00:00Apple's share is getting a boost following a revenue beat in an upbeat holiday forecast.
00:04Gene Munster of Deepwater Asset Management writing this,
00:07I expect Apple to be the best performing mag 7 through the end of the year.
00:11Gene joins us now.
00:12Gene, Apple, best performing.
00:15Why?
00:16It's pretty straightforward.
00:18There's two big levers.
00:19First is that iPhone demand for the next three quarters is likely going to outpace the street.
00:25The street's looking for around 7%.
00:27I expect it to be 10%.
00:28That, of course, is one of the big focus.
00:31That's why the stock was moving around aftermarket yesterday.
00:34It's all about the iPhone.
00:35So that piece, and it begs the question of why is the iPhone going to be better?
00:40It's not about AI features.
00:42It's less about product features.
00:44It's more about this massive upgrade pool they had back in 2021.
00:48As a reminder, that year iPhone grew 39%, huge growth.
00:54And then the subsequent 15 quarters, it basically was down a half a percent.
00:58And now we're starting to reap the benefits of that big cycle.
01:03So that's one piece is just we're going to see some better iPhone numbers and expectations.
01:08And the second is that the Apple intelligence bar is just so low coming into the new Siri next year.
01:16And I think that hope springs eternal when it comes to investors and when it comes to a feature like Apple intelligence that I believe is going to be the biggest step forward since the iPhone itself.
01:27I mean, this is a massive potential for them to contextualize personal data with some sort of digital assistant.
01:34And, you know, they've set this high bar out that it's going to be next year.
01:38Your own Mark Gurman is saying that it's going to be kind of March, March, April time frame.
01:43And I think that anticipation of that's going to be good for the multiple.
01:46So when you put those two together, I think that sales are going to be better because of the iPhone upgrade pool.
01:50And then separately, I think the multiple expands because anticipation of what's going to happen with Apple intelligence.
01:57Gene, we were had we were speaking with Dan Ives earlier of Wedbush Securities.
02:01And he said that he expects Apple to partner with the likes of Google with some sort of a Gemini partnership to provide some of the heavy lifting for the AI effort.
02:10Is that something that you're expecting?
02:12Is that kind of the underpinning of the optimism around Apple AI?
02:15That's part of it.
02:18And I think Dan's definitely on to something that what's going on with Gemini and just Apple working beyond GPT and OpenAI.
02:27And what they have told us back at WWDC in June is that they are open to other developers, other platforms, other large language models.
02:35And they've specifically pointed out to Gemini.
02:38The central question is just how much?
02:42Is this just in terms of the menu for developers?
02:45Are they going to just allow developers to use the Gemini model when they build iOS apps?
02:49Or is this something bigger where they really lean on Gemini to power this new Siri experience?
02:55And so it is a daunting task to take this personalized data and do this contextual, build these personalized bots around it.
03:04And so I expect them to pull from more than one, more than just OpenAI to deliver that.
03:10So I think he's on to something.
03:11And one of the other big questions around this is what does this mean in terms of financially?
03:16And in the case where they would be doing something with Gemini, this is a little bit of a different piece where they're actually licensing technology from Google.
03:24It's most likely where Apple would pay Google for that.
03:27Now, they've given guidance to expect some of their CapEx and some expenses around AI to go up modestly next year, a few billion dollars, which seems like chump change when you look at these hundreds of billions of dollars that are being spent.
03:39So the bottom line is that this is a cost, if they do end up leveraging more around Google, is a cost that Apple can easily manage and maintain the margins that investors love so much.
03:53Gene, is there any regulatory risk to that?
03:55Is this a relationship that regulators would welcome and not challenge?
03:59I mean, clearly, the regulatory piece has been something that has concerned investors.
04:06That has been diminishing over time.
04:09And I think what we saw with the regulatory around Google and their search deal, of course, this is about a fifth of Apple's earnings come from this Google search placement.
04:20And so the fact that that kind of went in a good direction, I think, is a sign of a little bit of a softening tone on the regulatory side.
04:29So I think that in this piece, you know, this dynamic around Google, it largely won't have a regulatory topic.
04:36There is a question about if Apple does want to do something bigger, if they want to acquire somebody like a perplexity, which I think would make a ton of sense for them.
04:43You know, that is something that may be a little bit more of a challenge.
04:47These big tech companies want to get a hold of perplexity and Thropic, but I think that regulatory piece is something that's going to make that less likely.
04:55So, Gene, if a strong iPhone 17 upgrade cycle allowed Apple to play for time when it comes to their AI offering, just how much time did it give them?
05:04How patient are you willing to be to allow Apple to figure out and solve the mess that currently is Siri?
05:10I mean, it's really the central question for Apple over the next two years, three years, maybe even five years of how much time investors are going to give them to figure this out.
05:23So point of time today is that the bar is really high because they've set that bar high about what the next series is going to look like.
05:29But if we fast forward into April and let's say that it's a disappointment, I think that the stock will clearly trade off, but investors are going to give Apple more time.
05:39Competitively, all that's on the horizon next year is this new device that we'll see for the first time from OpenAI.
05:45It'll be available likely in 2027.
05:47But there has been essentially nothing that's happened when it comes to consumer hardware AI that has changed the competitive field.
05:55And so at the end of the day, consumers love their Apple devices.
06:00This resurgence we've seen with the iPhone in the last two quarters and the guidance for December is all about that commitment that Apple customers have to the platform, that upgrade pool.
06:11And so the reality is, is that these devices just become entrenched in our lives.
06:17They just surround us.
06:18It's not just the phone.
06:20And I think that that's going to give them much more time.
06:22Yes, the stock is going to have some variations around how people feel about any given change to their AI.
06:28But ultimately, they're going to investors will give them more time.
06:32And most importantly, the consumers will because they've made such a big investment to Apple's products over the last decade.
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