Apple is a really big company. Apple makes a lot of money.
Last year, Apple made nearly $100 billion in free cash flow.
That's amongst the top earning companies in the world.
Apple got this big and makes this much money not only because
they make good products and services, but also because they
have constructed an illegal monopoly over the past decade.
An ecosystem of products and services that work together and
force out competition. A monopoly that serves Apple and
Apple's profits but does not serve competitors or customers.
That is the argument that the Department of Justice is making
in their new ground breaking lawsuit against Apple.
Apple doesn't agree with the DOJ's characterization of their
success. Apple says this lawsuit
threatens who we are and the principles that set Apple
products apart in fiercely competitive markets.
If successful, it would hinder our ability to create the kind
of technology people expect to see from Apple where hardware,
software and services intersect. Apple also believes that the
Department of Justice is overstepping their boundaries,
not only trying to regulate Apple, but now trying to design
consumer products, saying quote, it would also set dangerous
precedent empowering government to take a heavy hand in
designing people's technology. So in this episode we'll be
going over both sides of this case, both the 88 page lawsuit
filed by the Department of Justice and Apple's likely
rebuttal. I'll be giving you some thoughts
on whether or not this is a buying opportunity, a bump in
the road for Apple or whether this presents a long term risk
for the company. So we have a lot to get into
this episode. We're going to be breaking down
all of that. There's also a couple other
things we have to get to in this episode.
There's a new company to the stock market, Reddit IPO D
yesterday. It's so new that Qualtrum
doesn't even have a logo for it. Regardless, we have some of the
early financials of the company, the revenue, the EBITDA, the
cash flows and the shares outstanding.
We'll be doing an analysis on the financial situation of
Reddit and we have another upgrade for Google.
It is now the best idea for Woodbush, which says that the
threat to Google search is overstated.
We'll be looking at their arguments of why they have
Google as their best idea. Let's first dive into this Apple
lawsuit. The first thing I want to
mention is that I really like Apple.
I like it as both a stock, but also as a company.
In fact, I've always liked Apple as a company.
I think they make fantastic roducts.
I like just about every single thing Apple makes.
I have an iPhone. I have an Apple Watch.
I have tablets. I have Macbooks and I have the
Apple TV. My favorite part of Apple
products is not just the hardware.
I do think the hardware is good. Apple, for example, was one of
the first companies to make a laptop that had a really big
trackpad and it worked really well.
I remember using PCs before switching to the MacBook, and I
just noticed that the trackpad was so much bigger and better.
It tracked better, it just worked better all around.
I remember the keyboards, the keys on it were just better.
The screen had a higher resolution, the speakers were
louder and clearer, and the battery life was better.
I was impressed that basically every part of the design, it was
superior to the PC that I used to use.
After buying a number of Apple devices like this, I became
convinced that this company was intensely focused on the quality
of products they were designing. They wanted to be differentiated
by the quality from the competition, but after using
Apple products for a while, I realized that the real value in
them is not simply the incredibly good hardware, but
it's the seamlessness in which their hardware works together.
Every Apple product is like a different form factor of the
same overall product. The Apple ecosystem, every
product, whether it's the iPhone, the iPad, the MacBook,
the iMac, all of them work seamlessly together.
All of your notes sync on the Notes app perfectly.
All of your photos sync on the photo apps perfectly. iMessage
works perfectly amongst every device.
FaceTime works perfectly amongst every device every single time,
without fail. It's true that Android has
syncing capabilities across their devices, but it never
seemed to work quite as good. It never seemed to work and
function the same way as Apple's, and part of the issue
for Android is it's so open, supporting so many devices, so
many form factors that it's difficult to support everything
and be seamless and work Florida State.
At the same time, the closed ecosystem of Apple is part of
the strength that has allowed it to build this seamless
experience for its users. A completely open ecosystem
that's forced to support anything and everything,
thousands upon thousands of different devices has a much
more difficult time building out the same seamless experience
that a closed ecosystem does. And ALE has proven that overtime
O. When I look at ALE as a company
and the value proposition offers to consumers, I see it as
twofold. They build incredibly good
devices just on a 1 to 1 measurement of the device and
the capability, the build and the form factor.
I think they build very good devices.
The other half of their value proposition to consumers is
their incredibly smooth, functional, cohesive, flawless
ecosystem where every device works seamlessly one to another.
When you're in the Apple ecosystem, it's as if you bought
one big device and every part of it is just a different form
factor. These two different value
propositions combined both the high quality product and the
high quality ecosystem is an incredible value proposition.
And that's why you see so many people choosing Apple and
they're expensive devices over the cheaper alternatives.
Time and time again, people choose Apple routinely over
their competitors. So that is how I view Apple.
I don't view it as a perfect company.
I don't believe that it's without flaw, but I view Apple
as an incredibly good company amongst a lot of inferior
companies. The way that Apple has executed
its plan over time and the value proposition offers customers, I
think is unparalleled. And it must be said that my view
on this is not unique. Apple routinely has been rated
one of the top most liked companies by customers,
typically within the top five Customers love Apple.
Customers love Apple products. They gravitate to this ecosystem
because they like the experience.
This has been reinforced by study after study after study.
But as always, there's two sides to every argument and the DOJ
does not see things this way. They believe that Apples
ecosystem in particular has been instrumental in forcing
customers to use Apple over competitors and boxing out
competition. That is the basis of this
lawsuit. This lawsuit is intensely
focused on the Apple ecosystem, with the core focuses being the
App Store, the Wallet, the Watch, and iMessage.
These are different factors of Apple's ecosystem that work
better with Apple than they do with other devices.
Now, we can go into each of these, but it's important to
know that this lawsuit hangs on a lot of statements that I would
say are subjective or even false statements.
They're they're based on opinion, and I think the opinion
of the DOJ is simply wrong here. For example, on paragraph ten of
the opening introduction, they say that this complaint
highlights 5 examples of Apple using the mechanisms to suppress
technologies that would have increased competition among
smartphones. Suppressing these technologies
does not reflect competition on the merits.
Rather, to protect its smartphone monopoly and the
extraordinary profits that monopolies generate, Apple
repeatedly chose to make its products worse for consumers.
To prevent competition from emerging, Apple repeatedly chose
to make its products worse for its own customers to prevent
competition. That is quite the claim on the
sub argument here they mentioned super apps.
Super apps provide a user with a broad range of functionality and
a single app. Super Apps can improve
smartphone competition by providing A consistent user
experience that can be ported across devices.
Suppressing super apps harms all smartphone users, including
Apple users, by denying them access to high quality
experiences and harms developers by preventing them from
innovating and selling products. This first allegation from the
DOJ that Apple denies access to super apps seems like they
didn't do their homework or they are grossly misinformed.
Apple has no ban on Super Apps. They support the biggest super
app on their phone, which is WeChat in China.
In the US you have meta which supports messaging, payment,
commerce, all in They say cloud streaming game
apps could provide users with ways to play computing intensive
games in the cloud. Cloud streaming games, and cloud
streaming in general, can improve smartphone competition
by decreasing the importance of expensive hardware to accomplish
high compute tasks on a smartphone.
Suppressing cloud streaming games harms users by denying
them the ability to play high compute games, and it harms
developers by preventing them from selling such games to
users. Now they outline that
suppressing cloud streaming games is a bad thing, basically
alleging that this is what Apple's doing.
But the DOJ knows that again, this is not something that
Apple's doing. Apple originally denied cloud
streaming games. That was one of the first moves
they made, but they quickly reversed it.
This was over two months ago. Apple is correcting it's
terrible approval requirements for game streaming apps in iOS
17.4 going to be corrected this year.
This is already released news. It's established Apple was
already headed this direction before this lawsuit, so the
first two complaints they launch are a non issue.
We move on to their next complaint centered around of
messaging apps. This is where they get into
iMessage. Messaging apps are apps that
allow users to communicate with friends, family, and other
contacts. Messaging apps that work equally
well across smartphones can improve competition among
smartphones by allowing users to switch phones without changing
the way they communicate with friends, family, and others.
Apple makes third party messaging apps on the iPhone
worse generally and relative to Apple Messages, Apple's own
messaging app, by prohibiting third party apps from sending or
receiving carrier based messages.
By doing so, Apple is knowingly and deliberately degrading
quality, privacy, and security for its users who do not have
iPhones. Apple also harms developers by
artificially constraining the size of their user base.
So this third complaint is centered around the blue bubble
versus the green bubble. We all know we've all been
there. If you're an Apple user, there's
someone in the group conversation that has an
Android, and they ruin it for everyone.
Now everyone has to message the person that has the green bubble
and you no longer get those awesome messaging features.
And I will say that this this does seem like a somewhat valid
complaint from the DOJ. They're basically saying that
Apple's not playing friendly with other phones and it's kind
of degrading the experience for everyone.
And I've, I've been there as well.
I have. I I know someone with the green
bubble and that does create a little bit of awkwardness and a
barrier when you're trying to text someone.
And it doesn't work quite as well, unfortunately for the
Department of Justice and their lawsuit that they launched
yesterday. Months ago, Apple already said
that it would support RCS in 2024.
They said this November 26 of 2023.
So this is something that Apple has released publicly, that
they're going to support RCS, which fixes all of the security
concerns, all of the messaging problems, knowing when people
are typing, being able to respond with emojis, all those
great things are going to be in RCS.
If we're keeping track here, this is the third complaint by
the DOJ out of the top three, which is a non issue.
Apple has already addressed this and is already moving in this
direction. Why is the Department of Justice
raising this like it's a grave concern that needs to be fixed?
When Apple says they're fixing it, they're already moving in
this direction. The purpose of lawsuits is to
compel companies to move in a certain direction.
So why are they suing Apple for something that Apple already
said they're doing? This next argument, I believe,
is especially misguided by the DOJ.
They say that smart watches are an expensive accessory that
typically must be paired to a smartphone.
Smartwatches can be paired with different smartphones and allow
users to retain their investment in the smartwatch when switching
phones, thereby decreasing the literal cost associated with
switching from 1 smartphone to another.
By suppressing key functions of third party smartwatches,
including the ability to respond to notifications and messages
and to maintain consistent connection with the iPhone,
Apple has denied users access to high performing smartwatches
with preferred styling. Now again, they're adding in
subjective claims here. Apple's denying users their
preferred styling because the Department of Justice knows best
what your preferred styling is. They also say that they're
denying users with better user interfaces and services.
That is a wildly up to statement for the DOJ to make.
They can say definitively what a better user interface and
services. There's better user interfaces
and services than the Apple smartwatch.
Now, I'm not going to pretend that I know quite as much about
user design and consumer preferences as the DOJ does, but
I believe the reason that the Apple Watch has dominated every
other smartwatch in the category isn't just because of their
linkage to the iPhone. It's partly because Apple makes
a really, really good watch with a really, really good design
like they do most of their hardware.
The Department of Justice is trying to pass through
subjective opinions as though it's fact certified and proven.
There's better user interfaces and services out there, but you
just don't have access to them because you're stuck with the
iPhone. They've also mentioned that it's
harm smart watch developers by decreasing their ability to
innovate and sell products, which of course they have zero
evidence for. The reason that I mentioned that
this complaint from the Department of Justice is
especially egregious is because there's no legal reason that
Apple has to open up their accessories for their devices to
everyone. This is not a standard that any
other company in the world is required to function by.
There's no requirement that Sony controllers must be compatible
with Xbox, even though they're the largest market share of
gaming devices. There's no other reference or
standard anywhere throughout business that they can use as a
president for this claim. This is simply a unique function
of them targeting Apple with something they're not targeting
any other company with. The argument that every
accessory Apple builds should work equally well with
competitors is a ridiculous claim, and it's also not a
function of how even other phone companies work.
Android watches work better with Androids than they do with the
iPhone. They do preference their own
devices. They work more seamless with it,
as they should. Those are the people designing
the device. It makes logical sense that the
people designing and building and manufacturing the device and
the software have it work better with other things they've
designed and built. The idea that the DOJ has of
taking an accessory device and having it function equally well
with other ecosystems that it wasn't built for is absurd.
The final complaint the DOJ has is centered around the Apple
wallet. This is the thin tech category
of Apple. Digital wallets are an
increasingly important way that smartphones are used and are a
product in which users develop a great deal of comfort and trust
as they typically contain users most sensitive information.
Digital wallets that work across smartphone platforms allow users
to move from 1 smartphone brand to another with decreased
friction. Among other things.
Apple has denied users access to digital wallets that would have
provided a wide variety of enhanced features and denied
digital wallet developers often banks the opportunity to provide
advanced digital payment services to their own customers.
So the complaint is that Apple has one wallet and they keep it
all to themselves in a very anti friendly way.
They just hog all the wallet space to themselves making it
difficult for you to transfer to a different phone.
This would be a very valid complaint if it was launched
over a year ago. From the Apple Developer
website, Tap to Pay on the iPhone.
Payment apps can now accept contactless payment from
contactless credit and debit cards, Apple Pay, Apple Watch,
and smartphones with other digital wallets right on the
iPhone without any extra terminal or hardware.
It seems as though the Department of Justice has been
working on this case for like 3 years, and a lot of the
complaints they came up with originally have already been
solved. Apple may have felt that
pressure and already made some changes.
And the Department of Justice is like, you know what?
We already came up with all of these complaints, even though
Apple has solved them. Let's just launch the lawsuit
anyways. We don't want to throw away all
this effort and time that we put into this lawsuit, so let's just
go ahead and sue them anyway. So in this lawsuit, the
Department of Justice faces a number of challenges, one of
them being the easy Apple defense they can point to and
say, look, all of these things that you're complaining about,
we're basically doing all of them ahead of time Before this
lawsuit was launched, why are you complaining about things
that were already actively moving to fix?
That's one thing they'll be able to point out to the judge.
The other challenge for the Department of Justice is proving
that they are harming customers, that Apple is actively harming
its customer base. It's difficult to prove that for
a company that's so chosen so frequently by its customers and
receive such positive feedback from customers.
Apple have an easy time proving that their customers are
extremely happy with their product.
The Department of Justice has to create a false narrative.
The people only choose Apple because they're locked into the
ecosystem that there's no other preference or reason that Apple
is the preferred choice over Android.
They'll also have to prove that it's a monopoly and that users
of Apple are simply trapped in and they have no choice in the
matter. They can't possibly choose one
of the various other cell phones that exist when there are so
many readily available options and so many ways of transferring
over. I think all of that is going to
be a big challenge for the Department of Justice.
So after looking at the Department of Justice's core
arguments, I think the likelihood of them winning this
case in a meaningful way is very small.
It's very unlikely in my opinion.
I believe the most likely outcome of this is that it is an
overhang on Apple stock. That is something that investors
have to concern themselves with in the back of their mind for
the next couple years. And ultimately, I think over the
next couple of years, most of these concerns will work their
way out. Apple likely won't have to make
any meaningful changes. I believe they'll make a few
concessions here and there. But ultimately, I think it will
have minimal impact on the trajectory of Apple and the
intrinsic value of the company. It is true that most regulation
by the government in an effort to break down big companies
typically further solidifies the incumbents.
That may not happen here, but that could be the outcome.
It's also true that every single time Apple has dipped throughout
its entire history because of regulatory concerns has been a
buying opportunity. Apple has dipped a little bit.
This year it's down 7%. I don't think that's a
meaningful dip. The company's still doing
incredibly well over the past five years, but either way, I
see this as unlikely to impact the meaningful long term
trajectory of Apple. It could diminish the mote
slightly, but I think that's something that Apple's prepared
to deal with. The bigger challenges I believe,
facing Apple is simply its vast size.
The company is already enormous. It already sells 2.2 billion
devices that have active users. It already has so many software
features it's trying to offer. It's tough for a company of this
size to grow in a meaningful way.
I think it's going to be a bigger challenge for Apple to
find meaningful growth paths than it is to defeat this
lawsuit. So As for me, when I look at
Apple and this lawsuit, I view it as a slight negative.
It could cause potential issues. Right now it's bringing down
sentiment, but overall, I don't think it's the biggest factor we
should concern ourselves with, with Apple.
Now, of course, we have to talk about Reddit.
This is the new IPO that happened yesterday, a company
that was founded in 2005, So it's roughly 18 years old.
And we finally get to see the financials of this almost 2
decade old social media company now in Coltrim.
We don't have all the metrics We'll get them in eventually,
especially after the first quarterly report.
But we do have some of the financial metrics here.
We have the revenue of the company, which is kind of
interesting. Reddit actually grew its revenue
rapidly from 2020 to 2023. So they're certainly having user
growth, engagement growth and they're adding in a lot more
ads. You've noticed that if you've
been a Reddit user, in 2020 they did $228 million in revenue and
then the most recent year 2023, they did 804.
So that's very fast revenue growth over a four year period.
I actually like seeing this top line growth for such an old
company, but I have a feeling that most of this revenue growth
was by shoving in a lot of ads. Suddenly over the past four
years, the EBIT of the company has been negative every single
year. In 2023, it's slightly less in
the red than it was in 2022. So I guess that's a positive
movement in the right direction. But they still lost $126 million
in EBITDA. Now of course, we get to the
free cash flow, which I believe is the most meaningful metric
for profitability and it also doesn't look great.
Reddit has been free cash flow negative since 2020 every single
year. 20/20 was -64,000,000, 2020 1 -, 132 million, 2022 -,
100 million and 2023 - 84,000,000.
So we have an 18 year old company that's never generated
free cash flow. We also add in stock based comp.
We have to make sure these employees and executives get
their payday. While the company is losing cash
flow, it is paying its executives and employees
handsomely with stock based compensation.
In 2021 we had 149 million, they paid more in stock based comp
than they lost in free cash flow.
In 20/22 it was 55,000,000 and then the most recent year it was
47 million. So they seem to be cutting down
on their Rs US or they've trimmed the amount of employees
they have. Either way their stock based
comp is going down. Now, as you would imagine, a
company that's not generating any cash flow, in fact, it's
losing money every single year, is also diluting to pay for
those developers and executives. They went from 48 million shares
outstanding to 59 million over the past four years.
In the past one year, they diluted around 3.3%.
When we get to the profitability ratios of the company, this is
also where we see a company that you would imagine is immature, A
newer one trying to just get to scale.
But we're talking about Reddit here.
This is one of the top ten biggest websites in the world.
It's basically the result of every single Google search.
This company is at massive scale and it has been for over a
decade, but yet the return on capital employed is negative
every single year. The gross margins are very high.
Now the gross margins are high because this company has no real
costs of goods. They don't really sell anything
that has a physical cost. It's all digital.
So they have 86% gross margins. But when we look at their
operating margins and we add in those operational cost of paying
employees and and different operational expenses, the
margins go negative -17% and then the profit margin of the
company's -11%. I guess it's headed in the right
direction. Hopefully they'll have positive
profit margins in the future. But right now they have huge
operational problems with this company.
When we look at the expenses of the company, this is where we
see the glaring issues with how they're running their business
in their research and development.
Last year they spent $438 million on R&D, 438.
Their total revenue for the year was 804.
So they spent over half of their revenue on R&D.
What is a company like Reddit doing?
Spending 400 + 1,000,000 dollars on research and development?
That's not counting their sales and marketing, that's not
counting their general and administrative.
This is just R&D. And they spent almost half a
billion dollars for a company like Reddit.
They run a website that looks almost no different than it did
10 years ago. I don't like social media
companies as investments that much anyway, but I especially
don't like Reddit. I think it's right there with
other companies like Pinterest and Snapchat, companies that
will likely disappoint investors for a long period of time.
Now, finally, we have good news for shareholders of Google.
It's finally getting upgrades and positive vibes from
different analysts, one of them being Wedbush.
Google search faces competitive risks from other generative
artificial intelligence players. But one Wedbush says investors
concerns are exaggerated. Scott Devin moved Alphabet to
the Wedbush Best Ideas list and increased the stock price target
to 175 from 160. They wrote on a note Friday that
they believe, quote, the perceived structural risks to
Google search are overstated. Alphabet's competitive
advantages are multifaceted. The company has an unmatched
breadth of data to develop and train AI models across text,
images and video. A massive user base spanning
Google Search, YouTube, Android and other Google applications,
AI optimized compute infrastructure supported by
custom silicon and access to leading engineering talent, and
a proven track record of effective monetization.
As evidence of Google's ability to monetize AI and actually make
it a good revenue stream is the talks the potential deal between
Google and Apple to license Gemini as part of Apple devices
to use that AI technology. Apple's a bit behind an AI, so
they want to go to a good partner and they're leaning
towards Google. Now, we don't know the specific
finances of this potential deal, but it does illustrate that
Google does have great potential to monetize their AI.
So I agree with the upgrade here.
I think Google will be above 175 eventually.
Of course I'm holding the company.
I remain bullish on it. That's going to be it for this
time. If you want to see more
exclusive content, AMA's lots of different things, you can check
out the Patreon. When you join the Patreon, you
also get access to qualtrum.com, which is the analysis website
that I built. So try it out for free.
There's a link in the ping comment below.
Other than that, I'll see you in the next one.