discountopinion

Clearly a challenging quarter on the hardware side and the story seems to be repeating over the last few quarters.
The services story is becoming increasingly pronounced and thus a source of exposure given the anti-trust activities looking to unlock the walled garden and threaten the partnership with Google.

All things being equal then Services may get into relative gross margin contribution parity with hardware in Q3 2025. 
Below is my calcs on the recent quarterly results for services. Errors may be in there

Metric	Current Year (March 30, 2024)	Previous Year (April 1, 2023)	Year-on-Year Increase (%)
Services Revenue (million USD)	23,867	20,907	14.16
Cost of Services (million USD)	6,058	6,065	-0.12
Absolute Gross Profit (million USD)	17,809	14,842	19.99
Gross Margin (%)	74.62	70.99	5.11
Relative Gross Margin Contribution (%)	42.13	35.36	19.15

I have to say that most Equities analysts talk their own book.

I.e. if their most profitable clients are looking to load up on AAPL then they will put out cautionary notes to the public about AAPL to allow their clients to buy into depressed demand and thus secure lower average per share prices. Reverse behaviour if looking to offload shares in bulk then talk up the stock to sell into strong demand to get as much for the shares as possible.

Looking objectively at AAPL and unit sales for a minute. Yes handset sales are somewhat threatened as people stretch their upgrade cycles longer and longer. This is somewhat offset with building momentum in new markets like India and Indonesia with huge populations, rapidly growing affluence and low current base for Apple.

Overall selling devices may be less of the story for AAPL in the next few years depending on how some pivotal rulings may or may not change the landscape. This is where one should keep one's eye as services have about 2x gross margin compared to devices and if continuing uninterrupted will soon be 50% of overall gross margin contribution.

Cutting AAPL targets due to handset concerns is quite dumb. Being somewhat concerned with seismic shifts in the services revenue is a better thing to be focused on and caution is needed here.

AAPL needs to better articulate their story of how they will prosper in a world with multiple app stores, competition of in-app payments, search engine placement competition or bans. I.e. what is the growth model with minimal control of the eco-system vs. strong control as it is now.

Personally I think Apple has a bright future ahead of itself as most customers will remain loyal to the brand and the service ecosystem. It is an aspirational product and ecosystem in most countries and as a comparison LMVH, Hermes and others are doing exceedingly well despite there being a mee-too universe of copycats. On the other hand Hermes does not stop the wearer from having Zara trousers together with a silk scarf. Apple currently limits the customer from mixing and matching devices and services with others for the most part.

From my side truth and perception are sometimes hard to disentangle. Apple not having visible generative AI products and a really poor quality assistant Siri that has fallen behind the times makes perception of falling behind the truth. Apple will likely have issues in attracting AI talent that is gravitating towards Google, Microsoft, Meta, Tesla etc.

They can have all the innovation in the world behind closed doors but silence is increasingly equaling falling behind in a market that is extremely open source and open discourse about their innovations.

In my view it is a huge miss at Apple to be so behind in shipping strong AI features in their products and OS. Some executives should really be replaced as they have become complacent with a string of years of high profits and margins. Craig should have ridden the AI wave but dropped the ball. They are getting the old bank disease. 

As an Apple fanboi, I find it hugely disappointing that Apple is not ground zero for some of the seismic shifts in the industry on this topic. Acquiring Siri a decade so ago was a great move and then they completely let it die on the vine. 

Right now it seems like the elite at Apple can be found in the chip department and the rest are muddling through bailed out by industry leading silicon.

Multimodal models are now busy blowing the barn doors off what is possible and Apple is busy polishing the edges of the as-is.

I have no doubt that Apple explores all sorts of concepts and files patents. Some of it may be PsyOps against the competition to occlude their real intent.

Apple Ring - feels meh if already having a watch.  A better product would be a scaled down Apple Watch that can tell time, health features, cellular, gps and satellite comms with personal attack alarm. Many schools are banning smart phones and smart watches regardless of the software modes for use in school.. a visibly scaled down version would be great for kids.

A ring would be a pain in the neck to scale to mass volumes since there will be a wide range of finger sizes. Customer variance in size is low cost to manage when having the variance in a rubber loop on the iPhone. I do not see it for a ring unless reaching massive scale.

Apple smart glasses? Not yet. Need massive uplift of Apples AI chops first.

AirPods with cameras? Feels like a massive distraction instead of doubling down on the market segment of assisted hearing. 

Hi Dewme,

I see your points and my points were not articulated well.

Amazon seems to be abandoning Alexa and giving up on the ecosystem since it was an initial loss leader for a way to shop with Amazon that never appeared. Amazon will not continue to subsidize the Alexa ecosystem forever.

the current use cases for both Siri and Alexa merely scratches the surface of what voice based computing can offer. Children in particular love having conversations and learning. People with vision impairment benefit from HomePods a lot.

i didn’t mean for apple to aim for the price point of the cheap echo dots, I meant for apple to lean in on device local ai above and beyond what Alexa and current Siri are capable of.

As home automation becomes ever more intrusive in our lives then apples privacy ethos is a great selling point. Amazon is terrible.

the cost and price point will be determined by the capabilities of the next Apple Watch Ultra soc.

dewme said:

discountopinion said:

Ideally Apple will want to do a platform play and invest to also kick Alexa in the teeth. The Echo Dots of this world would then be painfully obsolete. If Apple can do a software only upgrade of AI capability through some magic then they will win the internet. There is a slight chance they can make it happen as current Siri models have a larger proportion of on device processing.

The Echo Dots are sub $50 USD devices that get heavily discounted during Amazon’s sales events. I don’t see Apple targeting anything in that price range and sales volume. They are ubiquitous, cheap, work well, have voice recognition that puts Siri to shame, and could probably be sold in the checkout line in grocery stores. I use mine for turning on/off smart lights and smart plugs, in-house intercom, getting weather updates, setting alarms and timers, monitoring interior temperature, and automation. None of these things require more horsepower than what’s already in them. Some of the other more advanced capabilities of the Echo Dot, including integration with alarm systems using sound recognition, serving as mesh points on certain brand WiFi systems, and in the larger models, halfway decent audio playback.

Even the cheapest and oldest Dots are more than enough for listening to radio quality music, sports broadcasts, talk shows, podcasts, etc., especially while working in the garage or shed. I wouldn’t dare put an HomePod in my garage due to living in a fairly challenging 4-season climate with snow, rain, cold, high humidity, and dust always present, regardless of the much higher price and lower functionality of Apple’s smart speakers.  Even older Echo Dot models have been updated to support Thread and Matter. How many older Apple devices are being backfitted with Thread and Matter support? 

There’s no doubt that a 20-ton excavator would kick in the teeth of a hand shovel. But what’s the point? The Echo Dot and pretty much every current Echo device is way too low of a bar for Apple to aim for. Apple also needs to figure out how to monetize AI on some of these devices. Unlike Amazon, Apple has far more options available to take advantage of, like its customer centric ecosystem. Apple has clearly set its targets appropriately and is executing on a plan that is at least a decade in process. 

I am not convinced this is true. Apple seems to be accelerating devices towards the M4 platform or they would not have dropped the M4 bomb with the iPad Pro.

Further they have demonstrated acceleration in model ramp of CPUs last year by releasing multiple SKUs of M3* at the same time. This indicates massively improved partnership and logistics with TSMC and if continued to improve then we have a fair shot at across the board launch for WWDC which would be a tour de force to signal Apple is back with a vengeance and is all in on AI.

I am hoping hoping for M4 Ultra shockwave at WWDC to send the Pros swooning.

HomePod upgrade path for AI is sorely needed as Siri for HomePod is just awful at this stage. I have observed a deterioration over the past updates of OS or maybe the HomePod 2's have worse microphones. Frustrating part is that there are no diagnostics mechanisms that easily enable a customer to understand why there are challenges.

HomePod compute will likely follow Apple Watch Ultra 3 SoC upgrade to build volume for the SoC. The mini may not benefit in the same way unless as previous commentators have mentioned that AI on HomePod can be more lightweight due to fewer use cases needed support.

Ideally Apple will want to do a platform play and invest to also kick Alexa in the teeth. The Echo Dots of this world would then be painfully obsolete. If Apple can do a software only upgrade of AI capability through some magic then they will win the internet. There is a slight chance they can make it happen as current Siri models have a larger proportion of on device processing.

As a minimum a software only upgrade of Siri will defer more back to the Private Cloud Compute again to lean in on larger models for the older HomePods and then a new series HomePod 3 will be fully on device. I would revert back to the extra latency again for proper fidelity Siri on older devices rather than the current issues.

I would bet on tandem OLED for the flagship iPhones since Apple has proven the tech for the iPad Pro and it would put the Pro line in sync with premium visuals.

I highly doubt they will go for under screen anything as what is the pull factor? Yes TouchID is useful but likely they need all the space they can get to bring enhanced camera optics and telescope lens and potentially the double OLED display in addition to AI enhanced SoC.

OMG so tempting to get the M4 IPad Pro with all the trimmings. I am holding out though to understand if the 8GB vs 16GB is of material importance or not for the future.

Woah.. NPU in M4 seems to be 2x of TOPS than M3... Memory bandwidth is also up 20%. GenAI here we go.

Can't wait to see an Ultra or Extreme version of this baby.