It’s worth noting that Apple had a solid June quarter, exceeding revenue expectations by 1.6% and earnings by 4%.

Guidance for September was in line with the Street’s expectations, which is impressive given that the Osborne Effect is in play. This effect occurs when consumers delay purchasing current devices in anticipation of a soon-to-be-released new version. Every September quarter for Apple experiences some level of the Osborne Effect, but this quarter, the impact is expected to be greater due to heightened anticipation of the new hardware, especially with the addition of Apple Intelligence, which promises to dramatically enhance the utility of the phone. Overall, I estimate that about 80% of the company’s 2.2 billion-plus active devices will need to be upgraded to access generative AI features.

Now that September guidance is in place, investors can increasingly shift their focus to CY25 and CY26 growth expectations, which should see further acceleration in revenue growth driven by the upcoming supercycle. The Street expects FY24 growth to be 1.5%, FY25 to be 7.4%, and FY26 to be 6.1%. However, I believe growth in FY25 will be closer to 9%, and FY26 will be closer to 8%.

Unlike most of the other Mag 7 companies, Apple’s CapEx remains a low outlier. I expect Apple will continue to spend about $10B a year on CapEx, compared to the rest of big tech, which spends between $35B and $55B annually.

On the call, Cook said:

“On the CapEx part, it’s important to remember that we employ a hybrid kind of approach, where we do things internally and we have certain partners that we do business with externally, where the CapEx would appear in their respective businesses. But yes, you can expect that we will continue to invest and increase it, year-on-year.”

While management didn’t provide details on how CapEx is shared with OpenAI or any other partners, it’s clear that Apple is trading its distribution network of approximately 1.9 billion monthly active users for access to OpenAI’s models and the corresponding Azure infrastructure. This is a great trade for Apple because it allows them to immediately catch up in the generative AI feature race without spending hundreds of billions of dollars and 3-5 years to build it themselves. In the end, the partnership approach should prove to be a win for investors in the form of higher revenue growth (driven by Apple Intelligence features), which should lead to higher margins.

China remains a concern for Apple investors. The China segment was down 6.5% year-over-year in the June quarter, compared to Street expectations of a 0.7% decline. If we exclude China from the overall results, Apple’s topline would have been up 7% in the June 2024 quarter, compared to the overall business, which was up 5%. In other words, China represented a 2% drag on sales growth in the recently reported quarter.

On the call, Cook mentioned that the softness in China was due to two factors: it’s “the most competitive environment in the world” and the current macroeconomic conditions. I’d also add that the difficult comparison in June 2024 was a factor. Looking back to last year, in March 2023, China was down 3%, but in June 2023, it jumped to an 8% increase. That plus 8% is what Apple was up against this quarter. Moving forward, comparisons become easier in China with comps of down 2.5% in September 2023, down 13% in December 2023, down 8% in March 2024, and down 7% in June 2024.

The bottom line is that I expect the region to return to growth by December 2024. This expectation hinges on Apple announcing a partnership by October with a Chinese LLM provider, likely Baidu, to add generative AI to Apple’s China lineup.

Disclaimer