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Loup TV: Apple’s “Far Out” iPhone 14 Event

Loup TV: Apple’s “Far Out” iPhone 14 Event

After a day of letting Apple’s Far Out event marinate, Gene shares his takeaways, including:

  • iPhone 14’s Emergency SOS with satellite connectivity: This is a technological step forward for Apple and marks the first sleek form factor satellite offering apart from GPS. Use cases: emergency workers, people in the backcountry and also a safety net for network quality issues in urban areas.
  • Watch Ultra: Apple took a page out of Rolex’s marketing and elevated Watch’s advertising with extreme use cases like deep-sea scuba diving, marathon athletics and extreme sports.
  • Product pricing maintained across the board: One of the great things about Apple is their excellence in navigating supply chain even in a climbing cost environment.
Apple: A Masterclass in Refinement and Innovation

Apple: A Masterclass in Refinement and Innovation

Apple’s Fall iPhone event stuck to the company’s Playbook for Success. Take a loved product, progress its features and refine its look while maintaining its price point. I’m so familiar with the Playbook that I forget it has a tried-and-true track record of inspiring Apple consumers to buy more products as well as fostering new members into the family. Collectively, Apple’s newly announced iPhones, Watches and AirPods should be enough to deliver upside to the September numbers, despite one of the four iPhone models not shipping until October. Looking to FY23, I believe there were enough announcements for the company to slightly exceed the consensus estimate of 5% revenue growth.

The master of refinement

What impressed me throughout the event was that Apple continues to discover new features that enable them to dip into new markets. I’m not talking about the marketing for Watch Ultra with scuba divers and mountain climbers, or the iPhone 14 Pro’s professional-grade camera. Apple’s product marketing inspires the everyday customer to purchase more of its products, similar to a page from Rolex’s book on marketing. I’m talking about features like the expand the product’s reach, like the new Watch battery that lasts for three days, compared to the current less-than-a-day battery, opening the product to a market of people who don’t like charging their watch every day. Separately, the Watch’s new body temperature sensor opens the product to women who want improved cycle tracking. That same feature temp feature can open up a new market around wellness monitoring, letting users know when they are starting to run a fever—a use case the company did not mention. Lastly, the satellite feature in iPhone 14 that will make users feel safer, with emergency message in areas, sometimes urban, that have no cell connection.

It’s worth noting, these refinements are made possible partly because of Apple’s lead in hardware. The company noted that its new A15 Bionic chip is three years ahead of the competition. Even if it were only a year ahead, that’s still a sizable lead in tech, which makes it hard for competitors like Samsung and Google to catch up.

Another product refinement is the”Dynamic Island” feature within the iPhone 14 Pro models. The idea is to centralize the iPhone’s user interface into a smaller, more manageable window. This is a new feature that I’ll likely adapt to and love within three days — which also means that other phone makers will copy it and most likely do a slightly worse job at it. One clever aspect of “Dynamic Island” is it makes the display feel larger. Essentially, the layout of the display tricks the brain into believing that the forward-facing camera is a part of the display. This gives the illusion that the entire screen is a much larger display than it actually is. That’s an example of the attention to detail that makes Apple products great.

First, refinement. Then, innovation?

Some will exit the fall iPhone event thinking: Yet again, this year is just another year of marginal upgrades. Where is Apple’s legendary innovation? I see it different. The announcements today are more than enough for Apple to sustain and grow its $410B business next year at a pace ahead of investors’ 5% growth expectations. While the core business continues to refine and grow, it will fund the company’s next step into a new market, like wearables, health, or auto. Entering into a single one of these three markets would likely more than satisfy investors’ questioning about pace of innovation for the next decade. The auto market is clearly the largest opportunity, with the potential to account for more than a third of the company’s revenue in the next ten years. While we didn’t get any hints about new segments at the iPhone event, details of their progress toward these segments will likely leak in the months ahead, and those product leaks should move the multiple on shares of AAPL higher.

Maintaining price is the new price cut

The biggest surprise of the event was Apple maintained last year’s pricing for all of its new products. I expect the impact of this decision to be positive for revenue and neutral to earnings. For revenue, I believe maintaining prices will be viewed as a price cut by consumers who have been trained to expect and accept higher pricing. This should result in more unit sales and growing overall revenue. Ironically, the iPhone is one product that could weather a price hike because it’s a necessity, yet the company is maintaining its price which consumers will appreciate. As for the rising costs, I believe that Apple will be able to maintain margins despite the cost environment given that, over the past year, Apple maintained gross margins at 43% in the face of vertical increases in the cost of some components, shipping, and salaries. Apple has a way of successfully managing these costs and I expect that excellence will continue.

Recap of announcements

Watch Series 8

  • Pricing: Starts at $399, which is the same starting price for the Series 7.
  • New features include:
    • Temperature Sensor: Announced as expected. A material biomarker used to detect illness and to help improve tracking women’s health cycles. Every five seconds, the sensor measures wrist temperature and tracks it accordingly in the Apple Health app. My take: Third party apps will jump all over this feature in the years to come.
    • Car Crash Detection: If detected, emergency services will automatically be notified and emergency contacts will be alerted. My take: it’s going to save lives.
  • Now accompany pre-existing features: Heart Rate, A-Fib, Blood Oxygen, Gate Monitoring, and Fall Detection.

Apple Watch Ultra (new)

  • Pricing: $799, the Goldilocks price. It’s high enough that profitability will be better than Series 8, but low enough that consumers will still stretch to buy it.
  • If you want to hike Antartica, scuba in Borneo, or simply go shopping — it’s a must-have. My take: If you want to get it or gift it before the holiday, best to order soon. I expect this model to be in short supply this Fall.

AirPods Pro (new)

AirPods make up 5% of Apple’s revenue. This was the least exciting of Apple’s announcements. The product is less of a luxury and more of a necessity if you ask any gig worker. My take: They’re keeping AirPods relevant.

iPhone 14 and iPhone Plus (new)

  • Pricing: $799 and $899, respectively.
  • New features include:
    • Satellite Connection: Apple is pitching this use case as Emergency SOS, but we think it’s really for emergency texting and the Find My feature. This satellite comes without the bulky antenna which is next-level engineering, and it’ll be free for two years with the new iPhone. I’m betting there will be an annual $30 fee afterward. My take: Its appeal will reach beyond backpackers, to anyone who wants to feel safe.

iPhone Pros and iPhone Pro Max (new)

  • Pricing: $999 and $1049, respectively. They basically kept pricing the same, which should be a comfort to investors that iPhone growth will continue. For the September quarter, the Street is looking for 9.5% y/y growth. For December, 1.1%. I feel comfortable that Apple will meet (or exceed) those numbers.
  • New features include:
    • Dynamic Island: A micro-control and message window set at the top center of the iPhone. The idea is to centralize the iPhone interface into a more manageable window. My take: Dynamic island will change how we use our phones. Getting right to what we want faster. iPhone owners are going to love it.
    • 48MP Camera with Ultra Wide, ProRAW, and Action Mode: The next logical step up from last year’s camera. Apple’s approach: sell to the professional, win over the everyday user. Rolex uses a similar game plan. While camera geeks may point out that the 10X zoom camera on Samsung Galaxy is better, that doesn’t matter much. Apple sells their specs infinitely better than Samsung does. Even more than a decade later, Samsung still struggles to hit the nail on its smartphone marketing. My take: Another page out of Rolex marketing by focusing on the inspiring use case to make everyone want the product. After all, aren’t we all pros?
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AI Day Primer

AI Day Primer

Tesla’s second annual AI Day is coming up on September 30th. While the event is primarily geared toward recruiting talent for AI, software and chip development (confirmed by Elon on Twitter), it serves a second purpose of outlining the company’s progress and long-term vision on the topic.

Last year’s event was focused on FSD and featured the announcement of Optimus, the humanoid-robot, so we are expecting a similar order of operations for this month’s event.

The takeaway

AI Day II is already a win for Tesla. As investors, we believe that AI Day will be combination of hard-to-understand technical jargon along with optimistic comments from Elon regarding the timeline of FSD. In the end, many—potentially including ourselves—may leave the event thinking there was little new added to the story. That takeaway misses the point: Autonomy is coming, and no other automaker has made the progress that Tesla has in advancing its potential. Eventually, Tesla will get it right and FSD will ship. And, once again, the company will be years ahead of its competition.

Where is FSD today?

The promise of Level 5 FSD has been on the table since 2018, when Musk said that FSD would be “safer than humans,” enable drivers “to fall asleep” at the wheel and deliver passengers “without intervention.” Musk also claims that, eventually, the cost of FSD will be “less than the subsidized value of a bus ticket.” While we believe this will be true in the future, today, the software is still at the L2 conditional automation, a light year gap to L5 and costs $15k.

We estimate that there are about 100k FSD betas on the road since its launch in October 2020. These beta testers are part of our estimated 400k FSD owners total, with 75% of those based in the US. This implies about a 20% adoption rate life to date.

While there is significant work to be done in order to ramp the current FSD beta to Full Self-Driving, Tesla just released an update (10.69.1) that includes improved speed while entering highways, improved driving smoothness, better prediction of the trajectory and speed of objects, better navigation around forking lanes and reduced false slowdowns near crosswalks. 

The March of Nines

We believe that the latest updates underscore how even some of FSD’s basic driving behaviors still need refinement. This begs the question: How reliable does the technology need to be before lawmakers fully support it? We believe it comes down to the “March of Nines” theory, suggesting that an autonomous vehicle needs to be right 99.9999% of the time—or, involved in a single fatal crash for every 85 million miles driven—for it to be as safe as a human driver.

This theory is weighted by the importance of the corner cases, which are extremely infrequent events on the road. An example of a corner case is a highway sign falling down in front of a moving car.

The belief in the March of Nines tempers the willingness of lawmakers to pave the way for FSD. But, AI Day is a chance for Tesla to present why such cases are less relevant and that improving the software will save lives.

Getting geeky, the workings of FSD

For starters, it’s about the data. Since 2015, the company has been collecting actual miles driven data and, as of December 2018, collected 1B miles. By 2020, we estimate that Tesla hit 2B miles of data collected compared to Waymo’s 6.1m miles reported the same year.

When Tesla says its “collects” data, it means it’s capturing gateway log files (seatbelt, AP, cruise-control, speed settings, brake usage, steering input), stored in the vehicle’s event data recorder (EDR), and data records of FSD/AP enabled vehicles. Video is submitted to Tesla when a corner case is observed. The data is stored on a small 8GB chip, according to Spectrum IEEE, and sent back to Tesla over mobile data.

One reason why Tesla’s approach to solving FSD is different than other companies (like Waymo that uses Lidar for its L4 software) is that Tesla’s 7nm D1 chip, Dojo, learns primarily by camera images. Dojo takes in various inputs including singular snapshots of a scene, a bird’s eye view and vector space (the conversion of 2D images into a digitized 3D space) to conduct its AI training. Dojo then makes predictions based upon the movement of objects in the 3D image and self-checks its predictions. This process is repeated, again and again, for the purpose of learning pattern recognition and improving prediction accuracy. Then, Dojo can implement actions such as braking at a crosswalk for pedestrians.

In order for FSD to go mainstream, additional step functions in Dojo’s efficiency will be required. While the company has been clear that all Teslas made today will not require a hardware update for full autonomy, we are betting that additional hardware upgrades will be needed in the future.

In terms of privacy

While the data collected by Tesla is said to replace VIN numbers with temporary, generic IDs, it is possible to temporarily disable collection of personal data (Software > Data > Sharing) on the Tesla dashboard. The only way to fully deactivate Connectivity is to contact Tesla.

A chance to address its critics

AI Day is also a chance for the company to address FSD critics, including:

  • NHTSA: Currently assessing the performance of Autopilot in nearly 830K Tesla vehicles to better understand “the role that the Cabin Camera plays in the enforcement of driver engagement/attentiveness.” Last month, the organization issued a statement that the technology is far from reliable and that “no one should risk their life, or the life of anyone else, to test the performance of vehicle technology.”
  • Ralph Nader: Called the company’s release of FSD “one of the most dangerous and irresponsible actions by a car company in decades.”
  • The Dawn Project: Implied that FSD makes 1000X more critical errors than human drivers (which is a a difficult claim to prove, in our opinion.) Tesla has since filed a cease and desist letter to founder Dan O’Dowd for “disseminating defamatory information to the public regarding the capabilities of Tesla’s FSD technology.”

The Toy Department: Optimus

It’s worth noting that Musk hinted we may have a working Optimus prototype by September 30. While the odds of seeing a working prototype at the event are low, we view Tesla outlining its long-term obstacles related to the humanoid opportunity as time well spent given the size of its addressable market. In a nutshell, that market would be defined as physical labor. The initial industry that Optimus would likely disrupt is US manufacturing jobs that account for about 10% of labor, or about $500B in annual wages. The global market for physical labor is many times larger than US manufacturing labor. It’s a massive market, even bigger than the $2.5T in annual global car sales. We will continue with more about Optimus after AI day.

Autonomous Vehicles, Tesla
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