TOP STORY
🍎 Apple Jumps 5% This Week After Revenue Hits All-Time High

🤯 What a wild week in the markets - on Thursday, we already covered Nvidia’s -17% DeepSeek-driven crash along with Tesla, Meta, and Microsoft’s earnings, but there’s still a ton more news to cover in just the last few days…

🎯 Today we’ll focus on Apple’s earnings report and Trump’s tariffs, but first here’s a quick overview on how the markets overall performed this week:

• S&P 500: -1%

• Nasdaq 100: -1.4%

• TSX: +0.25%

• Bitcoin: -4.5%

• Nvidia: -15.8%

🍎 And last but not least, Apple, which climbed +5.3% since market open on Monday.

🤿 So let’s dive into why Blossom’s 4th favourite stock saw such a big jump…

💰 Apple’s Earnings: Service Revenues Steals the Show

 📊 First off, the big numbers:

• 💸 Earnings per share: $2.40, up 10% from last year, 2% higher than analysts expected

• 💰 Revenue: $124.3B, up 4% from last year, 1.5% higher than expected

• 📲 iPhone Revenue: $69.1B, down -0.8% from last year, -2.7% lower than expected

• 🍎 Services Revenues: $26.3B, up 14% from last year, 1% higher than expected

🏆 As you can see by the numbers, Apple’s Services Revenue delivered a much-needed win to counter its declining iPhone revenue - driving Apple’s total revenues to all-time-highs and beating the record last set in Q4 2021.

🤑 And while Services only represent 21.2% of Apple’s total revenue, because of its much higher gross profit margin, it accounts for nearly 40% of all of Apple’s gross profit - driving the strong 10% growth in earnings per share.

💰 Apple’s Services revenue includes App Store Fees, Advertising, Apple Pay, Apple TV+, Apple Music, and iCloud.

💸 Since these services don’t have manufacturing costs like an iPhone, they are much more profitable - with a 74% gross margin compared to only 37% on products.

🇨🇳 Apple’s Still Struggling in China

😰 Now not everything was rosy for Apple. Its iPhone revenues missed targets and even declined overall - pulled down by sales in China, which fell by a massive 11.1%.

💡 Apple CEO Tim Cook gave 3 reasons to justify and ease concerns about the big decline:

1. Cook said half of the drop was due to a ‘change in channel inventory’, meaning Apple reduced the number of iPhones it shipped to suppliers in China

2. Apple Intelligence is not yet available in China, although Apple plans to roll it out in April (more on that later)

3. China recently introduced a national subsidy to boost consumption and domestic demand, and smartphones were recently added to the list of eligible products in early January

📉 Even so, this isn’t the first time Apple has seen declines in the Chinese market. In fact, Apple has seen quarterly declines for the past 6 quarters in a row, recently losing its spot among the Top 5 smartphone vendors in China as competition from Vivo, Oppo, Huawei and other local producers intensifies:

📉 Despite the track record of continued decreases, Tim Cook is confident that the launch of Apple Intelligence in China this April will help iPhone sales bounce back from their slump, so let’s take a look at the early results of Apple Intelligence and what analysts have to say about the world’s most valuable company…

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TOP STORY CONTINUED
🤖 Apple Intelligence Shows Early Promise

This was the first full quarter with the iPhone 16 and Apple’s AI Intelligence in the market, and with iPhone sales on the decline, investors are hopeful that the new features will spur upgrades. When it was first announced, some even predicted that it would kick off an ‘upgrade supercycle.’

According to Apple CEO Tim Cook, the early data is promising:

But not everyone has been a fan of the new features. Apple Intelligence has been the laughing stock in some forums online for hilarious fails, with an entire Reddit forum dedicated to posting fails, most notably from its notification summary feature. 

Apple even had to disable the feature for News & Entertainment after catching fire for sending an incorrect notification that said Luigi Manjione shot himself:

🎯 Analyst Reactions

So, what have analysts been saying about all this?

Before earnings, analysts were mixed, with only 59% of the analysts polled by Visible Alpha having ‘Buy’ ratings.

After the announcement, many analysts raised their price targets but some remain cautious. Here are the key arguments for/against:

📈 Reasons for Optimism

1) 🤑 Lower AI Spending than Mag 7 Peers

• Apple has been spending a LOT less than its peers on AI (~$10B in 2024 compared to $80B for Microsoft), so it largely avoided the hit other Mag 7 stocks took this week when DeepSeek cast doubt on the billions being spent.

• Apple actually rose on the news of DeepSeek’s potential breakthroughs, as many believe the lower cost per compute will help Apple by accelerating AI adoption on devices.

2) 📲 The Launch of the Lower-Cost iPhone SE4

• Apple is slated to launch its lower-priced iPhone SE4 in March, which will help boost revenue, especially in more price-sensitive markets like China and India.

3) 🤖 Apple’s Unique Positioning in the AI Revolution

• Many pointed out that Apple is well-positioned to benefit from AI ‘regardless of which AI systems prevail’ as Apple’s iPhones are likely to be the primary device people use to interact with AI.

• Dan Ives of Wedbush believes that while the ‘Nvidia AI revolution essentially happened overnight, ‘Apple’s AI consumer revolution’ will take 12-18 months as the 2.4 billion iOS devices upgrade.

• Citigroup analyst Atif Malik also noted that ‘while Apple is behind on AI,’ its focus on end-to-end AI security is underappreciated.

📉 Reasons for Concern

1) 🇨🇳 Declining Market Share in China

• Some analysts, such as JPMorgan, are unconvinced that Apple Intelligence will help turn things around in China, as the problem is due to increased competition.

2) 👎 Limited Traction from AI Features

• While Cook claims the upgrade cycle is the highest ever, that doesn’t necessarily mean feature adoption is high, and analysts like New Street’s Antoine Chkaiban say he is “not convinced that on-device AI will enable game-changing user experiences because the hardware is not game-changing,” and points to the poor reception the initial AI features have received.

• He adds that the ‘top models are already available on most iPhones through various apps’, so users don’t really have a strong need to upgrade.

3) 💹 Foreign Exchange Headwinds and Tariffs

• The US dollars recent appreciation makes American products more expensive abroad - particularly in China which makes up 17% of Apple’s revenues.

• Trump tariffs on Chinese imports could increase Apple’s costs as Apple still assembles most of its products in China. Apple did however receive an exemption for import tariffs in Trump’s first term and may receive one again.

🙋‍♂️ My Thoughts

As I said back in September, I’m pretty conflicted on this one. I used to lean more bullish, but now I’m pretty 50-50, as the poor reception of Apple’s initial AI features is worrisome and I find Chkaiban’s arguments compelling.

I’m currently happy with the ~3% exposure I have from my S&P 500 holdings (Apple is currently ~7% of the S&P 500) but I’m curious to read what you all think on Blossom!

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FROM THE BLOSSOM COMMUNITY
⭐️ Featured Discussions this Week

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