Monday Notes: Neo still sinking in

260 million Mac users? Huge room for growth.

It’s a massive untapped opportunity for Apple, whose Mac installed base of 260 million units lags far behind the iPhone installed base of 1.5 billion units. Mohan believes the total addressable market for the Neo could be $32 billion for 2026. If Apple can capture just 10% of that market for budget laptops, and do so with a 19% operating margin, the company can boost earnings per share by an incremental 3 cents, according to Mohan.

“We see Neo driving meaningful adoption for first-time Mac owners with a distinct customer base relative to the Air and Pro models,” Mohan wrote.

The Neo will dramatically disrupt competitors in the market for budget personal computers, Seaport analyst Jay Goldberg wrote in a Monday note, as the $500 to $700 price tier is one of the most profitable segments for PC makers. Both Mohan and Goldberg have a buy rating and $320 price target on Apple’s stock, implying over 20% of upside from current levels.
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As Apple expands into the budget computer market, the company is also looking to seize share from its smartphone competitors during a period of memory crunch. Artificial-intelligence infrastructure is gobbling up so much memory that many suppliers have sold out their capacity through at least next year. That has an impact on makers of consumer hardware that also count memory as a key component.

Apple has been paying a premium to buy up memory chips in what Goldberg believes is a “is part of a deliberate strategy for the company to tighten conditions for its competitors.”
This strategy forces competitors to either raise prices for customers or reduce the memory content in their products, according to Goldberg. Meanwhile, he believes Apple intends to maintain both the memory content and pricing of its phones, allowing the iPhone maker to gain share even as the overall phone market shrinks by roughly 10%.

This strategy “will not come cheap for Apple,” Goldberg warned, noting that Apple’s product gross margin could sink to the low-30% range from the high-30% range seen a year ago.
“That said, we think the company can make up for some of this lost ground through its share gains,” he wrote, as new Apple users are likely to subscribe to Apple’s higher-margin subscription services to offset the hardware costs.

Mohan expressed similar sentiments, arguing that the Neo could lead to a stickier overall installed base for Apple and “increased services use over time.”

Source: MarketWatch

NB: Two analysts, two stories. The Neo will move the needle and the supply crunch will hamper competition…

…These are not shattering news but the narratives are beginning to diffuse into consensus. I still take issue with Goldberg's assumptions about margin. Pricing can be very volatile but Apple is also the best at securing the best deals. So far the company has guided margins higher not lower. We will get an update in a few weeks.

On the topic of Neo, the eyes should be on the growth in install base. The only indicator we have is the "50% new to the product" indicator every quarter. Management needs to update with some qualification of that measure. Look for "above 50%" when the Mac data is on deck.

 

As I wrote before, the key metric is the number of Mac users. 260 million is a reasonable assumption. Over 350 million Macs have been sold in the last 20 years. If we assume half are new to the platform then 175 million have been added. The base in 2006 was probably in the 50 to 60 million range putting the total today at 250 million.

It's a long way to go to 1 billion Mac users and I don't know if it will ever happen given that most will have to switch from Windows and the lock-in is strong regardless of a better and cheaper alternative being available.

Nevertheless, a doubling of the Mac user base is certainly a worthy and achievable goal over the next decade.