unmanned aircraft must remain within visual line of sight of the operator or visual observer."
O'Reilly: That, in and of itself, sounds like a problem.
Hamilton: Yes. If you look at it logistically speaking, you've got your house -- where you love to order diapers all the time.
O'Reilly: Wait, wait. We're in the D.C. metro area here.
O'Reilly: Can the drone operator be at the top of a tall building, and that counts?
Hamilton: Who knows? I'm sure there are some caveats to it, but you've got your house and then you've got the distribution center. Obviously there has to be a line of sight between the two. It doesn't bode well for Amazon right now.
O'Reilly: That's not practical.
Hamilton: The second thing, also not boding too well; "Drones may not operate over persons not directly involved with the operation of the device, and drones must stay close enough to the operator for the operator to be capable of seeing the aircraft without the aid of any corrective lens."
Essentially, this means you can't hold your binoculars up. It has to be visible through regular eyesight.
O'Reilly: When I read this, I basically concluded that the FAA has cleared 15-year-old children to fly their drones in their backyards, and that was pretty much it.
Hamilton: Exactly, yes. But you have to put this in context. What's Bezos thinking when he sees this news? Is he like ...
O'Reilly: "I'm glad I set up my drone lab in Cambridge, England, and not in the United States."
Hamilton: Yes. Looking at it, do you think Bezos is really sitting there like, "Hey guys, we really gave it a hard try. Let's give up."
Hamilton: I don't think that's the case at all, because you have to look at the history of technology. Any time anything disruptive or kind of new ... some people perceive drones to be scary because you've got the association with missiles and so forth, and all the terrorist sort of things.
O'Reilly: And Skynet. Don't forget Skynet!
Hamilton: Exactly, Skynet. But you have to look at the history of any sort of innovation. For the most part, the tech companies or the public sector leads, and regulatory follows.
Right now we're seeing Bezos come out; they're on their, I don't know, third, fourth, fifth iteration of drones at this point. It's not anywhere near market acceptance or market usability at this point, especially because of the regulations.
O'Reilly: I was just rereading David Gardner, one of The Motley Fool's co-founders, long history of loving Amazon and investing in it and everything.
This thing that I was reading mentioned how, in 1997, Bezos did an interview and the anchor just made fun of him. He just could not imagine a world where people would be comfortable using their credit cards online!
Hamilton: Surprise! What are we doing now?
O'Reilly: Oh my gosh, and two years later, Jeff Bezos is Time's Man of the Year.
Hamilton: Yes. Can't imagine a world where we have e-books instead of regular publishing, or we're reading our newspaper on a device rather than flipping the page.
Those are all things that have been mentioned before, but ultimately I think it comes down to this. If there is the benefit to the consumer for delivery drones, then regulatory agencies will shape an agenda or shape regulations to fit that within the model.
You have to look at it. Really, is there a benefit? I think there is a pretty strong argument. I would love it. You're a family man; how many times a week do you make random trips to the store, for whatever sort of necessities?
O'Reilly: It has gone up astronomically, particularly since we had a child, but also with the wife. We had one car and, "Oh, Sean, we need Motrin. I've got a cold." Multiple trips, just up the road to Harris Teeter, and it's for tiny little items that I spend $5 on, but it takes 30 minutes.
Hamilton: Now imagine if there was a drone that could cut those trips, say in half, or even completely replace those trips. Is that a huge benefit to you?
Hamilton: Yes, so apply that to not only you but -- I don't know, how many people are in the U.S. -- but hundreds of millions of consumers, potentially, globally. That's a huge benefit to the economy, society as a whole.
I think there really is that consumer benefit. I don't think Bezos is saying, "Hey guys, let's give up. Time to move on." I think they're pushing ahead. This is definitely somewhat of a headwind immediately, but I don't think it's something that's going to stop the trend altogether.
O'Reilly: For sure. Very cool. Before we leave, we have a little bit of trivia here.
Hamilton: Yes, we wanted to do something new.
O'Reilly: I can't wait for you to try to stump me! We did want to try this new format, just give everybody a little something fun to leave you all with. Are you going to say the question, or should I?
Hamilton: I'll propose a question, but more than anything I think there's a lot of really cool tech history out there, and it's really fascinating to me. Hopefully our listeners will find it fascinating as well.
Maybe there are some tech geeks out there that can sympathize with me. I think it would be a good way to teach a little bit about the history of tech, and hit upon different news -- anything that's going on -- so we'll probably end our show with trivia from now on.
O'Reilly: Very cool. All right, hit me.
Hamilton: First one. What tech leader was born in the same year as Steve Jobs, in 1955? Our choices are:
- The man from Amazon himself, Jeff Bezos,
- Tim Cook, CEO of Apple,
- Bill Gates, of course the Microsoft (NASDAQ:MSFT) guy,
- And Larry Ellison of Oracle (NYSE:ORCL).
O'Reilly: I am sorry to say I actually knew the answer to this. The answer is C, Bill Gates.
Hamilton: You are 100% correct. It's interesting, when you look at the history of that relationship, and how Apple came to be, and how Microsoft Windows came to be. When you look at it, Apple was the first company to come out with what they call a graphic user interface, which is what Windows is, which is what iOS is.
O'Reilly: You ever see that made for TV movie, Pirates of Silicon Valley?
O'Reilly: I think about that every time; the similarities between Gates ... it's like an arch-nemesis kind of thing!
Hamilton: Looking at it, Apple essentially took the technology from Xerox (NYSE:XRX). Xerox didn't want to commercialize it. They created the graphical user interface. Bill Gates and Steve Jobs were friends at the time, in the early '80s.
Bill Gates also saw the technology as well. Some argue that he stole it; Steve Jobs argues that he stole it. Bill Gates argues that he also saw it at Xerox, and essentially "If you've got eyes, plagiarize," that sort of thing.
But when it comes down to it, we can see who won the actual game. Microsoft essentially licensed it out to every manufacturer ...
O'Reilly: That game.
Hamilton: Yes, that game specifically. They just had different visions. Microsoft wanted to license it, Apple wanted to own the whole ecosystem and experience. Definitely an interesting fact to look at in history.
O'Reilly: Dun, dun, dun!
Hamilton: Those two guys were born the same year.
O'Reilly: The similarities -- actually, we should talk about this next time -- the similarities between their education experiences and early exposure to electronics and tech and everything.
Hamilton: Yes. Steve Jobs, big fan of LSD. Bill Gates, big fan of Harvard -- left it early.
O'Reilly: Very good! Before we leave, I did want to make all of our listeners aware of a special offer for a subscription to Motley Fool's top-performing newsletter, Stock Advisor. Those of you that are joining us on Industry Focus today, just head over to focus.fool.com to check this offer out.
That is it for us, and this technology edition of Industry Focus. Thanks for listening, and Fool on!
Nathan Hamilton owns shares of Amazon.com and Apple. Sean O'Reilly has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Apple, China Mobile, and Coach. The Motley Fool owns shares of Amazon.com, Apple, Coach, and Oracle. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.