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Apple Setting up for Faster Growth in December
Shares of AAPL traded down 2% after posting what was essentially an in-line June quarter. Guidance for September calls for a 1% y/y decline in revenue compared to expectations of 1% growth. Those details water down the most important dynamic of the quarter: the installed base of active devices hit an all-time record. That means Apple's ecosystem is expanding which is key for long term investors. This growing base should power revenue growth acceleration in December and for full year 2024.

Key Takeaways

The June quarter was as expected and September guidance was slightly below the Street.
The most important datapoint from the June quarter was the installed base of active devices set an all-time record.
India is an important part of the Apple growth story and it's just getting started.
Investors are missing the potential of Vision Pro.

The quarter and the guide

Results: June quarter revenue and earnings were essentially in line with expectations with overall revenue down 1.5% y/y compared to down 2.5% in March. I view these results as respectable given the broader smartphone market was down closer to 20% in the quarter, and that includes the help of the iPhone. Excluding the iPhone, I believe the overall market would have been down closer to 25% y/y.

Gross margin and profits were slightly better than expectations.

Guidance: Shares of AAPL traded down about 2% after the earnings call given September quarter guidance, excluding the impact of FX, calls for revenue to be down 3.5% y/y. The company will benefit from a 2% y/y FX tailwind, so factoring in FX, revenue in September will be down about 1.5% y/y compared to Street expectations of up 1% y/y.

  • iPhone and Services growth in September will accelerate, and Mac and iPad will be down-double digits from difficult comps last year with new Macs and new iPads.
  • September quarter gross margins are expected to be flat from June. This is a positive development given over the past two years gross margin has dipped by about 1% sequentially from June to September.

It's about the flywheel

Apple continued the trend of growing its active device installed base, an important metric for long-term investors. The commentary was similar to the March quarter saying that it grew and stopped short of giving exact numbers. In December they reported the base at 8% y/y, reaching over 2B devices. I believe the growth for the past two quarters was likely in the 2-3% y/y, and the overall base is now approaching 2.05B devices. If you are curious, I estimate about 1.2B of those are iPhones.

I believe we are entering a new chapter of how investors view Apple. Over the next five years, I expect investors will increasingly see Apple as a can’t live without consumer staples company. The stock’s reaction to a soft September revenue guide and only being down 2% is the latest evidence that this investor shift is happening. The Apple flywheel is alive and well, following a 20-year success story in which consumers buy one Apple product, fall in love, buy another product, add a service, upgrade, and repeat.

Apple updates its active installed base about once a year, which means we may have to wait six months for the next data point. In the meantime investors will likely be increasing their focus on the metric given if it keeps growing, investors can sleep well at night.

I continue to believe Apple should trade at a premium to other consumer staples given it has both earnings stability along with optionality to accelerate revenue growth. Coke, Clorox, and P&G currently trade at 24x 2024 EPS. AAPL now trades slightly above that group at 28x with the optionality to reaccelerate revenue around India, wearables, Vision Pro, health,  financial products, and auto along with adding AI to the fabric of all of its products.  Some of that is already baked into estimates, with consumer staples companies expected to grow revenue at 4% y/y in 2024 compared to Apple at 10%.


The India opportunity

When it comes to the Apple growth story, the company needs new big markets to go after to sustain a 5-10% revenue growth over the next 7 years (until 2030).

India is one of the important parts of Apple’s growth story for the balance of the decade. On the earnings call, Cook commented that India hit a June quarter revenue record and grew “strong double digits” and the company opened two new stores that Cook commented are “beating expectations.”  The company is early in the process of building out channels and putting investment in direct-to-consumer. It’s the largest market in the world, and Cook says they have a “very very modest market share and it’s a huge opportunity.”

This begs the question, how much can India move the needle for Apple? The company does not break out sales for the country, and I estimate that India is about 3% of revenue today or ~$12B in sales growing at 20-25% y/y. Long-term I believe India should surpass Greater China, which will account for about 20% of sales this year or just under $80B.

While at first take it’s hard to believe that Apple could grow India from $12B today to $80B in seven years, the China case study is evidence that the company can turn on mega growth when it goes hard after a large addressable market. In 2010 China sales were about $3B and seven years later reached $58B, which gives some creditability to the theme that India will soon be Apple’s biggest needle mover.

If you factor in that it takes seven years to reach $80B in India revenue, that translates to India alone can add an additional 2-3% to annual y/y revenue growth to the overall business. I believe Apple has a goal to increase the business by 5-10% a year, so picking up a couple of percentage points of growth from one region is measurable.


Vision Pro

I was surprised that the topic of Vision Pro came up in the last question in the Q&A. Cook commented that Apple is currently shipping headsets to developers and expects to continue shipping the device “early next year.”

I believe spatial computing will join mobile as our central daily computing platforms and by 2030 it will account for more than 10% of Apple’s overall business. Most investors think it’s too expensive, too clumsy, and will be an afterthought by the end of the decade.

The reason is to date, headsets have been a technology solution looking for a problem, which has stoked questions about the category’s utility. The iPhone’s tentpole features were clear: a widescreen iPod, a phone, and an internet communicator. Apple Watch offered: a timepiece, a new way to connect, and activity tracking.
Surprisingly (and contrary to the common thinking on iPhone and Apple Watch), Apple was clear from the start about what made those products different and better. Both are critical in order to create a new category and start a paradigm shift.
Vision Pro’s singular tentpole feature is spatial computing. It brings the digital world and the physical world together. As an example, during my demo, one feature that stuck out to me was spatial video, which will change how people recollect memories. The workplace, entertainment, and education will also benefit in new ways from spatial computing.
With Apple’s conception of spatial computing, you don’t feel closed off to the physical world like in VR. The real world is accessible and apparent, so using the product feels natural. This is testimony to the revolutionary hardware and software that powers Vision Pro.

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