- Stock Market Nerd
- Posts
- Apple, Amazon & DraftKings Earnings Coverage
Apple, Amazon & DraftKings Earnings Coverage
Exploring the results of these three companies
Brad Freeman
August 01, 2024 • Estimated Reading Time: 10 minutes
Table of Contents
In case you missed it, access SoFi, PayPal, Microsoft, Lemonade, Mastercard (brief) and Starbucks earnings reviews from this week here.
1. Apple (AAPL) – Earnings Review
a. Demand
Beat revenue estimates by 1.3% & beat low single digit growth guidance.
Foreign exchange (FX) was a 230 basis point (bps; 1 basis point = 0.01%) headwind vs. 250 bps expected. This beat was not largely powered by easier currency exchange rates (which is a good thing).
Set new revenue records in two dozen countries.
Services beat revenue estimates by 0.8%.
iPhone revenue beat estimates by 1.8%. iPhone revenue fell slightly Y/Y, but rose slightly Y/Y FX neural (FXN)
Mac revenue rose 2.4% Y/Y.
iPad revenue rose 22% Y/Y.
Wearables, Home and Accessories revenue fell 2.3% Y/Y (lapping strong Apple Watch debuts)
China revenue fell 6% Y/Y; Americas revenue rose 6.5% Y/Y; Europe revenue fell slightly Y/Y.
b. Profits & Margins
Beat EBIT estimates by 3.2%.
Operating expenses (OpEx) rose 7% Y/Y.
Beat $1.34 EPS estimate by $0.06. EPS rose by 11% Y/Y.
Beat 46% GAAP gross profit margin (GPM) estimates and its same guidance by 30 bps each.
GPM fell Q/Q due to hardware mix shift to lower margin products.
Year-to-date (YTD) Operating Cash flow of $91.4B vs. $88.9B Y/Y.
c. Balance Sheet
$62B in cash & equivalents & $91B in long term marketable securities (which it includes in cash & equivalents even though these aren’t current assets).
$101B in total debt.
Share count fell 2.7% Y/Y.
d. Guidance & Valuation
Apple guided to similar revenue growth next Q vs. this Q. That implies 5% Y/Y growth vs. 4.2% expected. This includes 10%+ Y/Y services growth. It also sees a 46% GAAP GPM, vs. 45.8% expected. Based on OpEx guidance, EBIT was also 2.9% ahead of expectations. Strong guide.
Apple trades for 33× 2024 EPS. EPS is expected to rise by 8% this year and by 11% next year.
e. Call & Release
Apple Intelligence:
Apple Intelligence was a focal point of the call. This is part of the overall release of iPhone Operating System (iOS) 18.1. Early Apple tools from the launch include image generation, notification summarizing and prioritization, Siri upgrades and a ChatGPT integration too. And intuitively, developers will be eager to get their hands on this new technology to build new apps for Apple’s gigantic customer base. As previously announced, Apple is introducing this to developers this week. That news comes after reports of Apple delaying the introduction of Apple Intelligence tools for consumers for a few months – per Bloomberg.
Eventually, Apple Intelligence will touch essentially every 1st and 3rd party app Apple offers. The usage of these tools will require an iPhone 15 model or a Macbook from 2020 or later and will happen in stages. Geographic and language expansion (as well as continued product debuts) will continue well into 2025 and likely beyond.
As reviewed in my coverage of the 2024 Worldwide Developer Conference (WWDC), Apple is taking a privacy-first approach to this launch. As Tim Cook puts it, the firm is “minimizing data sharing while maximizing the amount of data processed on device.” It isn’t impermissibly collecting and using personal data to season GenAI models (although its partner OpenAI has been accused of doing so). And when more processing power is required for a query/question than a device can provide, Apple’s private cloud (run by Apple Silicon) will field traffic. It will do so without any data leakage or storage beyond what it needs at that moment to respond.
CapEx & GenAI Costs:
Apple seems poised to use its supply chain partners to side-step a lot of the CapEx associated with being a big player in GenAI. It sees its chips, device ecosystem, developer network and Apple Intelligence as sufficient. It doesn’t think it needs to play a game of build the best model or the biggest data center. It thinks it can do things like use Alphabet chips to train its AI algorithms and let OpenAI plug the large language model (LLM) gap on its software. It does cost money to build the chips it needs to power Apple’s hardware, but the firm is not feeling the need to ramp CapEx like every other mega cap currently is.
As a general rule of thumb, Apple Intelligence will focus on more personal use cases for granular utility, while ChatGPT will be used for “world knowledge” so Apple doesn’t need to build the infrastructure to offer that itself. It already has the ecosystem moat; there’s no need to try to build another expensive moat.
Vision Pro:
Despite reports of Vision Pro sales sharply missing expectations, Apple remains confident in the prospects of this hardware… and I agree with them. Apple needs to insulate itself from the risk of headsets becoming the next computing device beyond smartphones. That’s not at all a certainty. But? Apple does need to lay the groundwork and invest to ensure it has a large piece of this market if headsets do turn out to be the future. For now, the hardware (Vision Pro and Quest) is clunky, heavy, hot and makes me dizzy. You also can’t really do much with it.
We are several, several iterations away from these headsets being powerful and comfortable enough to drive ubiquity. Manufacturers will likely need to offer far more compelling use cases while also miniaturizing the tech enough to look like a pair of Ray Bans. We are a long way away from that being a reality. But? Investing today positions Apple to be confident in not falling behind tomorrow. Its balance sheet and margin profile also make Vision Pro as a temporary cash incinerator easy to tolerate.
Vision Pro now has 2,500 native spatial apps and 1.5 million Vision operating system (Vision OS) compatible apps.
Hardware Context:
24% Y/Y iPad growth was helped by a strong iPad Pro debut. The tech comes with Apple’s latest M4 chip and is Apple Intelligence compatible. 50% of all iPad customers were new to the product during the quarter and, per 451 Research, the product has a lofty 97% customer satisfaction rate vs. 96% Q/Q.
iPhone set new records across a lot of Europe and Mexico, although continues to see revenue decline across China and other geographies. When measuring iPhone 15 vs. iPhone 14 at this stage of the new phone’s rollout, iPhone 15 is outperforming its predecessor. The active install base continued to climb, which simply gives Apple more devices to cross-sell margin accretive services to. Per 451 Research, the iPhone has a 98% customer satisfaction rate vs. 99% Q/Q. Beyond Apple Intelligence, iOS 18 will introduce satellite messaging, app hiding (for all you Tinder users), and a photo app redesign, as disclosed at WWDC.
50% of all Macbook Air customers during the quarter were new. Per 451 research, the product has a 96% customer satisfaction rate.
67% of Apple Watch customers during the quarter were new. The runway is still long.
USAA & American Express purchased MacBooks for their employees.
Services:
Transacting and paid accounts both reached new records, with paid accounts continuing its streak of 10%+ Y/Y growth. Total subscriptions for Apple have doubled in 2 years, and newer initiatives like ads and payments continue to thrive. It expanded tap-to-pay on iPhone to Japan, Canada, Italy and Germany during the quarter and added rewards to Apple Pay too.
China:
Revenue growth of -6% was -3% FXN and improved vs. the first half of the year. It set a new record for its Greater China install base and a June quarter upgrade record in Mainland China too. Per Kantar survey, iPhones were all 3 of the top models in urban China during the period. Most Chinese buyers remain brand new to Apple and the company remains convinced in the promise of this market for the long haul.
f. Take
This quarter was pretty good. Services drove the revenue and profit outperformance and that theme looks poised to continue into next quarter. Apple’s ecosystem is seemingly impenetrable, and it has an increasingly large series of services to cross-sell and drive more growth. That should continue to keep the slow revenue growth engine humming while it drives more cross-sell and buyback-based operating leverage. I do think that it will likely need to rev the innovation engine a bit at some point to stay king of consumer hardware, but we don’t feel close to an iPhone replacement threat becoming real. This is one of the most expensive names in the market based on forward growth prospects, but its decades of historically strong execution and its fortress moat earn it that premium in droves. Apple keeps on chugging.
2. Amazon (AMZN) – Earnings Review
That’s the end of tonight’s free section. Upgrade below for more Apple coverage, as well as Amazon and DraftKings reviews.
Reply