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1. Apple is hunting for its next growth engine
  • The decline is being driven by falling sales of the iPhone, which represents 51% of Apple’s total revenue. iPhone unit shipments and sales were both down about 10%, despite the global smartphone market being up about 8% in shipments during the same quarter. Apple’s iPad sales were also down 17% and “Wearables, Home and Accessories” was down 10%, although these represented a smaller part of Apple’s business (6% and 9%, respectively). Among Apple’s device segments, only the Mac saw year-over-year growth (4%).
  • There were bright spots in Apple’s recent earnings report. Services (e.g. apps, music, movies, books) grew 14% year-over-year to now account for 26% of total revenue. But whereas Apple seemed infallible not too long ago, questions are now being raised as to whether Apple is still a growth stock.
  • AI has come into focus as a major potential growth lever for Apple. On last week’s earnings call, Cook framed the opportunity: “We believe in the transformative power and promise of AI, and we believe we have advantages that will differentiate us in this new era, including Apple's unique combination of seamless hardware, software and services integration, groundbreaking Apple's silicon, with our industry-leading neural engines and our unwavering focus on privacy, which underpins everything we create.” He went on to describe the MacBook Air as “the best consumer laptop for AI with breakthrough performance of the M3 chip and its even more powerful neural engine” and the Apple Watch as “harnessing AI and machine-learning to power lifesaving features like a regular rhythm notifications and fall detection.”
  • In Sep 2023, it was reported that Apple has lately been spending $1B+ per year on AI research and hardware. The company has also been building out its AI teams, aggressively recruiting from Google and Meta, among others.
  • In Oct 2023, Apple released an open-source multimodal LLM called Ferret, which can be used to understand mobile UI screens. It was followed by last month’s release of a set of OpenELM (Efficient Language Model) models that can be run on-device (e.g. on a laptop or phone). Compared to the Allen Institute’s open-source OLMo LLM, which is of similar size, OpenELM is 2.4% more accurate while using 50% fewer pretraining tokens. One user described it as a “solid model but very aligned” (i.e. safe but not creative). Apple also released AXLearn, the machine-learning framework used to train Ajax, and CoreNet, the library used to train OpenELM.
  • Chips are central to Apple’s vision for its role and control in an AI-driven future. On Tuesday, Apple announced its latest M4 chip, which is powering its newest iPad Pro. The system-on-a-chip (SoC) is “Apple’s fastest Neural Engine ever, capable of up to 38 trillion operations per second, which is faster than the neural processing unit of any AI PC today.” The M4 is up to 4x faster than the M2, and can deliver comparable performance with half the power. Separately, Apple is reportedly working with contract chip-manufacturing giant (and longstanding Apple partner) TSMC on an AI chip for data centers.
  • Finally, Apple is looking towards the growth of “emerging markets” – countries like India, Saudi Arabia, Mexico, Turkey, Brazil, and Indonesia – to close the gap from China’s pullback. As Apple’s CFO put it, “[T]he numbers are getting large” and “the gap as you compare it to the numbers in China is reducing, and hopefully, that trajectory continues for a long time.”
  • There is analyst bullishness that, with iOS 18, AI could drive the next “supercycle” for iPhone sales this coming fall. Some are expecting Apple to reveal some of its new AI offerings even sooner, at the upcoming developers conference in Jun 2024.
  • Anticipation may be getting ahead of reality though. It will take time for Apple to execute – according to Cook, AI’s impact on financials won’t be seen “within the next quarter or so.” As Cook put it, “Our M.O., if you will, has always been to do work and then talk about work and not to get out in front of ourselves.” And even if there is a big reveal, software upgrades historically “haven't been a big factor in driving [Apple’s] product cycles – unfortunately for Apple.
Related Content:
  • Jan 26 2024 (Special Edition): Our annual look ahead – 13 market shifts to watch in 2024
  • Jun 9 2023 (3 Shifts): The details and possibilities of Apple’s new Vision Pro headset
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Disclosure: Contributors have financial interests in Meta, Microsoft, Alphabet, and OpenAI. Amazon and Google are vendors of 6Pages.
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