Apple Stock Forecast

Summary

Apple’s new television streaming service could be revealed during the September conference for the new iPhone.

A change in the television viewing model that focuses on comfort would cause Apple to immediately become a major player in the market.

Curated content that would compete with the likes of Netflix would lead to a repeat of the struggles of Apple Music, possibly worse.

I Know First is bullish on Apple over the long-term, in part because of the upside potential inherent in the Apple TV streaming service.

Back in 2006, the iPhone changed the market and almost singlehandedly caused Apple (NASDAQ:AAPL) to become the largest company in the world. The company had a record year of sales with the phone during the first half of the year, as the iPhone 6 and its larger screens filled a pent-up demand for a product that Apple customers had been wanting for years. With the incredible growth, analysts and investors alike are wondering if Apple will be able to maintain the rapid pace of growth that caused the stock price to climb to all-time highs in February of this year.

The stock largely traded in a range near those all-time highs until July 20th. Since then, the stock price has fallen roughly 13%, largely over concerns about demand in the China market. The newest iPhones, the 6s and 6s Plus, will be introduced during a conference in September, most likely on the 9th. But the iPhone is not the product to be watching out for.

The new Apple TV will most likely also be revealed during the September event. Speculation about the first update to the set top box in over two years has been widely anticipated. But analysts still seem to be undervaluing the potential for Apple upon entering into this market, as its purpose is misunderstood. Such an example can be seen in this article published on August 12th, Can Apple Burst The Netflix Bubble. The more apt question is can Apple effectively change the television market.

Demand For New Television Model

For decades, the television market has remained largely unchanged. The traditional cable package has been the norm for quite a while, even as younger users move to different modes of receiving their television entertainment. Viewers no longer have to rely on the traditional television-viewing schedule, as innovations such as DVR and internet streaming have started to shift the paradigm. While some companies have introduced set top boxes through which users can stream their cable packages, this market remains largely untapped.

This shift can best be seen in the success of Netflix (NASDAQ:NFLX), which surpassed 65 million global subscribers during the past quarter with its streaming package. This number will continue to grow, as the streaming service continues to expand internationally. The company plans to be in 200 countries by the end of 2016, and subscriber growth has been quite impressive, causing the stock price to climb 147% since the beginning of the year.

The article mentioned earlier was written with the assumption that Netflix and Apple would be direct competitors when Apple TV enters into the television streaming market, based off of comments from Jimmy Iovine that Apple could curate television content better than others such as Netflix.

Apple should not view Netflix as a rival, but rather as a part of its television network that it will provide to customers. The rumored service that was to be released during the World Wide Developers Conference and now in September should focus on giving customers a slimmed down, cheaper package of channels that can be streamed.

The television streaming service wasn’t released in June because the negotiations with major networks were not completed. These negotiations should include the ability to stream the networks’ popular shows at users’ convenience. This is what makes Netflix so popular to customers, a wide range of shows, movies, and documentaries that users can watch at their own leisure when it is convenient for them.

At this point in time, it makes no sense for Apple to worry about creating and curating content when others are doing that job for them. As mentioned earlier, the new Apple TV package will not rival Netflix. Instead, it and Netflix should compliment each other perfectly, as Netflix has basically become a television network that customers subscribe to, with a large backlog of content and original programming.

Apple TV users will be able to access this content the same way they have in the past, as well as HBO’s new streaming service that Apple introduced earlier this year. In fact, they might be more inclined to with a cheaper, slimmed down cable package that cuts out many of the cable channels users never use but are still unwittingly paying for.

Apple might be able to curate content marginally better than Netflix, but that likely won’t be enough to steal away Netflix’s customers, as the struggles with the recent introduction of Apple’s music streaming service has shown. Giving customers a simple to use, cheap streaming service that includes live television as well as the ability to stream content at their own time would be a huge step forward for the television industry, whereas improving curated content would be an incremental step from the work done by Netflix and its smaller rivals.

It would also be more differentiated than current products on the market, like Sling TV, the offering introduced by Dish (NASDAQ:DISH) earlier this year. Apple’s TV streaming service will allow users to stream their content across all of their devices, including the iPhone, iPad, Mac, and Apple TV set top box. In fact, the Apple TV service could improve the company’s overall ecosystem, especially for a larger iPad that has been rumored which would be perfect for streaming television on.

Figure 1. Source: MacRumors. The iPad could benefit from the Apple TV streaming service.

This is without even getting into some of the applications that can be implemented down the road by implementing Siri to allow control of the entire home through the Apple TV system, such as turning off the lights or closing the garage door from the comforts of one’s couch.

Importance Of Comfort And Ease Of Use

There is also reason to believe that an Apple TV streaming system can be more successful than the music service. The aforementioned slimmed down cable package would be less expensive and offer advantages compared to other services in the market. The current television streaming services are much less established and popular than current music services, as well.

Apple in all honesty mismanaged the release of Apple Music, acting as if it was a revolutionary product when it wasn’t. Spotify offered a similar service at the same price for years before Apple entered the market, and offering a few radio stations and “curated content” is not enough to convince people to switch over. The fact is, Apple was late to this market but acted like it was creating something entirely new.

The Apple Music platform should have been rolled out without the big presentation and bluster that comes with new products from Apple, easing early expectations as the service was released. This is especially true since the service has come littered with bugs that cause issues such as downloading the same song multiple times and deleting others.

The service was not differentiated enough from a service like Spotify or Pandora (NYSE:P) to compel customers to switch over besides having a few albums released exclusively to its service. This presents the other issue with music, which are illegal downloads. Two such albums that are not on Spotify but are on Apple are Taylor Swift’s 1989 and Dr. Dre’s Compton. But even if these albums could be enough to cause a user to switch over, tech savvy users could illegally download them and continue using the other services, which is still just as convenient.

That represents the whole issue with the entertainment services, where comfort reigns supreme. At this point in time, Apple’s new music service simply doesn’t make it convenient for users to switch over or compel them to do so. The service is hard to sign up for initially, involving a complicated process. The user interface isn’t easy to navigate either, with the Wall Street Journal describing it as a Russian nesting doll, having menus within menus within menus.

The Apple TV service needs to focus on being as simple and easy to use as possible while offering a cheap, slimmed down package that users want, not on forcing users to go through all kinds of leaps to have a slightly better package of curated content than established rivals that users will be reluctant to leave. Users have long been fed up with shoddy cable packages such as Time Warner Cable (NYSE:TWC) with bad service and hard to navigate menus.

I Know First supplies financial services, mainly through stock forecasts via their predictive algorithm. The algorithm incorporates a 15-year database, and utilizes it to predict the flow of money across 2000 markets. The self-learning algorithm uses artificial intelligence, predictive models based on artificial neural networks, and genetic algorithms to predict money movements within various markets.

The algorithm produces a forecast with a signal and a predictability indicator. The signal is the number in the middle of the box. The predictability is the number at the bottom of the box. At the top, a specific asset is identified. This format is consistent across all predictions. The middle number is indicative of strength and direction, not a price target. The bottom number, the predictability, signifies a confidence level.

I Know First has had success predicting the movement of Apple’ stock price in the past. In this one-year forecast from August 10th, 2014, Apple had a bullish signal strength of 13.33. In accordance with the algorithm’s prediction, the stock price increased 28.53% during that time.

Having explained how I Know First’s algorithm works, it is worthwhile to see if the algorithm agrees with the bullish fundamental analysis of the company. The three-month and one-year forecasts for Apple are included.

Apple has a positive signal strength for both time horizons. This indicates that the stock is slightly undervalued currently. Over the predicted time horizons, the introduction of the Apple TV streaming service could add another source of revenue for the company, meaning it could be more undervalued than the algorithm currently recognizes. The fact that the algorithm is bullish on Apple without this business is a positive sign, as well.

Positive signal strength does not mean investors should automatically buy the stock. Dr. Roitman, who created the algorithm, created rules for entry for a stock such as Apple. Using this trading strategy, an investor should buy a stock if the last 5 signal strength’s average is positive and if the last closing price is above the 5-day moving average price. When both of these conditions are met, it is a good time to initiate a position in the stock.

Conclusion

The focus of the new Apple TV should not be on curated content, even if Apple can do a better job than Netflix as Iovine claims. Instead, it needs to worry about making sure the new streaming service is simple and easy to use. A slimmed down, cheaper cable package will have huge demand and could shift how people watch television, offering a lucrative new business segment for Apple.

Taking on Netflix and other streaming services to provide better curated content will lead to the same poor results as Apple Music. The music streaming service could still prove to be successful, but only because of Apple’s name recognition and ability to invest heavily in the product. Apple TV has the potential to be so much more, changing how people view television and relax at night. Netflix should be viewed as a complimentary service that can boost Apple TV, adding content to its slimmed down package for users that want its backlog of content.

Taking this view of Apple TV, it could become the largest provider of cable in the country, as most customers simply don’t need all of the random television channels that come prepackaged in bundles. Cutting away this extra fat and focusing on ease of comfort can use a simple, intuitive television product that improves the viewing experience, compelling cable customers to switch to Apple’s product, giving Apple a whole new source for revenue moving forward.

At I Know First we use genetic algorithms and artificial neural networks to study financial markets in order to breakdown the flow of money between stocks, commodities and currencies. Our current algorithmic forecast for AAPL indicates a bullish outlook ,

I Know First is bullish in Apple over the long term. The Apple TV streaming service plays a role in this bullish valuation, as it could revolutionize the television-viewing model and attract large numbers of users. This would improve the overall ecosystem, especially for the iPad, and provide a new revenue stream.

