Apple‘s ( AAPL -2.66% ) recent hour-long event gave it the chance to highlight multiple upgrades to its devices, but some were more noteworthy than others. In this podcast, Motley Fool analyst Tim Beyers discusses:
- How the new iPhone SE indicates Apple’s unwillingness to cede market share to anyone.
- Pricing the Max Studio desktop for a small consumer base.
- The “super chip” powering the Max Studio.
- Live sports being added to Apple+.
He’s also got a look at Netflix ( NFLX -2.74% ) taking a “never say never” approach to ads on its platform.
Motley Fool podcast producer Rickey Mulvey moderates a “bull vs. bear” debate between Motley Fool contributor Matt Frankel and Motley Fool analyst Jason Moser over Block ( SQ -6.95% ), the company formerly known as Square.
To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on March 9, 2022.
Chris Hill: Today on Motley Fool Money we’ll help you make sense out of all the headlines from Apple’s big event. We’ve got a debate over one of the leaders in FinTech. That and more coming up write-down. I’m Chris Hill, joined by Motley Fool Senior Analyst Tim Beyers. Thanks for being here.
Tim Beyers: Thanks for having me, Chris!
Chris Hill: Apple had their event yesterday, and as typically happens, and a lot of, if not most of what we’ve heard was not new products, it was incremental upgrades, but a couple of headlines on the product front, the iPhone SE, which I guess is now the low-end version of the iPhone for $429, and the Max studio desktop, which appears to be aimed at professionals. I say that based on the price points, I mean, this is a new desktop with a 27-inch monitor, and depending on how many bells and whistles you want, you could very easily drop $6,000 on this thing, will get to both of them. But of the two, is one more significant to you in terms of Apple’s business and the bottom line and what it means for shareholders. Through the lens of investors, what’s the headline of yesterday’s event?
Tim Beyers: The iPhone SE is Apple throwing its weight around and saying, just in case you thought that we were going to see any market share in the smartphone market? No. We’re not doing that. We’re not doing that, and here’s the thing, Chris, the iPhone SE 3, I really think of the iPhone SE model line, and you could make a strong argument against this, so this is the argument I’m going to make. I think of this as the mainline iPhone. I don’t think it’s the bigger models. I think this is the one because it is a reasonable size, not too massive, but it’s very powerful, very compact, much more affordable, has a really great camera, it takes all of the same apps, it’s an amazing product. For the upgrade cycle, and Apple has this, Apple has a known iPhone upgrade cycle. Every couple of years, they do a bit of refresh, and this is one that I think is well-timed, well-priced, and packs a lot of features in it. This is the one that really matters for Apple’s business, in my opinion, because the iPhone is still a massive driver of profit for Apple as a company, it’s going to be that way for a very long period of time, creating a very accessible iPhone that anybody can get behind and have as their remain iPhone for a lot of years. I think it’s core to Apple’s business, so even though it’s an upgrade, like you said, Chris, I would count this one is a fairly big win. I’ll pause there because I have some things to say about the back studio.
Chris Hill: Let’s talk about this. Joanna Stern from The Wall Street Journal is probably the best out there in terms of consumer tech, and she put together a great five-minute summary video of the event. I have to confess when I was watching it, I had to pause it to look at this desktop to really wrap my head around what this device was. Once I did that, then all I could focus on was the price. The baseline price is $2,000. If you want the souped-up diversion, it’s 4,000. The 27 inch monitor, $1,600, and if you want to higher-end version, it’s $2,000. What is the addressable market for a $6,000 desktop computer?
Tim Beyers: You assumed it was for professionals, I will just go ahead and say super villains. Because this thing ought to come with a volcanic layer. It is ridiculous how powerful this thing is, and we will get into the Ultra chip, but basically, this computer is the home for the Ultra chip, which the Ultra chip is absolutely insane. Apple has really been flexing its muscles around chip design, so the M1 Ultra chip is, I mean, Tom’s Guide calls it a new super Chip. I think that’s right to call it that, 20 core CPU, 64 core graphics processor attached to this 32-core new role engine. In other words, really fast, way more power than most people really need. Yes, it will be for the enthusiast market. This will be for people who really want to do fancy things with their Max, if there’s not going to be a ton of people who buy this. But I think there is such a thing in-tech as a statement product. This is a statement product, the Max studio is a statement product. Again, just like the iPhone SE 3, just in case you thought we were going to let others encroach on our market share? No. The Max Studio is just in case you thought that there are some others out there who are making really supremely fast chips, and they can build a faster, more functional desktop than we can? No.
Now, that is not to say that there aren’t really amazing desktops out there. Dell is a great example. Dell Alienware desktops are in meds. There are really impressive formatted Windows PCs out there, no doubt. But this one is going to be right up there with them. It is a statement product for Apple, and I think what it’s intended to do, Chris, is get people to notice like, wow, OK, maybe I need to take a look at the new set of max, maybe it’s time for me to upgrade. Its a little bit like, you don’t go to a car show, it’s not like, yo, yeah, I’m going to buy the new concept GT. But does it get you thinking about Ford? Yeah, it does.
Chris Hill: Before we get to the sports angle here, and I do want to spend a minute on that, just in terms of everything else at the event, did anything surprise you?
Tim Beyers: I would say the Mark studio did surprise me just at the scope of the statement that they are making here. The ultra chip, I really shouldn’t be surprised by that but just the sheer functionality and sheer horsepower. Apple really is trying to establish itself as a dominant designer of chips and trying to get people to see that there are real benefits because of the sheer power of the M1 family and the bionic family in the iPhone, there’s real power in going with Apple hardware because it’s self-contained and it’s incredibly powerful. I really shouldn’t be surprised how much Apple is throwing its weight around but honestly, I was a little bit surprised the only other thing I’ll say is the new iPad Air is just that’s another one that it’s just going to quietly do a lot of things that are incredibly impressive in a pretty small format. I think that Apple is just trying to remind people that we make some of the best hardware in the world and ever since we decided to do it ourselves, our hardware got better. You could argue that but I think that’s the argument that Apple is trying to make.
Chris Hill: Almost as an afterthought, as a throw-in, Apple dropped that they are getting into live sports.
Tim Beyers: Yeah.
Chris Hill: Now, they’re doing it with Major League Baseball streaming games on Friday nights. That would be even better if the Major League Baseball owners hadn’t locked out the players and there were actual spring training games being played right now but to the larger point, we’re finally here. That was one of my thoughts when I was reading through this stuff, I thought we’re finally at the point that has been theorized for at least five and probably closer to 8-10 years that Apple is getting into live sports.
Tim Beyers: Yeah, and I would be more excited about this first if there was actual baseball right now, so that’s number one, but number two I would be more excited if it wasn’t baseball which sounds terrible because it’s not that I don’t like baseball, I do but I think that Major League Baseball’s ratings and its appeal has been a little bit on the decline and some of that has to do, which is the nature of the game, I don’t think the way the games are like we had just this past season, we had the whole thing around, what is a legal substance on the mount for a picture to throw and there was just a whole bunch of controversy and a lot of madness and nobody really had a clear answer.
This mass inside Major League Baseball makes it an interesting but really weird time for Apple to spend a lot of money on this. I think it’s a bigger deal, I will give you let’s say the NFL is off the table but if it’s like college football or the NHL or Major League Soccer even. I think that would be a little more interesting because then you’re picking up a niche audience and then doing testing and you’re allowing yourself to build around that but I will say this, Chris, I mean, we’re not seeing the end of this. A lot of companies will be watching very closely how Apple performs with a streaming deal for live sports because that has traditionally been the purview of regular over the top or cable and do the streaming providers start to own these deals? I don’t know. But I think there’s going to be a lot of people watching.
Chris Hill: Speaking of streaming video late last week, Disney announced or rather confirmed that later this year they’re going to offer an ad-supported tier of Disney Plus, and now Netflix isn’t rolling it out. CFO Spencer Neumann was at Morgan Stanley‘s Conference on media and technology. He was asked if the company was ever going to change its position on being ad-free and he said, ” Never say never. It’s not in our plan right now but never say never.” If you’re a shareholder, do you want them to offer this?
Tim Beyers: No, I don’t. I love that Spencer gave the Mike Tom one answer. For those who don’t know this quote it was the Pittsburgh Steeler’s quote when asked whether or not he would take the USC job, he said, “Never say never but ever.” It was like that, I like that it was the Tomlin answer. I think there’s good reason for him to be skeptical and not try to feed the beast too much here. His additional comments were about like it’s a little bit hard for us to see others doing this but essentially the points he made was, we’re not going to rush into this and I’m glad to hear that because I think there is a better model for Netflix that fits with their culture. This is what I mean by that. Instead of an ad model where everything is essentially the same, you just have a lower-tier price point and you still get all of Netflix but you got to watch some ads.
Netflix’s brand has been a tailored experience for me or you as a consumer. If you want to best around with this and have lower-priced tiers, then create lower content tiers to go with those price tiers where you can start experimenting with what you know about me as a consumer and allowing what you know about me to give me options for subscribing at different price points. Without introducing ads, just keep ads off the platform but you just create other ways for me to engage with Netflix. They have all of the data to do that. They’ve just decided one price point for simplicity sake and then they tinker with it around the world but they could do a lot more tinkering Chris, before they decide to do any advertising model. I think that would be better for them. I really don’t want them to go down this path.
Chris Hill: Tim Beyers, great talking to me as always, thanks for being here.
Tim Beyers: Thanks Chris.
Chris Hill: Back by popular demand, it’s Bull versus Bear. Debating the company formerly known as Square. No more rhymes. To get things started here is Ricky Mulvey.
Ricky Mulvey: Thanks Chris. This is Bull versus Bear, where you hear the Bull case and a Bear case for a stock and decide who made the better argument. Stay the stock is Block analysts, Jason Moser and Matt Frankel. Gentlemen, this is a stock that you already own.
Matt Frankel: Yeah, I found this since just after the IPO.
Ricky Mulvey: Jason, feeling a little pressure to make the bear case then.
Jason Moser: It is a little pressure. Listen, I appreciate the coin flip nature of it, but yeah, I mean, we got to reiterate. I do still own the stock and frankly, I’ve recommended it to members of the service too. So don’t everybody jump the gun. This ought to be fun just to debate both sides of the case regardless.
Ricky Mulvey: If you’re buying a stock, you also want to know why someone is selling it to you, so it’s important to understand the bull and bear side of it.
Jason Moser: That’s a good point.
Ricky Mulvey: We will get started. Matt Frankel has the bull case. You have two and a half minutes.
Matt Frankel: I’m more excited to hear the bear case because I always say if you don’t know the bear case, you haven’t done enough research yet. But let me run down the reasons why I own Square. There are companies that do what Square does piece by piece. There are other companies that provide low cost payment processing hardware, for example. There are companies that provide person-to-person payment apps. There are companies that allow you to buy Bitcoin. There are companies that facilitate projects on the blockchain networks and things like that. There aren’t as many companies that have an ecosystem field to the entire thing. Square has the Cash App ecosystem, which is 44 million active users, has functionality such as Bitcoin purchases, brokerage. You can buy stocks through the Cash App now. You can have a link debit card which Square has monetized the Cash App with. There’s a lot of future financial products that are likely on the horizon. Block just recently became a bank itself. They open Square Financial Services, which is its commercial bank.
We could see some more financial products come down the pike. The economics of the Cash App business is fantastic. Then listen to this. For a $10 average customer acquisition cost, the average active Cash App user generated $47 of gross profit last quarter. That’s a really great return. The seller ecosystem, which still is called Square, the Square name didn’t die entirely, has over $170 billion of annualized payment volume, which it gets fee income of. It is a big lending operation which was called Square Capital, but now is part of the bank I just mentioned. This could just be the starting point. Just to give you a number, PayPal has $1.3 trillion, trillion with a T, of payment volume through its network. It’s estimated that the total payment volume flowing around the world is about a $185 trillion when you consider things like person-to-person and business-to-business payments. It’s not just the seller in Cash App ecosystem.
I mentioned Bitcoin, Block recently acquired Tidal, the music platform, which it can really leverage in a bunch of different ways with both of its ecosystems. It has a blockchain business with a really complicated name, that is escaping me right now. It just acquired Afterpay, the big buy now pay later service, where it added over 16 million customers and 100,000 retailers to its ecosystem, many of which were in Australia, which is one of Square’s expansion markets. Because it bought it at an all stock deal, once where Block stock price dropped, it actually got a better deal on Afterpay, which I like. Very profitable gross profit at a 50 percent annualized rate for the past five years. It’s running at a net loss right now, but that doesn’t really matter when you have growth like that. It’s not really losing money, it’s just a small net loss. Jack Dorsey recently resigned to CEO of Twitter so now he is exclusively focused on Block, has a great leadership team in board. Square’s board is ranging from former CEOs to the former Treasury Secretary of the United states on the board. It’s a really impressive company.
Ricky Mulvey: Jason, the bear case or some of the risks for the company, if you will.
Jason Moser: Some of the risks, the bear case, however you want to phrase it, I’ll focus on three points here. Like a lot of what Matt said, I think with leadership that first and foremost, I think leadership and Jack Dorsey, do you have to be aware of the founder leader? Because that can be the sword that cuts both ways. Jack Dorsey still owns about 8.5 percent of the shares, co-founder of the business, CEO, as Matt said. He did step away from Twitter, so he’s devoting his sole attention to Square, to Block now, which I like that. But Dorsey is also a bit of a wildcard at times, I mean, he sees himself more as a talent finder and enabling leaders to run the company and then he goes off on tangencies. He’s got a little bit of a unique world view there. Remember he was talking about moving to Africa for a year at some point? I mean, how does that impact the company? How does that impact your team? I just don’t know. I mean, you know the old saying, out of sight, out of mind.
We’re seeing this push and pull of big tech wanting to go back to the office. Dorsey’s saying you can work remotely forever. His successor at Twitter, taking a bit of a different view there. Bottom line, it’s not say Dorsey makes the bear case, but there’s an unpredictability attached to him that could tilt things in that direction. I would just remind listeners to think back to Under Armour and Kevin Plank, I think you get very similar dynamic there. He was a big part of the bull case and also a big part of the bear case. I think Jack Dorsey, he assumes that same role here with Block. In regard to the business itself, the second point I’d like to make is just on diversification. That old Peter Lynch saying there, when a company starts going off to all different directions and not really focusing on its core competencies. I’ve loved the Square and the Cash App side of the business. But then you see the Tidals, and the Spirals, and the TBD, all the stuff focused on crypto and Bitcoin. It raises some questions.
I mean is the focus solely on Bitcoin the right way to go or does Bitcoin make this business look better than it really is? I mean, if you look at just this most recent quarter, Bitcoin revenue, $1.96 billion, that was up 12 percent, but Bitcoin gross profit was only $46 million, so it’s only two percent of the coin revenue. Is the juice worth the squeeze there? I don’t know. If you’re a crypto skeptic, it’s something worth keeping in mind. Then finally, I think regulatory risks are something to keep in mind. This is a much different company than it was five years ago. There are a lot of moving parts now, as Matt noted, but you’ve got the Square Financial Services, so they’re essentially now subject to banking regulations. You’ve got the Cash App operating as a broker or dealer, they answer to the SEC and FINRA. It’s just a bit of a different company today than it was five years ago. That regulatory risk has ramped up a little bit.
Ricky Mulvey: Matt, do you want to follow up on anything you heard from the bear case?
Matt Frankel: Yeah and I know I went over it last time, so I’ll be quick on this one. I’ve said before that Jack Dorsey succession with Bitcoin and crypto currency is my least favorite part of investing in Square. Not to knock anything about crypto currency or Bitcoin, I just think the other businesses are very promising in and of itself, to Jason’s point of diversification. I treat the blockchain Bitcoin focus, all that as a bonus. The business has enough by itself, if anything comes off the Bitcoin and blockchain area of it, great. But if not, I still think it’s a great business. Jason brought up some very valid concerns, but I like the business regardless.
Ricky Mulvey: Jason, do you want to follow up on anything you heard in the bull case?
Jason Moser: Yes. I mean, the only thing really that comes to mind, I guess I can thank PayPal for this because they brought it to the forefront here recently with their most recent quarterly report. I wonder if at some point we won’t see Block talk more about the quality of the users in their Cash App ecosystem. I mean, that was something that PayPal brought up. They kept on growing these users to just these astronomical levels. But then they came back a few quarters later and said hey, it turns out that we have all these users but only a few of them are really quality users. Essentially the majority of the revenue is tied to a third of the user base, and so they focus more on higher quality users going forward for PayPal made sense. It makes me wonder if we won’t see that same dynamic play out for Cash App at some point. I looked at myself, personally I have Cash App on my phone and frankly, I think I’ve got like a $20 balance in Cash App, but I’ve also not used Cash App in probably two years. Technically I guess I’m a user, but there’s no way I’m a quality user, and so I wonder if we won’t see that same dynamic play out with Cash App, that would be just something we’re keeping in mind, watching in the next several quarters.
Ricky Mulvey: Question for both of you on that end, as a user, do you like using the Cash App or Venmo more? We’ll start with Jason.
Jason Moser: I were Venmo family. We all use Venmo here. My wife, kids, myself, we’re Venmo or PayPal. We’ve tried Square Cash App, I mean, we did, just Venmo was what ended up sticking, and I think part of it has to do with so many of my kids’ friends use Venmo. It was just a little bit more of a filming your interface. We are Venmo family.
Ricky Mulvey: Got some network effect. Matt, how about you?
Matt Frankel: I actually didn’t adopt either of them till about a year ago. I’m the old guy of the group, I guess in that sense. But I use Venmo more than I use Cash App, I will say that much. But I’m an active user of both.
Ricky Mulvey: @MotleyFoolMoney on Twitter. There you can vote on who made the better argument. Matt, Jason, both of you are shareholders in Block, correct?
Jason Moser: Correct.
Matt Frankel: Absolutely.
Chris Hill: Like Ricky said, let us know what you think. Go to our Twitter feed, @MotleyFoolMoney and cast your vote. That’s all for today. But coming up tomorrow, a closer look at the industry in everyone’s spotlight right now, oil. As always, people on the program may have interest in the stocks they talk about, and the Motley Fool may have formal recommendations for or against, so don’t buy yourselves stocks based solely on what you hear. I’m Chris Hill. Thanks for listening. We’ll see you tomorrow.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.