Apple: Here's why Morgan Stanley's Erik Woodring is bullish on the stock

Is this the week that Apple finally found its footing? Let’s ask Eric Woodring. He is Morgan Stanley’s Apple analyst. He is with us at post nine for his first TV reaction to that report. Good to see you. Welcome back. So I look at your notes today. You say, quote, it’s hard to not be more bullish on Apple here. Why so sure? So I think the risk ultimately coming into earnings was a fear of a guide down. We actually got a guide up. So we move past the June quarter guide now and we look at the developer conference upcoming, the iPhone launch coming later in September. This is historically when an iPhone when Apple outperforms, yet we’ve seen the stock start the year as its biggest, as one of the biggest underperformance years in the last decade. So there’s a bit of a catch up trade. The risk is behind us, estimates seem de risk and there’s a reason to be excited about the future. Well, the revenue decline, OK, the fifth time in six quarters that we’ve seen that. What reverses it and why doesn’t that trouble you more sure. So there’s there’s the good and the bad, let’s take the good first, which is services, right. Services growth outperformed 14%, very consistent all time revenue and and record gross margins. On the other side, the product business is still relatively weak, iPhone declining 10% year over year. The total product business down 8%. There’s still work to do in what I’d call an uneven consumer environment, but what Mr. Market cares about is what’s ahead of us, not what’s behind us. Ultimately, it still does come down primarily to the iPhone. That’s where the AI narrative really becomes weaved into. And obviously, I assume we’ll get into this, but that’s where we are more bullish as we look forward because of the AI narrative and the AI playing into an iPhone refresh cycle, which has been stalled, right? Exactly. The opportunity to refresh an aged installed base at a time when there’s concerns that Apple has gone X growth introducing this new technology for the first time again that is ultimately can be a catalyst in our to drive that refresh cycle, re accelerate growth. Why do you think the the refresh cycle has been as disappointing as it’s been? Sure. So again, over the last, let’s call it decades since the iPhone was launched in 2017, I think the innovation curve has looked very different. It’s flattened over time. The early days of the smartphone market saw very significant upgrades. What we see now are are maybe more subtle upgrades, maybe some of them even in the guts of the phone, right? Apple silicon is big, a big powerhouse recently. So. So ultimately what Apple needs to do is one, introduce new innovation. AI can be that catalyst. But two, ultimately we are still in a very uneven demand environment, concerns about rates, concerns about the economy, concerns about where Jobs might be going. If there’s something to look forward to in the future in terms of rate cuts, there could be more confidence from the consumer to say, hey maybe I’m willing to spend a little bit more in the future. I’m glad you mentioned innovation because the the critics today and there are a few, yeah, of course. And the snark is about innovation and the lack thereof in those folks mind and say the most innovating thing, the innovative thing that they’re doing now is the massive buyback, right. And that this is a financial engineering story, not an innovation story and that nothing material has changed right now. You’ve probably heard the same criticism today around the way how do you respond to that? Well, listen, let’s, let’s take both of them separately. Apple announced the incremental $110 billion buyback authorization, biggest in company history. They are effectively generating that. We call that incremental. I know, I know, but they are, they are generating too much cash, a good problem to have and they’re going to return more of that to shareholders via buybacks. That doesn’t mean that they aren’t investing. Look at their R&D, they’re going to spend about $31 billion in R&D this year. How much does Microsoft, Microsoft spend, $31 billion. How much does Google spend $35 billion to say that they aren’t innovating? I I just think is not necessarily seeing for the forest of the trees. They have a different business model than many of their other mega cap tech peers and I just think that sometimes maybe that gets lost in conversation. Apple doesn’t need to invest in a massive cloud business that is more profitable at scale. What they need to do is leverage their existing device space, provide new features to their consumers and just drive that catalyst engine again record record installed base across geos and categories entering the June quarter. All of this becomes very important when it comes to R&D and and ultimately I I do think that they’re ultimately spending, they are innovating. It just looks different than it once did.