Enjoy’s recent investor update was evidence the company is progressing more quickly than we anticipated on its goal of becoming the Smart Last Mile solution for premium brands, including Apple and AT&T. Today, the last mile is confusing for consumers and brands. Enjoy makes it better with faster delivery, higher engagement through setup, along with an in-home shopping experience. The company expects to go public via a Marquee Raine SPAC (ticker: MRAC) by year-end. Loup’s an investor in Enjoy.
What is Smart Last Mile?
It’s best to start by outlining what the current “dumb” last mile looks like for consumers and brands. When checking out online, consumers typically have three delivery options: in-store pickup, same day for a fee, or 1-4 days for free. A Smart Last Mile will eventually offer in-store pick up, 1-hour delivery, or set up with an expert. For brands, the delivery options are divided between several service providers, including Postmates, FedEx, and UPS.
Consumers typically approach a purchase with one of two mindsets: 1) I know what I want and I want it fast, and 2) I generally know what I want and am open to hearing about other products.
- I know what I want and I want it fast. Over the next year, Enjoy will quicken delivery times to under one hour through its mobile warehouses. For example, an Enjoy delivery van with inventory will be on the road, connected directly to a brand’s point-of-sale system. An order comes in for a delivery location 15 minutes from the mobile warehouse location. The order is routed to and fulfilled by Enjoy within the hour. Postmates can’t achieve sub-one-hour delivery windows given the drivers don’t hold inventory. For consumers, ordering online with delivery in an hour is ecommerce nirvana. For brands, it means increased conversion given the enticing delivery speeds.
- I generally know what I want and am open to hearing about other products. This is experiential retail, which online ordering with delivery to the door does not satisfy. For the consumer, Enjoy gives an option to bring experiential retail to the home through an expert that delivers the product, sets up the device, suggests accessories, and helps with any technical questions. The shopping experience takes about 30 minutes — significantly less than driving to the store for a similar purchase. In turn, brands see better customer engagement, increasing customer satisfaction, higher average order values through attaching accessories and services (adding 5G, Apple One bundle), and ultimately, increasing customer lifetime values.
Enjoy expects to cover all of its existing ~50 US markets with Smart Last Mile service this holiday season. For next year, the company projects to add 45 new markets in North America. By the end of 2022, Enjoy excepts to cover 235 million addressable customers globally.
Apple partnership expands
Enjoy now works with Apple in 14 US markets, up from 8 in mid-August and 3 earlier in the year. They now cover 67 million addressable customers. We see the expansion of the Apple relationship as the second most important development in the past month, after the launch of Smart Last Mile. We believe if Enjoy executes, it has the chance to be a core element in Apple’s global, direct strategy, complementing the company’s pillars around online and brick and mortar. We’ve researched Apple for two decades and know there are no guarantees when it comes to long-term partners. For Enjoy to be successful, they’ll have to earn the right to serve Apple customers one market, one visit at a time. Conservatively, we estimate Apple represents a $4B plus opportunity for Enjoy.
The SPAC investor headwind is having a 10% impact on Enjoy’s near-term valuation. Despite reiterating full year 2021 revenue and earnings guidance, the company and Marquee Raine have lowered the approximate pro forma enterprise value by 10%, from $1.18B to $1.06B. This change makes sense given investors’ recent concerns around the unpredictable trading of SPACs. Our view on long-term valuation is unchanged. In our opinion, fair valuation today should apply a 5.6x revenue multiple on 2022 sales estimates, which yields a $1.4B valuation, versus Enjoy’s current $1.06B valuation. Looking out two years from now, valuation will likely be based on 2024 revenue estimates, which should be around $700m. Applying a 4x revenue multiple to 2024 sales, which is more conservative than the current comp group’s multiple, yields a $2.8B valuation.
Apple’s annual flagship event was another iteration of providing products with increasing value to consumers at largely consistent prices. This is what we refer to as a virtuous cycle of mutual benefit. A product provides increasing value to the consumer at the same or lower price point, while more value accrues to Apple as it continues to grow its monetizable device base. Companies that participate in this virtuous cycle are most likely to continue to gain market share and expand market cap.
Case study in the four Ps.
Apple is a master of marketing’s four Ps. As the iPhone lineup has grown, so too has the importance of separating product features and pricing across the line. During the event, as Apple walked through each model, it became clear they’ve designed an iPhone for everyone with mostly overlapping features, yet separate and distinct in appeal and price, each with its own value proposition. Tim Cook, for example, said the iPhone 13 Pro is “for those who want the most out of their iPhone.” Beyond product and pricing, however, place and promotion have been real drivers of scale and margin expansion in the iPhone business. The iPhone’s “place,” or providing customers convenient access to purchase iPhones, has shifted from stores to online.
The beauty of the fall event, annual upgrades
In lining up the four Ps for separate and distinct customers, iPhone has expanded its base while driving increased conversion to the iPhone Upgrade Program. Apple has made annual upgrades seamless. And herein lies the beauty of Apple’s seemingly boring annual upgrades: annual upgrades! Pulling customers into a faster upgrade cycle. Combine all this with Apple’s advertising (from the event itself to 30 second spots to product placement in Ted Lasso), and the company’s world class marketing capabilities are clear and obvious.
What is less obvious is the juggernaut they’ve created with these annual upgrades. Apple enjoys increasingly recurring spend on a growing share of consumers’ wallets with expanding optionality from related services and accessories. Also important, the upgrade 5G rising tide will continue in FY22. We estimate 400m iPhones are over 3 years old, a base that gives Apple a head start in meeting Street expectations for 260m iPhone unit sales over the next 12 months.
Room for innovation
On top of what Apple announced at its fall event, we still we see room for innovation. For example, Apple made no mention of a hardware subscription that could eventually eliminate the annual upgrade decision. We continue to believe Apple will eventually introduce a 360 bundle with Apple One for services, plus iPhone, Mac, iPad and/or Apple Watch hardware for a single monthly fee. Such a bundle would further tighten Apple’s death grip on the devices we use hundreds of times every day. Add on the potential for Apple to enter new markets including AR, MR, and auto, and we leave the event confident that despite a “boring” upgrade event, the company’s future will be exciting.
What was announced
- New iPad priced at $329 with 64GB of storage. Priced the same as the previous version, with double the storage.
- New iPad Mini at $499, up from $399. Lots to get excited about here for people that prefer the smaller size, along with a 5G option.
- Apple Watch Series 7 with 20% bigger screen size and 33% faster charge time (45 mins) over Series 6, with the price unchanged at $399. Notably, Watch did not add rumored biomarkers. We’ll have to wait a year or two for blood pressure monitoring.
- iPhone 13 Pro camera is cinema-level quality, with pricing unchanged from last year. Additionally, Apple introduced a 1TB storage option. While very few people will purchase the 1TB option, it carries about 85% gross margin that will offset some of the other rising component costs.
- We did not see everything we were looking for, which sets up a few expected new product announcements in October, including a new MacBook Pro and AirPods.
Back in June, I was expecting a decision from Judge Gonzalez Rogers on the Apple vs. Epic trial any day. At the time, I believed Apple would win most of the counts and lose one count related to steering. As it turns out, Apple anticipated the same outcome, and proactively made changes to App Store policies around steering in the month leading up to the September decision.
There was a reminder for me in how this played out: the App Store is a fast growing, dynamic business, and its policies will continue to evolve in the years to come. Below are the key App Store policy topics and our thoughts on how they play out in the years to come.
Third-party app stores on iOS.
The ruling states that Apple’s current policy prohibiting third-party app stores on iOS can remain, to help ensure the safety and security of iOS. This is a measurable win for Apple, which makes it difficult for federal regulators to impose a change that would require Apple to allow these outside stores.
Expected Change: Over the next five years, I expect Apple’s current policy on third-party app stores to remain unchanged.
While commissions were not directly addressed in the suit, indirectly they were the central topic. The ruling allows Apple to maintain its current 30% commission for larger developers and 15% for smaller ones. While the court decision is a win for Apple, we believe the free hand of the market will determine the App Store’s long-term commission rates. History shows Apple is willing to change. In 2016, Apple reduced its commission for the 2nd year of subscriptions to 15% from 30%. In 2020, the commission for smaller developers was reduced to 15% from 30%.
Expected Change: It’s unclear how commission rates play out. Apple has until mid-December to build a framework to allow developers to steer. In 2022, I expect developers will be in data gathering mode to determine the most favorable approach. On one hand, if the developer steers customers to pay outside of iOS, costs will decline because commissions are no longer paid. That said, costs will not go to zero, given there’s an expense to maintaining a payments platform. Additionally paying customer conversion will go down given the extra payment steps. Humans are of course lazy, and transacting within iOS is easiest. The math for the large developer will most likely come down to a 80% breakeven hurdle. If conversion rates are above 80%, the developer will likely continue to steer. If conversion falls below 80%, they’ll likely transact inside of iOS. If the large developers have the brand to drive greater than 80% conversion, Apple may consider lowering the 30% take rate to win them back. In the end, I believe it’s unlikely we see any commission rate changes over the next five years. If I’m wrong, I see a floor of the large developer commissions at 15%.
Judge Rogers left an ace in Apple’s pocket, granting the company the option to implement an “Apple Tax” to manage any negative impact from steering. In theory, Apple could charge an App Store listing fee. That said, the annual listing fees for larger developers would have to reach tens of millions of dollars in some cases to offset a commission reduction. Which begs the question, would a regulator consider it unfair for one developer to pay a high listing fee and another to pay a nominal fee? Either way, the Apple tax option is directionally positive for Apple to maintain favorable long-term store economics.