In this week's Industry Focus: Tech, Sean O'Reilly and Evan Niu talk about two companies with big upcoming news: Apple (NASDAQ:AAPL) and Tesla Motors (NASDAQ:TSLA). Listen in to hear about the two new products Apple has announced, one nifty way the company is returning value to shareholders, and how Apple is performing in the detachables space.
Then, on the Tesla side of things: what we know about Tesla's Model 3, how it'll make electric cars far more accessible to the public, and what might come of a significantly increased number of EVs on the road.
A full transcript follows the video.
This podcast was recorded on March 11, 2016.
Sean O'Reilly: We're talking the Tesla Model 3, the iPhone SE, as well as about Dylan Lewis behind his back, on this tech edition of Industry Focus.
Greetings, Fools! Sean O'Reilly here at Fool headquarters in Alexandria, Virginia. It is Friday, March 11, 2016, and joining me to talk tech via phone from Denver, Colorado, is former Fool.com technology bureau chief, Mr. Evan Niu. Evan, how is it going, man? Long time, no chat.
Evan Niu: Pretty good. Pretty nice out here today.
O'Reilly: Yeah. So, spring arrived in D.C. here this week, so it's been 60s and 70s, a little bit of sunny, a little bit of overcast. What is it like out there?
Niu: Right now, it's like 70 degrees. But I think out here it can snow all the way until like April or May, which is crazy, because I'm from Texas. But I have to get used to it.
O'Reilly: Oh, that's right! You and the wife are from Austin, I remember that. You guys would not stop talking about Austin. We miss you at HQ, man. I don't get to talk to you enough.
Niu: I know, man.
O'Reilly: So, really quick, before we talk about Tesla -- which, am I allowed to say this on air? You ordered one.
Niu: I do have one now.
O'Reilly: Oh my gosh, you have one?!
Niu: (laughs) It's true.
O'Reilly: I cannot wait to talk about that. But, first, we've got a couple of announcements out of Apple. First and foremost, what is the iPhone SE? I have not been keeping up nearly enough.
Niu: Yeah, so they officially sent out invitations for an event for March 21st, which is, you know, just over a week from now. And the two main things that people are expecting are this iPhone SE, which stands for special edition or something. I think the naming's kind of silly. I don't know why they --
O'Reilly: They already offer a gold iPhone, so what could possibly be special about this? (laughs)
Niu: Well, it's going to be, supposedly, a 4-inch one. They haven't released a new 4-inch iPhone since iPhone 5S in 2013. So, it's just kind of a way to update that 4-inch model, because a lot of people still like 4-inch phones. Not everyone wants --
O'Reilly: The huge one, yeah.
Niu: -- a bigger phone. Yeah. So, it's just really a way to strengthen the product lineup, really keep all of the main offerings, because they've always had a low, mid, and high price points that they sit at. So, this is just a way to kind of keep the lower price point strong product.
O'Reilly: Okay. So, what's been going on with the big iPad? The 9.7-inch iPad Pro?
Niu: Well, so, what they're also expected to announce is a 9.7-inch iPad Pro. The super big one is the 12.9-inch one.
O'Reilly: Oh, I'm sorry. Okay, yeah.
Niu: The 9.7 is what used to be the big one that they've always had. So, that one is kind of expected to be similar to the super giant one in terms of the design, how the four speakers and, apparently, they might even be rebranding it as -- because, right now, it's the iPad Air, they might make it an iPad Pro. So, kind of included in the Pro family, maybe with some of these features, like, maybe they have the Apple Pencil support, which, hopefully, is a big selling point for the big Pro. It's still kind of too early to say.
O'Reilly: Steve Jobs is rolling over in his grave. I'm just kidding (laughs). He hated the Pencil, the stylus stuff, right?
Niu: I mean, it makes no sense on a phone, which was like, those quotes of him bashing styluses were all over context of the iPhone. And it makes a little more sense on a tablet, because it's bigger, especially for creative professionals who rely on that type of stuff for their jobs.
O'Reilly: Have you caught wind of anything about the smart keyboard at all?
Niu: Yeah, so, that's another big question, are they going to also have a smart keyboard for this new 9.7-inch iPad Pro? Because right now, there's this recent report from IDC saying detachables are really taking off. So, think about Microsoft (NASDAQ:MSFT) Surface, which is the main detachable that everyone thinks about. But, as a category, people really like this idea of tablets that can -- for a long time, everyone was trying to figure out, how do you get a tablet and a laptop, one device that does all of that? And, a lot of companies tried and just didn't really make a lot of progress. But, this detachable idea is starting to take off.
IDC, for what it's worth, does consider the iPad Pro as a detachment because of the keyboard. So, if you have this 9.7-inch iPad Pro, and you have the keyboard, they can maybe take advantage of some of the increased demand we're seeing for these detachables, just because it's a little bit more versatile, a little bit more ... you can conceivably replace your laptop with it. I think it's ... I've never been interested in having a tablet that replaces my laptop, I prefer two separate categories. Like, I have my laptop and I have my tablet. They're good for different things. But, it's what the market wants.
O'Reilly: Yeah. What do you make of, since you mentioned it, the Microsoft Surface? Because a lot of people at this office...I mean, you've been here. We skew Apple occasionally, but there's a lot of people at the Fool at least who really like the Surface Pro 3 and 4.
Niu: I mean, I've never really liked it as a form factor just because you can't really use it on your lap, because the kickstand and ... this goes back to the age-old conversation about the compromises that come into having tablets that do the same thing as laptops. I just have never been a fan of that, because, it's like, a laptop, you want to be able to set it up anywhere you go. Like, you're in bed, you're on the train, you know what I mean? And with the kickstand, you can't really do that. I will say, though, that I think Microsoft does have a big advantage here in terms of the operating system, because Apple's always been this discrete approach of, "We have a tablet operating system and we have a desktop operating system."
But Microsoft has been working to converge and have this one operating system that can do both. So, in that sense, if you have a device that's trying to do both, I think Microsoft has an advantage there. iOS, when it's in the laptop setup with the keyboard, I just think it's awkward. You try to touch the screen, and it's just ergonomically not very pleasant to hold your hand up and try to do all this stuff on your screen. So, I think it's, Apple and Microsoft picked their approaches years ago, and now we're seeing how that all plays out, particularly as the market evolves. So, it'll be interesting to see how it plays out.
O'Reilly: Cool. Before we move on to Tesla, and since this is The Motley Fool and we care about investing, really quick talk to me about what Apple's set to announce regarding share buybacks and capital returns.
Niu: They give annual updates, so, every March, April, they give an update to their capital return program, so that's coming up here pretty soon. And, just a month ago or so, Tim Cook publicly committed to annual dividend increases, which should have been pretty obvious anyways. But, never hurts for him to reiterate that. So, I would expect Apple to give some type of dividend increase. Who knows, we'll just wait and see. But I'm a little bit, actually, of a bigger fan of the buyback program --
O'Reilly: Especially with the multiple on it --
Niu: -- it's so massive. Yeah. I mean, so, right now, for some context, the current program is for a total of $200 billion, including $140 billion for repurchases. To date, or at least as of December, last quarter, they had repurchased about $110 billion, which is kind of just crazy to think about. That's bigger than the market caps of megacap. That's more than a megacap.
O'Reilly: It's the GDP of a bunch of countries. (laugh)
Niu: Yeah, exactly, you know? So, that really is very [...], because they're retiring a ton of shares and really boosting earnings per share, which, Apple's always been cheap, but it just keeps it cheap, because the earnings multiple is so low. And some people like to call it financial engineering or whatever, but I think that's kind of a misleading term, because it suggests they're doing something nefarious (laughs), but it's just delivering value, real value, to shareholders, because they're just creating earnings per share to existing shareholders. I love the program because it's so big. And a lot of people generally criticize buyback programs when they're badly timed, but with Apple so cheap, it's hard to say that they're making a bad trade on it. It's not like they're buying it at the highs when the valuation is stretched. They're buying it when the shares are cheap. So, it's hard to apply those generic criticisms to it.
O'Reilly: Awesome. Well, before we move on, I wanted to point our listeners to the newly redesigned focus.fool.com. There, you'll discover a special offer to join The Motley Fool's Stock Advisor newsletter that works out to $129 for a full two-year subscription. Once again, that is focus.fool.com. So, Evan, before we talk Tesla Model 3 and stuff, I want to hear about your new whip.
Niu: So, I ordered a certified pre-owned Model S from Tesla a couple months ago. It took delivery about a month. So, it wasn't a new one, but it was like 18 months old, which was basically new. (laughs) And we got a great deal on it. So, I mean, it was basically a third off what it would cost to buy a brand new one.
O'Reilly: Was that process pretty smooth with Tesla?
Niu: Oh yeah, it was incredibly easy. I just went online and found a model on their pre-owned site that had really good mileage, had the options I wanted. And then just ordered online. They actually had to ship from New York. So, I had to wait a little while. But, in Colorado, we have a $6,000 tax credit for electric vehicles, and if that has never been claimed on that vehicle before, then you can claim it. So, even though this is a used one, since it's never been registered in Colorado, I'll get a $6,000 tax credit when I do my 2016 taxes, which, you know, certainly helps offset the price of the car.
O'Reilly: For sure. I notice you keep telling me you're always dropping the kids off at school and stuff, and I have to think that you're doing it just so you can drive around in the Tesla more.
Niu: Of course. You find excuses, now, to drive it. (laughs)
O'Reilly: (laughs) So, for one or two years, Musk has been teasing the Model 3, which is going to be more of their mainstream Tesla model. And as I understand it, the unveiling's going to be this month. So, what can Tesla investors expect?
Niu: It's hard to imagine any negative storylines coming out of this. Everyone is just so excited about this. You just hear people talking about it constantly. You go on the Internet, or, I'm sure you have friends, personally, I bet you have some friend who's heard about it and is interested. Right?
O'Reilly: I mean, what? It's going to be priced at $35,000. Yeah. (laughs)
Niu: And that's the crazy thing. No one knows what this car is going to look like. You know kind of the basic stats they're trying to hit, like, $35,000 price, 200 mph range. But you know nothing about what the car looks like, right?
O'Reilly: No, the only thing I knew is ... oh, shoot, what's the bigger one with the falcon wings?
O'Reilly: Yeah. I've seen that, I've been looking at photos of that for a year.
Niu: Yeah. But what's crazy is, there's so much interest around the car that no one's ever seen before. That's pretty impressive. People are just like, "All I want is an affordable Tesla. I don't know what it looks like, but I want it." There are tons of people on Twitter --
O'Reilly: Take my money.
Niu: Yeah, exactly. They're basically already planning on buying this car that (laughs) they've never even seen. It's just kind of crazy to think about, a purchase that large that people are ... I mean, obviously, not everyone's going to fall through. But the initial interest is so strong on a car that you know very little about, which is, I think, pretty impressive.
O'Reilly: So, you've expressed the opinion to me that Tesla still needs to beef up delivery, service, and Supercharger infrastructure. Can you add some color to that?
Niu: I think that's going to be a challenge. I mean, they're still targeting late 2017 for launch. But right now, they've produced a little over 100,000 vehicles total. They have the service, infrastructure, direct sales where they're allowed to, at least, which is state by state. But then, they have these Superchargers. But these Supercharger locations might only have 5-10 different stalls, and it takes 20-30 minutes to charge. In places like California where there are a lot of Teslas because California's just so friendly to EVs, they have a lot of Teslas in California. You do, even now, hear stories of congestion. Sometimes you can have really bad congestion. There's one story that went around over the holidays, this person had to wait like 40 minutes to charge up. And when you start talking about ramping up the volume they're expecting -- they're targeting like 500,000 units by 2020.
That has to put a strain on the infrastructure side, in terms of how you can deliver all these cars, how you can service all these cars, how you can provide sufficient Supercharger stations to all these cars? And I have no doubt that this is on their radar. But you really have to get ahead of it and build up this infrastructure ahead of time to be able to handle that sheer volume. And because Tesla's much more vertically integrated than other car makers, they do all of this stuff themselves. So, that's a big investment, it's a big commitment. It just really underscores the execution of what they need to execute on to really succeed and be able to handle this kind of volume, because they've never done this kind of volume before.
O'Reilly: It's kind of like, during the 70s oil embargo, you saw the lines at the gas stations. But this time, it's with a bunch of electric vehicles, and they're looking to charge up.
Niu: Yeah. So, that actually is another good point. I think, no one knows what the options are going to be priced at. So, I think it's pretty likely that they're going to charge you for Supercharging. Because, when they first launched the Model S, you had to pay extra to get Supercharging. Now, it's standard. But in the early days, with the lower-capacity models, you had to pay extra. I think it was like $2,500. So, it would make sense if they wanted to charge for it, because that also is a pretty important option, it helps increase the price of the car beyond just the base. But it also would limit, maybe, what kind of congestion volume you have of traffic at Superchargers, if not everyone chooses to get that capability.
O'Reilly: Got it. So, before we head out here, I'm anxious to get some insights on what you saw at the Meet Model X event that you attended there in Denver, I saw. And you saw the Model X there, right?
Niu: I drove it. (laughs)
O'Reilly: Oh my gosh! What did you think?
Niu: It was pretty wild. The car is just so fast, and it's an SUV. If you've ever test-driven one of the Ludicrous ones, it slams your head into the back of the seat, which is kind of jarring at first. I kind of feel bad for all Tesla's press people who have to constantly deal with that. I actually asked the press person --
O'Reilly: Getting whiplash, huh?
Niu: "Do you ever get sick?" Yeah, exactly. (laughs) You're constantly taking test drives, people are constantly slamming your head back into the seat because they're testing the car out. But, the panorama windshield is actually very cool. I didn't think it was going to be that cool, but being able to see so high up ... I mean, functionally, visibility, it's more of a vertical visibility. Things don't hit you from above in a car. So, I don't know how functional it is in terms of, it doesn't help you with your blind spot, for example. But, it does provide for a pretty crazy experience.
The doors are, of course, amazing. But I also have concerns, like, are those going to be more trouble than they're worth? Later on down the line, fast-forward five years, what's out of warranty repair expense going to be on those doors if there's a problem? And they've already had a lot of problems just in manufacturing them. So, it's a very complex design, and I think they're awesome, but I would have some concerns about, and maybe, as a risk going forward, it ends up being more trouble than it's worth because the benefits ... there are functional benefits, they can open in tight spots, you can get in the car easier. But, again, what's the benefit compared to the possible risk of the cost later on? And only time will tell.
O'Reilly: Got it. Before we head out, are you a Tesla shareholder right now?
Niu: Yeah, I invested in Tesla back in 2011 at about $30 a share.
O'Reilly: Wow, good for you.
Niu: We're enjoying the ride.
O'Reilly: So, you are a Musk believer. Okay, cool. Well, send my regards to the family, Evan, and thank you again for calling in.
Niu: Yeah, thanks for having me.
O'Reilly: Have a good one! If you're a loyal listener and have questions or comments, we would love to hear from you. Just email us at email@example.com. Again, that's firstname.lastname@example.org. And, as always, people on this program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against those stocks, so don't buy or sell anything based solely on what you hear on this program. For Evan Niu, I am Sean O'Reilly. Thanks for listening and Fool on!
Evan Niu, CFA owns shares of Apple and Tesla Motors. Evan Niu, CFA has the following options: long January 2018 $180 calls on Tesla Motors. Sean O'Reilly has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Apple, Tesla Motors, and Twitter. 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.