Apple is priced for an iPhone hit. What could go wrong?

Overheard

• "Everyone … thinks it's a bad idea or just a needless distraction. But [Masa] makes the decisions." — An anonymous SoftBank insider said everyone at the company is against taking it private. Everyone except Masa Son, that is.
• "While it was a successful listing (we pulled off the near impossible in getting the company listed and out in less than six months), it was blemished by Shareworks' failure." — An email from Palantir to employees said Morgan Stanley would "make people whole" for the outage that left some insiders unable to sell shares.
• "This is happening more and more … Tech companies give you a list of their competitors as a precondition [of taking your money]. Even small companies give you that restriction." — KKR Managing Director Chris Sun said Chinese companies are increasingly preventing investors from investing in rival firms.
• "We are worried our assets in China could one day be a hostage if the tensions between the U.S. and China continue to deteriorate." — An anonymous supply chain executive was one of many to tell Nikkei Asia that he's trying to move assets out of China under U.S. pressure.

The Big Story

Why Tuesday's iPhone launch is crucial

A new iPhone is always a big deal. But when Apple unveils its latest devices on Tuesday, it's a bigger deal than normal. "I don't think there's a lot of room for error," Wedbush analyst Daniel Ives told me.

Expectations for the first 5G iPhones are sky high, with Ives one of many predicting a "once in a decade supercycle" off the back of the launch.

• "About 40% of Apple's install base, based on our estimates, have not upgraded for three and a half years. If you combine that into a 5G, four phone release, we believe that really creates a perfect storm of demand," Ives said, predicting that Apple could sell more iPhones this fiscal year than the 231 million it did in 2015.

But there are significant risks ahead. For one, Apple is launching expensive phones into one of the worst economic environments in living memory. Ives said Wall Street has taken that into account, reducing projected unit sales by 10% to 15%, and that cheaper iPhone models — such as the SE and rumored iPhone 12 Mini — might make up for it. But in a report last month, Wolfe Research's Jeff Kvaal pointed out that "phone sales dramatically decelerated during the 2008 recession."

• Kvaal thinks the "supercycle" idea is overplayed, too. "Data from AT&T and Verizon indicate that their upgrade rates declined during the migration to LTE," he wrote, citing the "lengthening U.S. replacement rates through the 4G cycle" as further reason to be skeptical.
• It's yet to be seen if consumers really care about 5G, too: A study from April found that "65.7% of consumers said they weren't very excited," while recent analysis has shown that 5G is in many cases slower than 4G. "5G coverage is still limited, and it's unlikely consumers will pay extra for features they can't use," analyst Gene Munster recently said, adding that he expects 5G iPhone sales to quicken toward the end of next year once coverage has improved.

Plus there's more at stake here: Many of Apple's other most successful recent plays may also depend on strong iPhone sales.

• Some expect Apple to bundle Apple One, its new services package, with the new iPhones, a move that could provide a major boost to the company's increasingly important services revenue.
• Kvaal, meanwhile, thinks rumors that the iPhone 12 will ship without headphones indicates an attempt at increasing demand for AirPods.

If things don't go to plan, Apple's stock could be in for a tumultuous season. "This has to be a very successful product launch in order for the stock to continue to move higher," Ives said.

No pressure then, Tim.

A MESSAGE FROM PHILIPS

Stronger care … from more efficient operations

In a defining moment for healthcare, it's even more crucial to deliver patient-centered care efficiently. At Philips, we are committed to providing intelligent, automated workflows that seek to improve patient care. More efficient healthcare means stronger, more resilient healthcare.

Learn more.

Up to Speed

• Monday: NEC bought Avaloq for $2.2B. Nexi acquired SIA for $4.5B. Crowdcube acquired Seedrs. Alibaba agreed to buy a stake in Dufry. Cisco was ordered to pay $1.9B for patent infringements. Faraday Future said it's in talks to go public via a SPAC.
• Tuesday: Veeam bought Kasten for $150M. Clover Health said it would go public via Social Capital's SPAC at a $3.7B valuation. Tipalti raised $150M at a $2B+ valuation. Unqork raised $207M at a $2B valuation. Dialpad raised $100M at a $1.2B valuation. BiliBili was reported to be planning a Hong Kong secondary listing. Singapore's sovereign wealth fund was reported to be planning a $1B+ Ant Group investment. India offered manufacturing incentives to companies including Samsung, Foxconn, Wistron and Pegatron.
• Wednesday: Amazon filed a legal notice against Future Group for its asset sale to Reliance Retail. Airbnb was reported to have spent $1.2B+ between mid-2019 and mid-2020. S&P placed SMIC on a negative credit watch.
• Thursday: AMD was reported to be in talks to buy Xilinx. Samsung forecast an operating profit up 58% YoY. TSMC quarterly sales beat expectations. IBM said it would spin out its managed infrastructure unit. Affirm said it's confidentially filed for an IPO. Instacart raised $200M at a $17.7B valuation, and was reported to be planning an IPO. GoPuff raised $380M at a $3.9B valuation. MessageBird raised $200M at a $3B valuation. Tier said it was profitable. Square bought $50M of bitcoin.
• Today: FirstMark raised $360M for a SPAC that could take its portfolio companies public. Amazon reportedly invested $96M in its Indian payments unit.

Diving Deeper

Clearbanc thinks it can solve holiday shopping uncertainty

Clearbanc, known for offering ecommerce brands money to spend on ads, has a new product that it thinks could solve a big pain point this holiday season.

• "What we've been hearing from our customers … coming into Black Friday, into the holiday season [is that] they know it's going to be bigger than they've ever seen before, but they're not sure how big," Clearbanc co-founder Andrew D'Souza told me.
• That's making it difficult for retailers to know how much inventory to order: Buy too much and waste money; buy too little and risk missing potential sales.

Clearbanc's solution? "We'll buy your inventory for you, and you pay as you sell it," co-founder Michele Romanow explained. "You don't actually pay for your inventory until a customer buys it." That means Clearbanc is taking on some of the risk instead of the ecommerce brands: "If they don't sell the inventory, then we don't get our money back," Romanow said.

• Clearbanc will offer its customers up to $10 million to spend on buying inventory up front. As that inventory is sold, customers pay Clearbanc back — plus a 6% fee.

Romanow and D'Souza are positioning this as a better alternative to any other form of inventory financing: a kind of middle way between the available alternatives. "Almost all small-business loans have personal guarantees tied to them," Romanow said. For founders, she said, "that's the scariest thing in the world." D'Souza, meanwhile, said that Clearbanc's product ended up being much cheaper than equity investments, which are "very expensive both from a cost of capital perspective, from a time perspective, and then from a control and ownership perspective."

• The closest parallel to Clearbanc's product might be dropshipping. But with Clearbanc's product, the inventory is already in a warehouse, waiting to be shipped when a customer buys it, avoiding the lengthy delays associated with dropshipping.

Pulling this off will be hard, though. Etsy CTO Mike Fisher recently told me that while holiday demand is normally "very predictable," COVID means "it's all up in the air" this year. Romanow and D'Souza hope, though, that they have data that accurately predicts how much inventory brands need.

• "It took a lot of data to figure out, because there's a lot of risk here," Romanow said. D'Souza added that the company's marketing product derisks things, too, because it can offer brands extra capital to spend on ads to boost sales.

If it does work, it's easy to imagine Amazon or Shopify rolling out something similar to their merchants. It's a fundamentally different way of thinking about financing, really. "Traditional banks will look at what happens if [companies] fail," D'Souza said. "Their entire underwriting is, 'What can I get for this if I have to go take it?'" Clearbanc, as he sees it, is different. "We really underwrite [on] how likely is this product to sell … We're sort of betting on the company succeeding."

Money Talks

Roshan Saldanha, Sinch CFO

Has COVID-19 been net good or bad for the tech industry?

Net good. There are a few short-term adverse effects, such as reduced smartphone sales, but overall global digitalization has been accelerated due to the pandemic. Customer behavior has been permanently altered in many verticals, including learning, health care, communication, travel [and] banking, and this will favor the tech industry.

What tech stock do you have your eye on?

Nvidia … Several hundred million increasingly advanced chips will be needed to accelerate machine learning tasks. [It] recently released a new series of GPUs, which they claim to be "the largest generational leap" in its hardware.

What's been your worst financial decision?

Not deciding. The one that stands out the most is not buying Apple in 2001, in 2005, in 2007 until I finally jumped in during 2012.

What's your number one tip for adapting your company to post-COVID?

A bit unusual in the fourth industrial revolution, but my No. 1 tip would be to reconnect with your colleagues. We are all going towards a new normal, whether it's working from home or using digital tools at work. It will be even more important to have those deep, meaningful, and inspirational conversations.

What piece of financial advice should a founder ignore?

More funding = more success. Sinch is an excellent example of a company that had to be frugal with its spending to minimize raising capital, yet has managed to make it to the very top of the fragmented CPaaS market globally.

Coming Up

• Watch Apple's stock after the iPhone event on Tuesday. Facebook's new Oculus ships on the same day.
• Chinese vehicle sales data for September is released Monday, with the "new energy vehicles" number being one to watch. Over in the U.S., September's retail sales data is out Friday. Also keep an eye on stimulus talks, with the White House reportedly keen on a deal.

A MESSAGE FROM PHILIPS

Stronger care … from more efficient operations

In a defining moment for healthcare, it's even more crucial to deliver patient-centered care efficiently. At Philips, we are committed to providing intelligent, automated workflows that seek to improve patient care. More efficient healthcare means stronger, more resilient healthcare.

Learn more.