Apple FQ2 26 – Mini Cycle.

Silly gimmicks still sell phones.

• Apple reported good results as the distinctive new iPhone model is driving an upgrade cycle, which, combined with AI driving Macs and services, allows Tim Cook to bow out on a high.
• FQ2 26 revenues / EPS were $111.2bn / $2.01, nicely ahead of expectations of $109.5bn / $1.95.
• Once again, it was the iPhone that directed the course of the results, and here the iPhone 17 is driving a mini-replacement cycle.
• This is because with the new camera bump and distinctive colour, it is easy for everyone else to see that one has the latest and greatest device, which I think remains the main driver for the strength we are seeing.
• This could be somewhat enhanced this year, should Apple launch a folding phone, but it will be so expensive that only those who upgrade every year anyway are likely to buy it.
• Hence, I think that while it remains a super-premium product, it will not be a major driver of the upgrade cycle.
• The quarter was also enhanced by Mac, which grew by 6% YoY and was largely driven by the Mac Mini, which is now out of stock everywhere as it has become the platform of choice to run AI models locally rather than in the cloud.
• The $599 Neo was launched in March and so had no real effect on these numbers, but I think it represents a credible threat to Windows, meaning that Microsoft needs to pull its finger out and make Windows 11 much better than it is.
• Microsoft can be thankful that Apple’s AI remains far worse than even the rather awful CoPilot, but Apple has ramped up R&D spending and may not be awful at AI for very much longer.
• As a result of the ongoing upgrade cycle, guidance for the FQ3 26 was positive with YoY growth of 14% – 17% (15.5%) compared to consensus that was around 11% YoY with pretty steady gross margins.
• This shows that Apple is doing a good job at navigating the tricky memory environment, which is right in Mr Cook’s wheelhouse, where he is clearly being extremely useful right up to the last minute.
• The big question mark, of course, is next fiscal year, and with this upgrade cycle beginning to peter out, I suspect that growth will once again be driven by services with the iPhone largely treading water.
• That means that without a new product category or Siri suddenly becoming the best agent available, growth will once again become difficult to come by.
• This is why all eyes will be on WWDC in June to see what Apple plans to do with Siri and AI more generally to ensure that Apple has a seat at the AI table.
• Fortunately, AI is still not a factor when users are making a purchase decision on a smartphone and so Apple does have time to get this right.
• This may not always be the case, and Apple needs to have something top-notch that is exclusive to Apple to ensure that it maintains its differentiation, as simply rebadging Gemini will not be enough.
• The net result is this good set of results and outlook is enough to keep Apple’s valuation, but it is not going to push it materially higher or propel the shares to new heights.
• Hence, I remain ambivalent to the shares and would continue to look elsewhere.