Kramer: The tech giants are using "capex" to replace "opex"

Key Concepts

• Amazon: Cloud market share, AI workloads, AWS revenues, Project Reneer, non-AI workloads, advertising business, retail margins, AI integration, headcount reduction, margin expansion, capex vs. OPEX, automation, work culture.
• Apple: Price target, street expectations, iPhone sales (16 & 17), super cycle, sales boost, FY26 growth, EPS, supply constraints, new form factor, higher prices, in-house modem, Qualcomm, TSMC, innovation, consumer perception, installed base, December quarter projections, Apple Intelligence, AI partnerships, purchase consideration, ecosystem lock-in, services growth, iCloud, Apple Care, App Store.
• General: Market share, analyst notes, AI workloads, revenue, margins, capex, OPEX, automation, big tech, multiples, earnings growth, form factor, supply constraints, tailwinds, installed base, ecosystem, services.

Amazon

Cloud Market Share and AI Workloads

The discussion begins by addressing the narrative of Amazon losing market share in cloud computing, particularly for AI workloads. The speaker asserts that recent performance, including strong order books and the activation of "Project Reneer," effectively puts this narrative to rest. It's highlighted that the growth in AWS revenues is not solely driven by AI, but also by significant contributions from non-AI workloads.

Advertising and Retail Margins

Beyond cloud services, Amazon's advertising business, described as its highest-margin segment, is experiencing accelerated growth. Furthermore, there are indications of improving underlying retail margins for the company.

AI Integration and Headcount Reduction

While Amazon may not have a publicly visible chatbot like some competitors, AI is deeply embedded across its cloud, retail devices, and advertising units. Regarding the company's previous layoffs of approximately 14,000 white-collar workers, CEO Andy Jassy attributed these cuts to a cultural shift rather than AI. However, the speaker argues that AI is indeed contributing to margin expansion and headcount reduction by enabling companies to replace operational expenditures (OPEX) with capital expenditures (CAPEX) through automation. This strategic implementation of systems to automate tasks previously performed by humans is seen as a driver for the record margins observed in big tech, including Amazon, which would have achieved a record margin in the third quarter excluding one-off items.

Apple

Price Target and Street Expectations

The conversation shifts to Apple, where the speaker's price target of $277 significantly exceeds the street's consensus of $261. Despite this bullish outlook, the speaker emphasizes a disciplined approach, focusing on earnings growth to underpin valuation multiples rather than solely relying on momentum, especially after strong financial results.

iPhone Sales and Growth Drivers

The discussion touches upon strong sales of the iPhone 16 and 17, prompting questions about a potential "super cycle" or a temporary sales boost. The speaker projects 13% growth for FY26 with $9 EPS, contrasting with the street's expectation of 5% growth. Apple's guidance of 10-12% growth for the largest quarter of the year is seen as conservative, likely indicating higher actual growth. Key growth drivers identified include:

• New Form Factor: A significant design refresh after four years of similar aesthetics.
• Higher Prices: Increased pricing for the new models.
• In-house Modem: The integration of Apple's own modem, replacing an expensive $60 Qualcomm component with a $20 cost to TSMC, thereby boosting margins.

These factors counter the earlier skepticism about Apple's ability to innovate and grow, as evidenced by consumer demand and the projected $140 billion+ revenue for the December quarter.

Apple Intelligence and Ecosystem Lock-in

The impact of "Apple Intelligence" is explored. While Tim Cook anticipates more AI partnerships, the speaker notes that current iPhone 16 and 17 models are already capable of running Apple Intelligence. The question arises whether Apple Intelligence is a primary purchase driver or an added benefit. The speaker recounts asking Tim Cook directly if AI is a purchase consideration, to which Cook responded affirmatively, though it's not being heavily marketed yet. The full marketing push is expected next year with refreshed Siri and user-friendly features.

Apple Intelligence is seen as another factor contributing to the company's high customer retention rates within its ecosystem. Once users are integrated into the Apple ecosystem, they tend to remain, leading to high attach rates for other products like the Apple Watch and AirPods. This ecosystem lock-in also explains the substantial 15% growth in services revenue, driven by utilities like iCloud, Apple Care subscriptions, and App Store purchases.

Purchase Consideration for Apple Intelligence

When pressed for a personal opinion on whether Apple Intelligence is a driver for phone purchases, the speaker concludes that, at present, it is not the primary reason. Consumers are primarily buying new phones due to the attractive new form factor and the appeal of the products. The company's vast 1.3 billion installed base, coupled with the annual sale of 250-300 million phones, indicates that sales volume is not a significant challenge.

Conclusion

The analysis suggests that Amazon is successfully navigating the cloud market, with growth driven by both AI and non-AI workloads, alongside a strong advertising segment and improving retail margins. AI is playing a role in margin expansion through automation. For Apple, strong iPhone sales are underpinned by new design, higher prices, and cost-saving in-house components. While Apple Intelligence is a strategic development for ecosystem retention and future growth, current iPhone purchases are primarily driven by product appeal and form factor, leveraging Apple's massive installed base.