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For Apple, It’s All About the Active Device Base
Apple, Themes
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.

Key Takeaways

Upside to March and a soft June guide is an afterthought compared to the growing device base which means the Apple franchise is getting stronger.
Apple's growing active installed base is the substance of why it's becoming a consumer staples company.
It's clear that Apple sees India as a key growth opportunity that is just starting to take off.
Few details were shared about Apple's AI plans, but it's clear it will impact Apple's business.

It's all about the device base

For the March quarter, Apple reported 2% revenue upside and 7% earnings upside. June guidance came in below expectations, calling for a 2% y/y revenue decline compared to Street estimates of 2% growth. It is worth noting, FX will be a 4% headwind in the June quarter, which means some investors may view the revenue guidance as in line with the Street. My sense is many analysts knew about the upcoming FX impact which means it should have already been reflected in the consensus estimates.

Two years ago I would have expected shares to be down on those results and guidance. Instead, they are up in after-hours trading by 2%. I believe the reason is investors are putting more weight into the company’s device base.

Apple’s earnings press release led with the Cook quote on the active device growth, and CFO Luca Maestri mentioned it twice in his prepared remarks. In the Q&A, the topic came up in 4 of the 12 questions.

Apple did not report the base’s growth rate as they did in the December quarter (up 8%), but they did report it grew which is impressive given products revenue was down 4.6% y/y in March. That means more Apple customers are adding devices, and many of the devices that get turned in/resold are being refurbished and sold to first-time Apple customers. The used Apple device story is emerging as the company’s avenue to target the most price-sensitive smartphone buyer. While Apple does not directly benefit from the sale of a used device, there is a long-term revenue opportunity of selling services and capturing hardware upgrades in future quarters.


The next chapter in the Apple investment case

Every 5-10 years the Apple investment thesis changes. Twenty years ago it was a hardware product company that launched into new markets with the iPod, iPhone, and iPad. Ten years ago it was the start of recurring revenue with Services. While services added visibility to earnings, the hardware segment was still a nagging concern for investors given the hard lessons of the past when must-have consumer device companies broke, notably Sony, Nokia, and Blackberry.

I believe we are entering a new chapter in 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 June revenue guide 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 nine 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 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 26x 2024 EPS. AAPL trades at 24x with the optionality to reaccelerate revenue around wearables, 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 7%.


India becomes an investor focus

India was another focal point of the earnings call, mentioned five times in the prepared remarks along with three questions. While the company does not break out India’s revenue, I estimate it accounts for less than 3% of sales today. Long term, the India opportunity could be as big or bigger than Mainland China which I estimate was 14% of sales in the March quarter.

Cook made it easy for investors to understand how he feels about the opportunity and framed it with the following comment:

“Looking at the business in India, we did set a quarterly record and grew very strong double digits year-over-year. So it was quite a good quarter for us. Taking a step back, India is an incredibly exciting market. It’s a major focus for us. . . The vibrancy is unbelievable. Over time, we’ve been expanding our operations there to serve more customers. And three years ago, we launched the Apple Store online. We launched two stores just a few weeks ago, and they’re off to a great start, one in Mumbai and one in Delhi. We’ve got a number of channel partners in the country as well that we’re partnering with, and we’re very happy with how that’s going. Overall, I couldn’t be more delighted and excited by the enthusiasm I’m seeing for the brand there. There are a lot of people coming into the middle class, and I really feel that India is at a tipping point, and it’s great to be there.”

I’ve studied Cooks’s comments for almost twenty years. He’s a glass-half-full kind of guy, which means I’ve grown to expect upbeat comments about products and the company’s prospects. That said, his optimism around the India opportunity stands out as bullish. The topic is sure to be a key focus for investors in the years to come, similar to China’s growth ramp from 2010-2015. On top of that, India can play a key role in diversifying manufacturing away from China.


Cook views AI as "huge"

I was surprised the topic of AI was not mentioned in the prepared remarks and only came up once in the Q&A.

I believe Apple is downplaying the opportunity because they don’t want to participate in the AI investor hype cycle. That said, they’ve been doing a lot in AI. In a 2017 interview with Bloomberg, Apple CEO Tim Cook confirmed Project Titan, Apple’s car project. Cook referred to this as “the mother of all AI projects.” In 2018 Apple hired John Giannandrea to head Machine Learning and AI Strategy. Previously he was at Google running Machine Intelligence, Research, and Search. In other words, he is one of the world’s smartest people when it comes to AI. Since his joining, Apple has shared little about what he is working on.

On the call Cook’s response to the AI question gave me the sense that Apple is being smart (similar to Google) about rolling out AI and it will have a meaningful impact on most of their products in the future. Cook said: “As you know, we don’t comment on product road maps. I do think it’s very important to be deliberate and thoughtful in how you approach these things. And there’s a number of issues that need to be sorted as is being talked about in a number of different places, but the potential is certainly very interesting. And we’ve obviously made enormous progress integrating AI and machine learning throughout our ecosystem, and we weaved it into products and features for many years, as you probably know. You can see that in things like fall detection and crash detection and ECG. And so we are — we view AI as huge. And we’ll continue weaving it in our products on a very thoughtful basis.”

If you want a glimpse of AI in Apple products today, go into Photos and search for “dog” (assuming you have a dog).  The results will give a sense of AI in action. The good news is Apple does not use those images to train the models (Google does), which means your photos are safe.

I’m expecting to hear more about AI at next month’s WWDC. At the top of my wish list: generative AI within Mail.






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