Apple FQ2 2023 – Top dog.

Hardware rocks but AI flops

• Apple executed a pretty flawless quarter with market share gains in emerging markets offsetting the macro, but it is clear that when it comes to AI, Apple is miles behind.
• FQ2 2023 revenues / EPS were $94.8bn / $1.52 slightly ahead of estimates of $92.6bn / $1.43.
• Revenues were down YoY but if one excludes a 5% currency headwind, revenues managed to grow slightly.
• This is a pretty solid achievement given that its core market, smartphones, is expected to decline by more than 10% this year.
• iPhone was the powerhouse of these results with $51.3bn in revenues compared to estimates at $48.9bn which was almost entirely due to strength in emerging markets.
• Here, Apple is managing to gain share against Android confirming that almost everyone wants an iPhone but that they buy Android when they can’t afford it.
• Consequently, improving affluence in emerging markets is the main story of these results.
• To keep this trend going, affluence in emerging markets needs to keep expanding which is going to be pretty difficult in the current economic climate.
• Hence, I don’t think that this is a trend that can be relied on and I would feel uncomfortable with the expectation that this will continue in any reliable way.
• This is underscored by Qualcomm’s commentary which did not call out any particular strength at its “modem-only” customer which means that no one really knows where this is going.
• Elsewhere, the economy has had a bigger effect with Mac revenues down 31% YoY but services continue to fare well with revenue growth of 5.5% YoY.
• This is well down on the 20% YoY it reported last year but, in this climate, positive territory is a good result.
• However, when it comes to AI, Apple does not really know where it is going or what it is doing.
• RFM ranks Apple as one of the laggards in AI and there was nothing in these results that would dissuade me from this view.
• Apple’s answers to questions about AI were more vague and evasive than usual saying that it would continue to add AI to more of its products but on a “very thoughtful basis”.
• In plain English, this means “we haven’t got much and that we have no idea what to do about that whole generative AI thing”.
• The truth of the matter is that right now it does not matter that much because these models are still all in the cloud meaning that Apple devices will be able to access them whether Apple has the technology or not.
• Furthermore, having advanced language models running on the device has done nothing to lift Google Android’s market share and so generative AI is going to have no effect on Apple for a while.
• However, in the future when generative AI starts running on smartphones (as RFM research concludes that it will), then it will start to matter.
• Hence, I think Apple has time to decide what it is going to do and also to acquire one of the generative AI start-ups when it runs out of money.
• That being said, I still don’t like the shares very much which have a high multiple for pretty pedestrian growth meaning that there is much better to be had elsewhere.
• I would have Qualcomm, MediaTek and TSMC over this any day of the week.