Apple

The December outlook was better than it first appeared. Adjusting for the number of weeks in the quarter, growth in December should be 7% y/y compared to the Street that was at 5%. Additionally, the active installed base, Services, China, and gross margin showed surprising strength, evidence that the Apple revenue flywheel is rock solid.

The collective investing community is skeptical that Vision Pro will become a measurable part of Apple's business, because the utility of spatial computing is still unknown. As developers build exciting apps, demand and sales will increase.

The Financial Times has reported that Jony Ive, Sam Altman, and SoftBank are in talks to build an AI consumer device, likely a wearable. My guess is this never sees the light of day, but given the players involved it's worth considering its impact. Apple is in a good spot given the strength of its ecosystem makes it difficult for a one-off product to sway Apple users. Samsung on the other hand would be more at risk.

Meta's annual developer conference, Connect, highlighted that it shares the same vision with Apple when it comes to the potential of a new headset-computing paradigm, even if its flagship headset is light years behind (though priced far lower). Separately, Meta announced new AI products that will capture meaningful user attention.

Apple's dependency on China keeps investors up at night. Today Deepwater estimates that 40-45% of Apple's overall revenue is manufactured in China, and expects that to decline to 25-30% in five years. We believe half of the decline will be the direct result of production moving to India.

Apple excels at making consumer tech easy to use. The most recent example is the streamlined iPhone setup experience. Doing the little things right is why consumers who own one Apple product purchase additional products, locking those users in as lifelong customers.

Apple’s fall hardware event featured the new iPhone 15 family and updates to Apple Watch at prices unchanged from a year ago. While most of these updates were incremental, they’re enough to attract the 400m iPhone owners with phones more than 4 years old, which should return Apple to revenue growth in the December quarter. Most impressive was the addition of spatial photo and video capability on iPhone 15 Pro models, which lays the foundation for Vision Pro demand, due out early next year.

Shares of AAPL have recently declined by about 3% based on investor concern that an expanded iPhone ban for Chinese government employees and its affiliated companies will dampen Apple's sales. My math suggests the worst case scenario is a 1% negative impact on Apple's overall revenue in 2024. The bigger question is what's the long-term impact of the US and China moving in a different direction? The answer: Softness in China can be offset by strength in India.

The Supreme Court rules that Apple does not have give developers the option to steer payments outside of the App Store. That means that status quo of the App Store business model which should generate about 20% of the company's operating income this year is intact. The ruling also keeps Apple one step ahead in Washington's pursuit of big tech regulation.

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.

At Deepwater, our mission is to profit from where the world is going. This week, Gene got a preview of that future with a demo of Apple’s Vision Pro mixed reality headset. In this episode of Deepwater TV, Andrew and…

Apple made good on the rumor mill, announcing its first spatial computing headset, Apple Vision Pro. Available in early 2024 and priced at $3,499, it is at least $500 more expensive than most were expecting. The keynote left me with more questions than answers. After an hour-long demo my view of the product expanded. Spatial computing is a big deal. Yes, it's very expense and, yes, the selection of apps will be limited early on — but those barriers will disappear over time. Spatial computing is just too powerful not to go mainstream. I believe it will account for 10% of all Apple sales in 2030.