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.

Tim Cook has excellent access to Trump so likely Apple will be an example used in a soon to come tariff war.

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 trying to make lemonade out the lemons that Trump gave us.
Ok Looking at the bright side of the chaos…

Firstly - devices may be 80% of revenue but only about half of net profits. Services division is the best growing with 75% gross margin. Unlikely that tariffs will be as impactful to the services? Also potentially it may be possible to fairly quickly pivot services into a regional revenue model thus having the services “produced” in a local region and avoiding tariffs.

Apple exec team has one of the best logistics persons in the world - Tim Cook. Highly unlikely that Apple has not war gamed any and all scenarios around tariffs and Trump as the tariffs are not a surprise and have been telegraphed loudly and for a long time by the US govt. 

The stock market kneejerk reaction is risk off which is not based on individual company fundamentals or ability to weather the storm. 

Apple has a massive cash pile dedicated to share buybacks which will now achieve a lot more with the same cash. Apple is likely calmly retiring shares at a steep discount and lowering the EPS impact that tariffs may introduce.

Apple has a very tariff sensitive manufacturing strategy though compared to say Tesla that sources most of its components at its local manufacturing hubs in the US, Europe and China.

Apple has a high profile commitment to invest in the US which may now be at risk and Trump has used it as a case study of how his America First strategy is winning. Likely this gives Tim Cook some influence in agreeing better terms for Apple as a Presidential exception and Trump can sell it as similar to the Gold VIsa for 5 million USD.. i.e. invest X in the US and become tariff exempt.

I dont know if China considers the Apple phones manufactured in China to be caught by the tariffs. If not and the above deal with Trump works then the 2 largest markets for Apple are recovered and Europe will likely consider the Apple products as manufactured in China or India (?).

Chaos makes business hard to predict and there are many risks. There are some truisms though in classic thinking - China represents chaos as both danger and opportunity. Notable investors like Baron Rothschild paraphrased “on the sound of gunfire - invest”.

The company coming best out of all of this will be Berkshire Hathaway with 300 Billion USD of dry powder.

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.

As previous poster has said - Nvidia is likely used for training and fine tuning whereas Apple Silicon is used for inference. Scaling laws are now also relevant for inference with the advent of reasoning models. Apple still has a capex light AI strategy which is a boon for its bottom line.

Btw i see a lot of questions on how people could vote for Trump.. well i ask myself that as well but consider also that likely a large chunk of his support base own no or small quantities of equities and thus likely do not give two flying quacks about the chaos in the markets. They will care when/if inflation kicks off though.

IDK if I am correct, but I am always careful about what analysts are projecting and saying.

It can be that they are talking their own book... i.e. they talk down stocks when they have large clients that want to accumulate a position and buy into weak demand or increasing sales. They talk up a stock when they have large clients that want to offload a large position without moving the market down and thus increase the buy-side demand to sell into stronger prices.

No analyst in my mind would publicly talk up a stock without having all their key stakeholders first move on the signals and insight they have produced before the wider market benefits. Naturally all equities analysts will have the same interest or indeed may want to poison the well for the competition by dropping signals early.

Or maybe I am jaded

Overall it was a healthy development for the Apple business. Services keeps on its stable growth and the very positive outcome from my side was the bump in iPhone sales. Clearly the Apple intelligence hype is triggering upgrades and hopefully this will be a strong trend in the next couple of generations of devices. 

I think a potentially key missing step in Apple's AI strategy is developer friendly ways for all the GenAI startups to somehow securely tap into the growing on-device capability of Apple Silicon as a way to offset their capital burn on tokens consumption on the server side. Video AI is a clear hit among enthusiasts and likely burns tremendous amounts of tokens and capital for the startups. Apple's hybrid approach for their own models, which effectively pushes much of the Capex of compute to the customer device purchase, may paint a path for others to follow, should Apple release SDK guardrails to do so.

Apple has figured out a way to scale services revenue and investing in Apple Intelligence while keeping costs largely flat, unless they book Apple Intelligence build out in R&D which has been growing year on year.

As a shareholder I am happy with the outcomes. As a customer I am eagerly awaiting next gen AirPod Max, HomePods, and broader home automation.