Apple Q4 earnings preview: Analyst says that there's 'a lot of good news built into the shares'

Key Concepts

• iPhone 17 Cycle: The current performance and demand for Apple's latest iPhone model.
• AI Super Cycle: The anticipated significant growth driven by artificial intelligence integration in products.
• Lead Times: The duration between ordering an iPhone and receiving it, often used as an indicator of demand and supply chain health.
• Supply Chain Diversification: Apple's strategy of assembling products in different countries (e.g., India, Vietnam) to mitigate risks like tariffs and geopolitical issues.
• Competitive Pressure in China: The challenges Apple faces from local competitors in the Chinese market.
• Hardware Conduit for AI: The debate around what future hardware, beyond smartphones, will be the primary platform for AI adoption.
• Services Revenue: Apple's revenue generated from services like the App Store, Apple Music, iCloud, etc.
• Installed Base: The total number of active Apple devices owned by consumers.
• Margin Expansion: Increasing profitability, often driven by higher-margin revenue streams like services.
• Amazon Job Cuts: Recent reports of Amazon planning significant corporate job reductions.
• Andy Jassy's Margin Focus: Amazon CEO Andy Jassy's strategic emphasis on improving and maintaining company margins.

Apple's Market Position and iPhone Performance

The discussion centers on Apple's current market valuation, nearing $4 trillion, and the strength of its iPhone cycle. Apple's outlook for the September quarter anticipated mid-to-high single-digit revenue growth, driven by strong demand for the iPhone 17. The key question is whether the company exceeded these expectations and how the December quarter will perform. While there's no clear evidence of a major "AI super cycle" driven by the iPhone 17, there appears to be pent-up demand for new iPhones, with performance aligning with management's guidance.

Lead Times and Supply Chain Dynamics

A point of contention is the interpretation of extended iPhone lead times. Some analysts view this as a bullish indicator of strong demand. However, Tom suggests that the data might be misleading due to Apple's supply chain diversification. With iPhones being assembled in India instead of China for certain markets, and other products assembled in Vietnam for US sales, the comparison of lead times to previous periods might be an "apples to oranges" scenario. This shift in manufacturing locations, coupled with ongoing reliance on China for other aspects of production, could be affecting the perceived performance of lead time data.

Competitive Landscape in China

Tom highlights a significant challenge for Apple in China, where it generates approximately 10% of its sales. Beyond AI-related competitive pressures, Apple faces substantial competition from local players in this crucial market. This competitive pressure is a key factor to consider when evaluating the overall strength of Apple's performance, potentially tempering the optimism derived from lead time data.

The AI Question and Future Hardware

A significant portion of the conversation addresses the skepticism surrounding Apple's AI strategy. Many critics argue that Apple lacks a compelling AI story, posing an "existential risk." However, investors appear willing to overlook this for now. The primary reason cited is that the iPhone still accounts for over 50% of Apple's revenue. Even if iPhone 17 sales are driven by upgrade cycles rather than AI, the sheer volume of iPhone sales can still significantly impact earnings.

The broader question remains: what hardware will serve as the primary conduit for AI adoption beyond the smartphone? While AR/VR technologies, including Apple's Vision Pro, are mentioned, they are not yet seen as the definitive future hardware for widespread AI usage. The smartphone is expected to retain a role, albeit potentially diminished compared to its current dominance.

Services Growth and Profitability

The discussion shifts to Apple's services segment, which has been a strong performer and a key driver of the company's multiple expansion due to its relative profitability. Continued growth in Apple's installed base across all devices is expected to fuel further outperformance in services revenue compared to hardware sales. Furthermore, services revenue benefits from more favorable margins and is largely exempt from tariffs, presenting another positive outlook for the stock.

Amazon's Corporate Job Cuts

In the final moments, the conversation touches upon a Reuters report indicating Amazon's plan to cut up to 30,000 corporate jobs, representing about 10% of its corporate workforce. Tom interprets this move as a continuation of CEO Andy Jassy's focus on margins. He draws a parallel to previous actions, such as the "return to office or be laid off" policy, suggesting these job cuts are an amplified measure to manage costs and improve Amazon's overall profitability.

Synthesis and Conclusion

The current positive sentiment around Apple, reflected in its market cap, is largely underpinned by the perceived strength of the iPhone 17 cycle, which is meeting management's revenue growth expectations. However, a deeper analysis reveals complexities in interpreting demand indicators like lead times due to supply chain shifts. The competitive landscape in China remains a significant concern. While Apple's AI strategy is still under scrutiny, its dominant iPhone business provides a buffer. The growth and profitability of its services segment are crucial for future multiple expansion. Separately, Amazon's reported job cuts signal a strategic push by its leadership to enhance and maintain profit margins.