Apple Rallies Most in 18 Months

What’s the standout story for you? Just one thing that you learned from Apple last night, the one piece I learned is that the core business as Mark said, it’s not doing great, but it’s holding together. And there was again this fear that the estimates would be revised downward for the June quarter. They basically maintained them and I think that that is testimony to just the strength of their brand across the product lines, whether it’s be the software and the services or to even iPhone being down, it’s held together. And what I take away from that is that on the June quarter, we’re going to see revenue growth really for the first time in two years. Over the last two years, Apple’s revenue growth has averaged down 0.3%. It’s going to be up a couple percent in June, probably 4% in September and 6% in December. So that that turn around. That re acceleration is the one thing that stepped out to me, Gene. I’m showing our audience and you a table, and the table shows the list of largest announced company share buybacks in history. And unless you’ve been living under a rock, you’ll see there’s only one name on that list, Gene. It’s Apple. What’s the point in a $110 billion buyback? There’s two points. Number one is they’re sending a message to investors that they’re going to continue to return capital despite going into an investment phase related to AI. They’ve made that very clear that they think AI is going to be significant, Coke said. It’s going to impact most of their products, not just software, but hardware. And so the fact that they’re reiterating and increasing this buyback during that period, that’s one piece to it. A second is their cadence to getting to net cash neutral. And so this of course has been a goal for them for the past five years. Right now it’s at $57 billion. So they want to bring that down to zero. That means they have the same amount of cash as they have in debt. And what I see that step up from 90 to 110 billion in the buyback is an indication that they want to quicken that pace. The CFO, Luca, did mention on the call that they think that they won’t get to net cash neutral anytime soon. So that shows that just the strength of the overall business is really powering this buyback. I think investors should remain confident that ultimately that this business is producing just an incredible amount of cash, almost $90 billion a year in free cash flow. It’s remarkable despite the revenue being down basically 5% year over year. Well, we’re speaking with Gene Munster of Deepwater Asset Management. And Gene, you do a deep body of research into Apple. You yourself hold Apple shares. I believe the firm does not argue with me on this one, that there is a frustration from people around the world. They might not be investors, they might just be consumers that have an iPhone. And they say, come on man, this is Apple Cupertino. Stop messing around with buybacks and actually do something on the innovation side, Give us the degenerative AI platform on iOS or give us a serious, hard, great hardware upgrade. Do you have any sympathy with that? Absolutely. I mean Apple has been painfully silent on the topic in 2023. Of course as Mark mentioned about every other question on the call was related to AI that is now they’ve had a coming out, but they are, they are late, there’s no question about it. And another piece to just some sympathizing with that view, Another piece to this is that they got asked a question about CapEx basically going back to what happened with Meta and Google and Microsoft and all their step UPS increasing CapEx by 50 to 90% in calendar 24. And the expectation is that if Apple is serious about AI, they’re going to be pushing their CapEx at a similar rate. And Luca kind of sidestepped the question. He just kind of outlined how they approach CapEx in part first hand by their own build out and they also work with third parties. But he didn’t give any indication that that would be stepping up meaningfully and they actually maintain their margin guidance. And so I think that investors can show some, I think some frustration related to kind of again the pace. We’re going to know more in June. I would have welcomed them to have said they’re spending a boatload on CapEx, for example. I don’t think they’re going to build a foundation model to the same level that Microsoft, Google and Meta are doing. And so I think part of that is some of that frustrations to be understood. One last piece is that there you are on board on this and I think that they’re going to show some exciting things in June and beyond. Related to AI, well, let’s, let’s scratch a little bit deeper. I mean, as often as the case with Luka Maestri in particular, it’s, it’s reading between the lines. I think that’s probably a little bit kind. This is what Luka Maestri told Bloomberg’s Emily Chang last night. We have very exciting things to talk about soon, but obviously we think it’s a great opportunity. It’s a great new technology. We think it’s got a lot of potential. What does an Apple generative AI tool or platform look like in your mind, if indeed reading between those lines? Apple is working on something to that effect. So it’s going to think of it as in kind of two or three phases. The first phase, what we’ll see in the back half of this year is new operating systems, iOS and Mac OS. That’s just going to simply integrate generative AI into it. Siri may be able to have a conversation with Siri instead of just a point answer. You’ll be able to, I suspect this year be able to ask your phone to book you an Uber to the airport and then we’ll just take care of it. I think they’ll allow developers to start building AI into their apps with some foundation, a small foundation model that they’ll come out with. So it’s, I would say, early stage. I think the iPhone, this fall they will talk a lot about having iPhone AI silicon in it. And so that’s kind of the first stage, not very exciting, but at least a first step. The second piece is really exciting, which is related to agent or personalized or agentic AI. You can use any one of those phrases, but this is the idea of that You ask the device to do something for you and it does. It has multiple steps to it and it goes out and does it itself. And this is something that Apple has a unique opportunity, and especially around privacy. And Cook mentioned that in his prepared remarks, he talked about privacy as being a competitive advantage for Apple when it comes to AI. And I think what he’s hinting to is their belief in agent AI. And so how that presents itself is probably in 20 Five 2025. We’ll start to see this built more into the hardware and potentially even subscription services that allow you to do more things based on AI. And it’s, I think that to me is a really exciting product. Gene, it’s it’s been a while since you’ve been on the show. So let me milk out some value for the audience while we got you. Do you understand what’s happening in the smartphone market in China? Do you, do you understand the trajectory of where the iphone’s going in relation to the domestic OEMs, largely Android based that appear to be doing quite well. It’s definitely something we’d pay a lot of attention to and I think that the biggest force there is that there is a geopolitical element to it. Even though this is not explicitly spoken about with Chinese leadership, I think that there is a recommendation that any government employee starts to move to home homemade phones, which makes sense from their perspective and that’s a big pool. There’s a large population, we’re talking about 50 million high end phone users that work with the government and that can have a big impact when Apple selling 250 million phones a year. If you get a little bit of those to push to a competitor, I think that that has an impact. I think that the good news that’s that’s negative just there’s no way to to to to look at it any different. The good news is that the comps do get easier and 2nd is the company is talking about diversifying away from China. They spend a little bit of time on the call talking about that. But to answer your question, I think China is is still going to remain really important as a percentage of revenue. It’s about 19% right now. I suspect that’s going to drift down to 13 to 15% over the next few years.