Apple and Amazon – AI Laggards

Apple FQ2 25 – AI not a problem yet, but tariffs bite.

• Apple reported good results, but then guided weakly as it warned of a $900m tariff impact that sent the shares down 4% demonstrating just how skittish the market remains when it comes to the “T word”.
• FQ2 25 revenues and net income were $95.4bn / $24.8bn just ahead of consensus of $94.6bn / $24.5bn.
• Revenues grew by 5% YoY and Apple stated that demand for iPhone remained robust, underlining that AI is still a long way from influencing the consumer’s purchase decision when it comes to a smartphone.
• Across the business, the same story as Q4 24 played out with steady iPhone sales, weakness in China being supported by growth in services, which netted out to the 5% observed.
• However, that was where the good news stopped as Apple went on to bemoan the impact of tariffs on its business where it expects a $900m increase in expenses should the current regime continue as it is.
• Smartphones are currently exempted from the Chinese import tariffs but there are always second and third-order effects that will impact Apple which imports almost everything it sells.
• This also includes a rapid pivot to India and Vietnam for products that are destined for the USA, while China makes products for all of the other regions.
• Even with these mitigating actions, the hit is still significantly highlighting just how more exposed Apple is to tariffs than Google, Microsoft or Qualcomm.
• Apple continued to decline to give guidance as the uncertainty related to COVID has given way to inflation and now to tariffs.
• However, it did say that it expected revenue growth in FQ3 25 to be in the low to mid single digit range which is clearly below forecasts, where the average is 5%.
• The net result is that Apple remains in a difficult position having to navigate the tariff situation as well as dealing with the fact that it is well adrift of its competitors when it comes to AI.
• For the moment, this is not a very big issue but as soon as consumers begin basing some of their purchase decisions on AI services, Apple is in real trouble unless something changes.

Amazon FQ2 25 – AI Issue

• Amazon reported reasonable results but the uncertainty of tariffs and what they will do to both the price of the goods Amazon sells and a miss from AWS (read AI) caused disquiet in the shares.
• Q1 25 revenues / EPS were $155.7bn / $1.59 which was in line with revenue expectations of $155.2bn and ahead of EPS expectations of $1.37.
• AWS managed to post 17% YoY growth to $29.3bn which was in line with the consensus of $29.4bn but I was expecting more given how hot AI remains.
• Both Google and Microsoft have seen a good bounce in their growth while Amazon is chugging along at a relatively pedestrian 17% YoY which is 1% lower than it was in Q4 24.
• This is well below Microsoft Azure on 33% (see here) and sends the message that when clients think of AI, they do not think of Amazon.
• For the world’s largest supplier of compute infrastructure, this is a major problem as Microsoft is now growing at almost double the rate of Amazon.
• At that kind of difference, the once-unthinkable notion of market leadership change arrives in the realm of the possible.
• Furthermore, the billions that Amazon has already spent on AI infrastructure and the eye-watering $75bn that it intends to spend in the next 9 months do not seem to be doing the trick.
• Part of the reason for this is that Amazon remains a laggard in AI despite having one of the most used agents available, Alexa.
• This is because Alexa it not much good at doing anything beyond playing music, setting timers and turning the lights on and off.
• Consequently, consumers of Amazon AI who also work in the enterprise will not naturally think of Amazon when deciding where they are going to run their enterprise LLMs.
• Amazon’s problem is not nearly as bad as Apple’s but it is one that needs attention.
• Amazon also guided conservatively with Q2 25 revenues of $159bn – $164bn and operating profit of $13.0bn – $17.5bn.
• This is below consensus at $161bn / $17.8bn respectively and has been affected by many factors, including “tariff and trade policies” as Amazon put it.
• With demand and tariff uncertainty, question marks around its AI prowess and a 2025 PER of 30.7x, this is another of Mag 7 I am very comfortable not to own.