Hi YXI friends,

Today, we’re taking a comprehensive look at Apple Inc. (AAPL). While Apple’s recent innovations like the Vision Pro and Apple Intelligence are creating buzz, there is still a big question mark around whether Apple can pick up strong growth again.

In this note, we analyse Apple’s revenue drivers, latest performance, the challenges ahead, its valuation compared to peers, discounted cash flow modelling, and technical analysis.

Read to the end for a potential trade setup.

Let’s dive in!

DISCLAIMER: This newsletter is strictly educational. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice and nor should it be relied upon to make investment decisions. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note's date of publication and are subject to change without notice.

1. Apple: Still an iPhone Story

In the past 10 years, it would feel like Apple’s approach to innovation has become more incremental than explosive. I do like the wearables such as the Airpods Pro and Apple Watch, but the wow factor is nothing like the beginning of iPhone and the App Store.

Fast forward to this February, Apple released Apple Vision Pro into the market. Vision Pro is a very advanced AR/ VR headset that comes with a hefty price tag ($3499).

So, of course I bought one.

I was blown away by the experience and quality. It may just be the next generational product after iPhone.

Unfortunately, Vision Pro is still too early in its product cycle. I easily get dizzy and have dry-eyes after 20 minutes. Secondly, there are not enough apps for me to enjoy yet. This means the product is nowhere near as sticky as an iPhone despite the technology. Moreover, the price point heavily deters a mainstream market adoption.

All of the above is a convoluted way of saying Apple’s growth in the near future will still be mostly driven by iPhones, iPads, and Mac. 

In Q3 ending on June 29 (Apple’s financial year is October - September), 46% of Apple’s revenue comes from iPhone. iPad and Mac both contribute 8%. Usually, the Mac user has at least an iPhone or an iPad if not both. Wearables, Home and Accessaries (Apple Watch, AirPods, Apple TV etc) are about 10%.

Services (Apple Music, TV, iCloud, Apple Pay, App Store, App Store Ads etc) contributes just under 30% of the revenue.

2. Can Apple Intelligence Lead Apple’s New Growth Story?

Given that Apple’s revenue is mostly driven by iPhones, iPads, and Macs, its latest attempt to capitalise on AI seems pivotal to Apple’s next growth story.

Both Rabbit R1 and Human AI Pin, gadgets built around Gen-AI, have made an attempt on AI hardware. Both have received terrible product reviews.

Apples appears cautious in launching Apple Intelligence. The plan is a staggered rollout in US English on new iPhone, Mac, and iPads in September with iPhone 16. Newer Mac (M4-powered) and iPad models will be introduced in late 2024 / early 2025. The full integration with ChatGPT is expected by the end of 2024.

This sounds all promising, but the only problem is that due to regulation, Apple Intelligence wont’ be available in the EU (Digital Markets Act) or China (ChatGPT ban).

Europe and Greater China make up 43% of Apple’s Revenue. We will dive into the segment performance later, but the AI restriction can severely dampens the AI growth story.

There are no easy solutions for Apple. They need to carefully navigate the regulatory challenges (likely tweaking a lot of the software) for EU and probably partner with a local AI provider in China. Both take time.

3. FYQ3 2024 Overall Growth Highlights

In Q3, Apple reported a quarterly revenue of $85.8b, representing a 4.9% YoY growth.

This modest growth has finally put Apple’s TTM Revenue above 0% YoY, after 5 quarters of negative TTM growth.

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