Investors Fail To Ask Apple Most Fundamental Question

two tho fourteen. The shares now currently at the highest levels since November. The question is, did they deliver something so fabulous yesterday after the bell that this is a worthwhile rally? And here too, uh, perhaps cast little skepticism in sua ovida Bloomberg opinion columnists nobody covering all things tech and perhaps deservedly, let's hear what's going on here? So what's your take on this rally? Why our investors

so excited? Well, the short explanation is the Apple's results are less bad than people and maybe Apple it's thought a few months ago. So that's good news. Um, but look, it's still not great conditions for Apple. So look iPhone sales declined. I think it was seven revenue from iPhones decline in the March quarter. The company forecast implies that revenue growth might be more or less flat from a

year ago, so not great. And you've seen from what the company has done that it's doing things like discounting iPhones in China, offering aggressive prices on trade ins of older phones throughout many of their markets, so you know, there are effectively subsidizing UM iPhones to compensate for what has been declining unit sales of those devices. So I guess the question one of the questions I heard from investors, you know, kind of on the call last night, was

trying to get a sense of this iPhone business. How much of it is a temporary weakness and I phone sales or is this just a fundamental change in their phone business? You know, I actually think this is a significant failure of Wall Street two force Apple to answer the to me what to me is the most fundamental

question about Apple's business. Smartphone sales globally are declining, and they have been declining for eighteen months to two years, depending on or maybe longer, depending on whose numbers you look at. And if your Apple and you make the majority of your revenue from selling iPhones. That change in the market is an existential problem, and the company has never really had to address that question. Look, the market is declining. The market for your most important product is declining.

Do you think it's temporary? If not, what are you doing about it? And the company really hasn't tackled that question head on, And again I think that's a failure

by investors. Although you could say, in fairness, Apple has been emphasizing their services and Internet products side of the business, and that was one of the actual positives and surprisingly positive aspects of their earnings report was that they showed bigger than expected gains in those areas, So uh to some degree, couldn't you say that that's what they're trying to do, is to offset some of the concerns about

the slowing smartphone UH cycle by emphasizing these other areas. Yeah, and I think that's a fair point that and that's certainly what Apple bowls have been focused on, is this growing pile of revenue and high profit revenue generally from things like you know, um Apple's commission on App Store downloads or Apple Music subscriptions or they're coming Apple Television Service or Apple Care warranties. So that is good news, but look, that cannot fully fill the whole left by

declining iPhone sales. So once that I had in my column was in the first half of Apple's fiscal year, iPhone revenue declined by sixteen billion dollars, and the gains of everything else, every other business at Apple was eight and a half billion dollars, right, so you can see that there is still a mismatch between the declining main business and the growth of their other businesses. And look, I also feel like eventually you sort of run out.

You know, it's like the coyote that I'm sorry, the yeah, that you're running out over the canyon and eventually kind of lost track of my cartoon metaphor. But anyway, you know, you're you're you're running, your legs are running, and eventually

you run out over the canyon and you fall. That at some point, if Apple doesn't grow the number of new iPhone users, it is losing opportunities to sell you know, apps and Apple Music subscriptions and Apple TV subscriptions to that pool of people who own Apple devices, and so far to their credit, They've managed to keep growing that revenue even as the pool of new iPhone buyers levels off.

But I can't imagine that last forever, particularly if Apple doesn't make a more concerted effort to sell those services to people who don't own their devices. It's billions of people at Apple's ignoring. So is there what do you think they need to do to maybe recharge the growth of this company? Is is it something as big and existential and changing as a big acquisition, or is this just trying to build up their services business. I don't know, and I think part of it is what kind of

company does Apple want to be in the future. If it wants to be, let's say, a load a load of no growth company that generates revenue growth from squeezing its existing customers for more money. And my colleague Sarah Hallzac and I compared this basically to like Starbucks and McDonald's. Right, that restaurant traffic has been declining, but restaurants like McDonald's

has been making up for it by price increases. So if Apple wants to do that, if this is an r poo play, you generate more revenue from a stagnant base of users. Fine, but that's not the apple that people have come to expect, and that's not the That's exactly right. They've been to such a great growth story and new product after new product, and you know where's the next new product? Sure of a day. Thank you so much for joining us. Shares of Technology, Calumness for

Bloomberg Opinion. You can attach to any number of superlatives to Shopify, the Canadian e commerce retailer. If you take a look at its shares, they have more than doubled since Christmas Eve. They're the best performance performing shares on the S and P TSX Composite Index after a pot stock. Joining us here to talk about the company is Harley Finkelstein, chief operating officer of Shopify, Joining us here in our

Bloomberger Active Brokers Studios and Harley. Before we get into all the superlatives, can you just give us a sense of what Shopify exactly is. Yeah, it's a great question. I think what we're best known for is is helping small businesses build beautiful online stores. We've been doing that now for over fifteen years, and people know us best for that. But I think actually today which shop play

is truly as we are a retail operating system. And what I mean by that is you can come to Shopify because you want to build a great online store, or maybe you want to sell offline in a brick and mortar store and use our point of sell product, or maybe you want to cross sell on Amazon or eBay or something like Instagram or Facebook. But the idea is that it all feeds back into one centralized back office, and that Shopify. It's the first thing you open in

the morning, lasting you close. That's where you have your inventory, your customer information, your marketing data, that where you process shipping and payments, and that really is is your business um. And so we're doing that now for about eight twenty thousand merchants who have sold more than a hundred billion dollars on Shopify. UM. But I would say retail operating system is probably a better, uh definition of what we

are today. So obviously you're benefiting from this tremendous secular move from bricks and mortars to e commerce, and people think of that and they think of Amazon obviously. So aside from that great secular wind, that's that's at the back of your sales, What really are the growth drivers for your company. Here a couple of things. First of all, we make it really really easy to start a brand new business. So most of the most of the merchants that are on shop if these are first time entrepreneurs

that are just getting started. In fact, every minute or so a new business gets their first sale on Shopify, which is really exciting. Remember the first time that I had my first sale, I was an early Shopify merchant before I joined the company about it was called Smoother. It was a T shirt company. I had to support myself in law school and didn't have any money. My parents couldn't pay for school, so I built a Shopify store back in two thousand six, ended up selling T

shirts and paying my law school tuition. Um. And getting that first sale was it changed everything. It meant that I had freedom and I had autonomy and all of a sudden, now I can pursue my life's work and

that happens now almost every minute on Shopify. UM. So I would say that making it really easy for people to start me and so not only we're growing our piece of the pie, but we're going the pie itself from a total usable market perspective, and the ones that are successful on Shopify stay with us for a very long time, and in that journey we try to find them all the things they need to run their business. So we created Shopify Payments to give them economies a

scale on payment rates. We gave them shop by shipping rates, meaning they can get better rates to give you bigger companies. We now give capital. We've given out about over five million dollars of capital to these small businesses. So the idea is to find all the pain points that an entrepreneur may have and make it easier for them. And actually, if you aggregate all of our stores all in one, pretend that we are a retailer, we would be the

third largest US eclom retailer. So we are able now to go to the shipping companies and the payment companies and negotiate rates as if we were the third largest of US online retailer. But then give all these economies a scale to someone just starting at their mom's kitchen table. Really interesting And just to sort of give some more context, after your ported earnings yesterday, uh, your second quarter revenue forecast did beat estimate, so that was one five above estimates,

So it seems like things are going well. One question that I have though, is we talk about Amazon and its dominance and its effort to create its own products. We talk about Walmart, We talk about, you know, sort of how the big behemoths are getting bigger. How do small businesses compete with those? How do people find these sites given how much big, big, big store competition there is. Yeah,

and it's a great question. So one of the things we also have as part of our retail operating system is a marketing UH marketing section, a place where a small business can go and easily able to buy ads

and things like Google or Facebook. And on Monday we announce a partnership with Snapchat, so now they can easily buy ads directly on Snapchat to Traditionally, if a small business want to go ahead and buy ads on Facebook or Google or Snapchet, they would have to go to three different sites navigate the complexities of those ad platforms. And now we simplify it for them and we can go to those companies to ensure they're getting the best

rates possible. I think most people assume that, um So, right now e commerce globally is about one point nine trillion dollars. That's gonna go to about four trillion dollars in the next few years. I think a lot of people automatically jump to Amazon, owning a majority of that. I think Amazon ultimately will be the place where you go. You go to buy the stuff that you need as a consumer, your toilet paper, your shampoo, your your paper towel.

But I think for most consumers today, they actually like buying stuff from the people that make it. So you look at some of our favorite stores like Bombas Socks or Tommy john Underwear, or All Birds Shoes, or Kylie Cosmetics or Fashion Nova. These are all small businesses that are really large on Shopify, and they're able to sell direct to the end consumer in a way that they haven't been able to do before. I see on my handy Bloomber terminal here that Shopify gets about seventy percent

revenue in the US. So talk to us about kind of how you view some of the opportunities outside of the US and maybe North America broadly. Yeah, So it's it's a great point you make. Um So, traditionally we've really focused on North America, Australia, New Zealand, and the UK. About a year ago, almost to the day, we decided that it was time for us to expand to an

international market. We knew we had merchants elsewhere that wanted to use our products, but we didn't feel we had the right product fit yet, and so we began the journey to find product market fit internationally. And so we've now translated the Shopify dashboard into more than seven languages. We now have partners on the ground and in most of those countries as priority countries that can help you build an online store. And also we have the right

payment gateways. So for example, in a place like Germany, credit card penetration is not as used as like debit cards are. So we had to begin the journey to find product market fit internationally. But I would say that, um the future, in the future, international will be a huge part of our story. We're just getting started with that right now. Do you still sell T shirts? Uh, you can go to my T shirt shop. It's uh,

it's smoofered out my shopify dot com. It's still up there, but but unfortunately I've disabled to check it because I don't have time to shift the products out anymore myself. But um, but actually it's it's it's really great. In fact, Toby or our CEO and founder. He started Shopify because he wants sell snowboards on the internet in two thousand four and didn't like the software that was available throughout his own piece of software, and that software to sell

those snowboards has become Shopify. That's a great story. That is a great story. Harley Finalstein, thank you so much for joining us. Harley as the chief operating officer of Shopify. There based in Ottawa, Ontario, kind of, but he joins us here in our Bloomberg Interactor Brokers studio. President Trump and a group of leading Democrats announced a promise of two trillion dollar infrastructure plan. To get a sense of what this means, we welcome Michael Jay's. Michael is the

chief US Public Policy AMANUS WILL strategist at Morgan Stanley. Michael, thanks so much for joining us. So what is your take on this plan that was announced after the Democrats met with President Trump? Yeah, and thanks for having me on UM. I would say that until someone can identify what two trillion dollar tax i can fund this, that you should be deeply skeptical that something like this can happen. And in our view, we don't think you're going to

see an infrastructure package before one because of it. I mean, there's just a couple of numbers to put it in perspective, because there's a lot of different taxes that have been floated out there is potentially pay for us. Right, So if you increase the gas tax, that would get you about four hundred billion dollars. If you're rolled back the corporate tax rate by five points, that gets you about

five hundred billion dollars. If you took the two top two tax brackets up by a percentage each that gets you a d and twenty billion. Those are all extremely politically sensitive, and if you at all of them, you'd still have a trillion dollars left to go. So I think fair to say, can color us pretty skeptical about this going forward? So, Michael, there is a question though, of the private intervention here, the private involvement in some

sort of infrastructure plan. To Lane show, the Transportation Secretary saying telling Bloomberg Television at the Melican Institute Global Conference in Los Angeles that there are private pension funds as well as damnment funds that would love to play to the opportunity to invest in public infrastructure. Do you see that materializing something on that front. Yeah. Yeah, it's a

really interesting idea. And obviously we we've dealt with this for uh ten twenty years now, the sort of the talk of their being a tremendous amount of interest from private capital and investing and owning and operating public infrastructure assets. But uh, you know, from my perspective, as I mean it's poll analysts, I can tell you that I don't feel confident that the supply of those assets is there.

And what I mean by that is that you know, state local government's own about eighty eight percent of all infrastructure assets in the US, but they're sort of highly incentivized to keep them right, so it's a revenue producing asset. Generally, state lowe garments don't give them up unless they are

somewhat desperate for money. And uh, the cost of financing, uh, the construction of new assets is frankly just a lot cheaper through the tax exem bond market than giving up the cost of capital seven to eight percent returns for the private sector. So um, while you know P three's are generally the rule rather than the exception in other countries, largely because of the federalist system, we've set up here

in the availability of tax exam financing. They're more the exceptions in the rule, and I would expect that to continue. So I think it's a bad idea to do what you can to incentivize private capital come in, but I wouldn't expect that to be the thing that catalyzes the major infrastructure investment that the US needs to get back

up to speed. So, Michael, if there's two trillion dollar number that was thrown out by the Democrats and President Trump is not, you know, necessarily that realistic, what do you think can actually get done from the federal level. Yeah, Well, unfortunately, think on this issue where grid locked until the next election because um, frankly, what you need is one party in control of both the White House and Congress and

for them to make this their top priority. And it's probably because if you if you know, you go through the list of tax revenues that we just talked about, there's probably not a politically friendly way to completely fund this, and so you need one party or the other to kind of frame this as um a deficit financed investment, UM, but in sort of politically friendly terms, right, as an economic investment or or something some other way that's consistent

with their ideology. Uh So in the meantime between now and then, UM, I think unfortunately you're gridlocked. And even if you do the exercise of thinking about, well, what if we're wrong again, what if they actually could do a funded infrastructure plan, maybe slim it down to a trillion dollars over ten years. Um. You know, for investors, I don't know that that necessarily sends clear signals on what to do. Right. If it's funded, it's not a technically a fiscal stimulus, so over the next six to

twelve months, it doesn't necessarily translate into a GDP boost. Uh. You know, there are companies that should benefit from this, but if you're rolling back the corporate tax rate, that cuts against them, right, or if you're increasing the gas tax that hurts autos and freight transportation. So just a lot of mixed signals on what investors can take away from this. I'm curious from your perspective, what's the most pressing infrastructure project that the federal government uh could finance

or push along that that localities cannot. Well, you know, I don't know that there's one project in particular. I mean, they're Obviously there are several critical infrastructure projects UH in major urban hubs around the country. I think this is a situation where there just needs to be more federal money brought to bear in the aggregate and that sort of priority number one as opposed to being specific and surgical.

But the reason why I ask is because we've been talking about the record volume of cash flooded into the municipal bond market, and we've talked about how, yes, these are slow moving freight trains when you talk about local governments, But why couldn't they take that private money and pump it into projects that they need. Well, they can, but I think the question of whether or not municipalities are willing to access the taxics a market to undertake new

money financing. Right, So it's not that the money isn't there, it's a question of whether or not the willingness is there. And the constraint that state and local governments faces kind of a It's a combined political and fiscal constraint. And what I mean by that is that there's generally reticence to um increased taxes to help finance borrowing UM and budgets are already constrained from a combination of factors high operating leverage for one UM as well as pension overhanging

a lot of different areas. So you have a system where state and local governments spend about the money on infrastructure in this country, UM, but for a combination of political and fiscal reasons, are constrained. So they have been increasing, in particular over the last two years, they have been increasing their infrastructure spend, but just not to the degree that gets you the sort of catch up the potential

that we need to to be at. And that's where the the federal government's role, UM hypothetically then should be to really come in induce that entire process with more money. So, Michael, I'm a resident of New Jersey. I take the train every day back and forth under the Hudson River tunnels, and I fully expect them to cave in on me one day. Let's talk about the Gateway project. What is the status of that? Because that is going to be a state and federal partnership to get that done. What's

the status of that? Yeah, also a resident of New Jersey. Uh, So, I understand where you're coming from. UM. I think this is a situation where the need for that projects largely already been improved. Um, it's been somewhat delayed over the last couple of budget rounds uh and what appears to be sort of a personal disagreement between the President and

Chuck Schumer. Uh. So, I think there's a situation where the money, because it's already been approved, will eventually make it to its target, but it's being delayed for largely reasons of politics, which is not particularly comforting understand. But um, this appears to be a situation where the money has already approved for it. Yeah. Um, we're speaking with Michael Z's chief US public policy I mean strategist at Morgan Stanley.

I want to just let you know that William Barr, Attorney General, is currently giving his opening statement in front of the Senate, discussing, of course, the Robert Mueller report that he did release UH with with redactions and did summarize. There is obviously a concern on the part of Robert Muller, is expressed by I letter released earlier today that it was not fully represented in the summary. We will bring

you all of that when we get it. Michael. We want to continue the conversation here because as much as perhaps a two trillion dollar infrastructure spending plan is not realistic or feasible politically, there is a question of the municipal markets right now, and given how much money has gone in and I'm wondering from your perspective, especially where we are in the economic cycle, and given the tax cuts, I'm wondering from your perspective, which areas do you see

as the strongest and the weakest right now from an investing standpoint. Yeah, Well, for us that we think the opportunity still lies more in the enterprise segments of the municipal market as opposed to the state and local government segments of the municipal market. Right. So that's uh, the public enterprises like airports and toll roads and not for

profit hospitals and higher education institutions. UM. And that not necessarily because there's more yield to be captured in those areas, but more because we remain concerned the the overhang of liabilities UH that continue to pressure state and local governments. Uh, and that the next time we have a recession, we think will exert a fair amount of pressure on budgets. Right.

So that is deferred capital needs that is underfunded, retiree liabilities, the types of things that in good economic times, uh you have you know, strong and growing tax revenues and so you can kind of deal with the cost of those things as they come. But when tax revenues are declining in a recession, that financial leverage becomes operating leverage, which creates a budget deficit and forces some really tough choices. We don't think the market is properly a uh priced

in that segment for that. But the key there is, if you're looking for the market to weaken on that future dynamic, it requires you to place a high probability on there being a recession, and that's just not in our base case right now. And obviously I think investors don't really have that in their base case right now. So the market um in our view, even though it's pretty rich, can keep coming, keep humming along. Michael Jesus, thank you so much for spending the time with us.

Michael Z's chief US public policy and municipal strategist for Morgan Stanley joining us in New York. Switching gears, Let's go back to the financial markets. You know, we think about the melt up in the financial markets so far in one sector that has certainly participated has been the US high old market. We welcome Ken Monahana Mundy, pioneer co director of hi Yield Ken, thanks so much for

joining us here in our Bloomberg Interactor Brooker studio. What are you seeing in the high old market so far this year? It's been a great rebound off of that December low Thank you for having me again. And a melt up is the correct phrase for this, because we've certainly had a dramatic rally. Spreads have tightened in dramatically since um they're there their wives of December when we were trading in about five and fifty basis points over

and we're now down to about three seventy five. And that means that high yields made almost nine percent year to day. It's been a big year. Like equities. Yeah, so it's made almost nine percent of this year. That is the best return for the first four months of a year since two thousand and nine, when the market was rebounding from the worst financial crisis since the Great Recession. I'm just wondering, what do you think the full year twenty nine total return is going to be for US

hild bonds. Well, I think that if you look at the prognosticators out there right now, they're talking about a double digit return for the year, and that makes sense. If you kind of layer in four percent plus current yield for high yield UH for the remaining eight months of the year, it can get up to a double return. Double digits could be, it could be what are you talking about? Forties? Hard? It's really hard to get to

twelve to thirteen is is certainly within the range. That's that's certainly, and that's assuming we can straight line it. And obviously markets don't generally move in a straight line UM. But so I'm not saying that there's not going to be any disruption between now and the end of the year, but it's certainly achievable. So given that great performance, almost nine percent off of the low, where are you seeing value today in the HOW market? Well, you know, it's

it's it's harder to find value. So if we look at double B s, which is a significant portion of the market, UH spreads are only about sixteen basis points or so wider than they were at their October troughs, which is when early October we hit the post recession trough UH and we're a little wider, but not dramatically so.

Triple c's, on the other hand, are significantly wider and is one of your reporters has written recently written, Um that there are opportunities perhaps in the triple D spay a triple C space where one of those who's looking for value there. That doesn't mean that we're we're buying them, uh, you know, without any um selectivity at all, Um, you're having to kind of really go and look for that

proverbial needle in the haystack. And the market's very bifurcated between triple ceas we wouldn't touch with a ten foot pole, and those that look more attractive, and those are harder to find. Yesterday we were speaking with Bearing CEO Tom Fink, and he said that he is seeing the pendulum switch a little bit up more towards leveraged loans over hiled bonds, given how much highled that is rallied and the loans

that kind of lagged behind. Do you agree, Well, you've certainly seen a pick up and returns to her for loans as well, because they had gotten beaten up. Having said that, there is a much higher percentage of the marketplace. That's leverage loans that are training above par right now. Uh. And with leverage loans, you don't have a whole lot further to go than par because that's what they're gonna pay you back, and there's no prepayment penalty. UM, So

that's the problem. And uh, leverage loans particularly look particularly cheap. UH in the fourth quarter of last year when they got beaten up, is did HI yield bonds. And I know that there are a lot of structured products or cello managers that were quite excitedly picking up loans at that point, and and and and banking them for new transactions that have been priced this year, which ought to do quite well. But I think leverage loans, your upside

is limited, and that's the problem. So we're we're ten years into this economic cycle. How is when you take a look at your portfolio or some of the issues that you're looking at, how was a credit quality given where we are in the cycle right now. Well, you know, it's interesting if you if you look at it, um, you're not seeing the types of things at least yet

that you would typically see that are aggressive behaviors. So you talk about zero coupon bonds paying kind bonds, a large number of dividend transactions where companies are borrowing money just to repay the private equity sponsor. Now there are some of those in the offing. It's clearly because we're hearing some rumors of some of them right now. And uh, that may indicate that, you know, we're kind of closer to the ninth ending and than we are the sixth

or seventh. This recovery has certainly gone on for a long period of time, where one in the hundred and seventeenth or eighteenth month at this point, um since the end of the recession in online um. But as we know, recessions don't, excuse me, recoveries don't die of old age. So you said that there are some deals on tap dividend payment payment deals right there are, yeah, and I've announced. But the deals that they're out there also pick toggle deals.

I haven't seen any pick toggles yet. That would be an interesting one to see come back. I'm not saying that won't, but you know, that kind of is the kind of aggressive transaction structure you tend to see at the end of the cycle where people are trying to figure out how do I make a little bit extra return in my portfolio. Yeah, just before whatever. Everything's glowed and I'm not suggesting that either, but don't worry. Uh well, we've tried on to to push with that. Ken Monahan,

thank you so much. As always, we love your insights. Ken Monahan, I'm aun new Pioneer, co director of High Yield. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. Paul Sweeney, I'm on Twitter at pt Sweeney. I'm Lisa abram Woids. I'm on Twitter at Lisa A. Bramwod's one before the podcast. You can always catch us worldwide on Bloomberg Radio m