Apple

Apple’s September quarter results reflected stronger than expected iPhone sales and gave guidance for December that suggested top line growth will essentially be unchanged from September. In other words, Apple Intelligence will not accelerate growth in the December quarter, a reality that is disappointing to the "iPhone supercycle" camp. I believe once these features are in place, and available worldwide, the supercycle will begin, likely in the Jun-25 quarter.

I believe iPhone revenue will grow at 15% in FY25, compared to the Street's estimate of 7%. For FY26, I expect 17% growth versus the Street’s 8%. The most significant factor in my estimate is my belief that 8% of the iPhone installed base will upgrade early in FY25, and 14% in FY26. However, the dark side to the supercycle is I estimate iPhone revenue will be down 5% year-over-year in both FY27 and FY28.

Meta and Google are shifting their development focus away from Virtual Reality (VR) and Mixed Reality (MR) to ambient computing in the form of smart glasses given the potential that artificial intelligence adds to the form factor. I believe the annual market for smart glasses will reach hundreds of millions of units over the next decade, leading Apple to refocus its Spatial Computing initiatives to be more in line with Meta and Google wearables.

Apple reported another solid quarter, with sales growing by 5% year-over-year, marking an improvement from the 4% decline in March 2024. The September guidance suggests that growth will remain steady, which is a positive surprise given the potential impact of the Osborne Effect. More importantly, I continue to believe that the company will experience its strongest product cycle ever over the next two years, driven by Apple Intelligence that will lead upside to earnings.

Apple made good on expectations, announcing generative AI integration across its software and applications. Accessing these features will require 85% of Apple users to upgrade some or all of their devices over the next few years. This means revenue growth in FY25 and FY26 will likely be +10%, ahead of the current 6% and 4% expectations, which should be a positive for AAPL.

The most recent data coming out of China gives us a better picture of what is going on in Apple's China business. iPhone sales in Mainland China were likely down 5% y/y in Mar-24, better than Apple's reported 8% decline in Greater China. When Cook said iPhone grew in China in Mar-24, he was likely talking about units, not revenue. In other words, this means China's non-iPhone segment was down 12%, notably lower than the global average of Apple's non-iPhone revenue which was up 4% y/y.

Three of the four iPads got long awaited updates including thinner design, bigger screens, faster chips, and more memory. These changes will jump start the segment's growth in June and September after being down for 9 of the past 10 quarters. Looking into 2025, I expect the iPad to be on a steady decline of around 2% as the segment is impacted by the reality of infrequent upgrades. The big surprise announcement was the pace that Apple is introducing new chips, a sign that the company will use hardware as a competitive advantage once they get more into the AI race.

Shares of $AAPL traded up 6% following March results as investors were relieved that the company maintained Street revenue guidance along with an increased share buyback. The next seven months will likely show Apple's business accelerating every quarter from down 4% y/y in Mar-24 to up 6% in Dec-24. More importantly, the company reiterated their optimism that they will bring generative AI to most of their products, likely starting in the Fall. Bottom line: Apple's business is intact, revenue growth is improving, and the company is pursuing generative AI to further boost sales.

Joz, Apple's Head of Marketing, posted on X saying this year’s WWDC will be “Absolutely Incredible!” as in "AI". This will mark the first glimpse into the company's generative AI strategy and be a monumental day given it will usher in the biggest change in Apple's operating system design since the mid-80's point-and-tap/click interface. This will be a new communication interface driven by generative AI.

In 2020 Apple was more or less victorious over Epic games in defending the App Store. Now the DOJ is taking aim at Apple, largely focused on the iPhone’s role at promoting the sale of software and services and locking users into upgrading. The substance of the debate on shares of AAPL will focus on two topics: 1) What will the impact be to Apple’s Services segment? 2) How long will this take to sort out? While I believe this will take three years to sort out, I expect little will actually change, just like we saw 25 years ago with the DOJ going after Microsoft.

The news of Apple launching its own model and talking with Google and OpenAI to license a foundation model speaks to the degree that the company's growth North Star has changed over the past month. First, it was Project Titan getting canceled, now it’s considering doing something rare at Apple, license another company's tech stack. I believe Apple now gets it. AGI has the potential to have a profound impact on their business, and they need to add AI to the company's core competency of hardware, software, and services. To get there, I expect more investment, and a slight decline in margins in the near-term, and expanding margins long-term.

Deepwater’s first annual Frontier Tech Survey measures the American public’s viewpoint on emerging technologies, including AI, Electrification & Automation, the Creator Economy, and Health-Tech. Key Takeaways: AI – General usage and awareness remains low; opinions are mixed when it comes…