Apple

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.

   

It's been eight years since Apple jumped into a new product category. On June 5 that will likely change when Apple is expected to preview its $3,000 developer version of a mixed reality headset at WWDC. Many investors are skeptical about the prospects of the device given headsets are currently a solution looking for a problem. I believe the trend of more immersive consumer tech experiences will continue, which should pave the way for a robust headset market. By 2030, I believe the wearables/glasses segment could account for 10% of Apple's sales (assuming they don't release a car), a business similar in size to Apple's Mac and iPad businesses today.

For the March quarter, Apple beat estimates and guided revenue slightly below the Street for the June quarter. Despite the soft guide, shares of AAPL traded up 2% in after-hours. I believe the stock's strength is evidence that investors are putting more weight on Apple's active device base which grew in the quarter to over 2B despite products revenue being down 5% y/y. A growing base means the Apple product flywheel is working which is the foundation for the Apple investment case to shift to a consumer staples company that should yield a higher multiple. On top of that, AI and India represent untapped opportunities for the company.

Apple reports March results on May 4th. Outside of the typical focus on iPhone and Services revenue and guidance there will be increasing attention on the company's active installed base, which grew 8% y/y in the Dec-22 quarter. A growing base means the Apple product flywheel is working. That base is the foundation for the Apple investment case to shift to a consumer staples company that should yield a higher multiple. On top of that, Apple is making meaningful progress in AI, a dynamic that is under-appreciated by investors.

In 2021, the theme of the Metaverse was top of mind for tech investors, punctuated by Facebook's fall announcement of the name change to Meta. Today, tech investors have shifted their attention to AI, making the potential of the metaverse an afterthought. I believe, over the next decade, the substance of the metaverse will live up to the 2021 hype. That belief is based in part on rising investment and competition from TikTok and Apple to enable that future.

At a time when few western business leaders visit China, Tim Cook's recent visit was the latest evidence of his skill in threading the needle to benefit Apple shareholders. I see this trip as 10% political and 90% business, and it accomplished three things; improved the image of China in the eyes of western management teams, strengthened Apple's brand among Chinese consumers, and bought time for Apple to diversify its supply chain away from China.

Ahead of the Apple annual shareholder meeting, I've taken an inventory of recent analyst and investor commentary. There are two things that I feel are missing. First, Apple's strength of product demand and favorable economics despite the macro. Second, Apple's wide diversity across product lines, sectors, geographies, and currencies, which affords investors the safety of a consumer staples company. I also have one question to ask management at the meeting: Will Apple Car see the light of day?

It's rare that I write about Apple missing a quarter. For the twenty years I've been following the company, I now count three times results have come in below expectations. As I peeled back the layers of the results along with the company's guidance, the big picture became more clear. Even though Apple's business is being negatively impacted by the supply chain and the macro, the company is maintaining innovation excellence with its core products, optionality with potential new products (AR and auto) and most importantly a loyal, engaged and growing customer base. All signs suggest sunnier days will return for Apple.