Apple's (AAPL) first-quarter earnings results flew past Wall Street estimates, posting over $119.5 billion in revenue and adjusted earnings per share of $2.18. Although beat overall earnings estimates, net sales across Apple's categories and devices fell below expectations, particularly in its services and performance in China.
Manhattan Venture Partners Head of Research Santosh Rao addresses Apple's sales miss, touching upon which areas could be a cause for concern and how Apple will proceed in generative AI investments.
"They have the resources... intelligence to do a lot of stuff, but they need to execute, they need to show the numbers. And at this point we need to know, China, AI, and the whole services, why did that drop also?" Rao ponders.
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JULIE HYMAN: Do you see sort of the services and importantly, that China number, as a disappointment?
SANTOSH RAO: Absolutely. I think these services is their big anchor in this whole-- as the top line iPhone revenue kind of stalls or comes down. But I think services revenue wears an anchor, needed to grow. Overall, China is a big concern. That's dropping.
We knew there were issues there. So I think these two things add up. It's-- the number is a miss overall, but I think it's not a major disaster. You can-- I can see them coming back. The stock kind of trading in the range, because it's all about the future here going forward, how they get the generative AI into their whole mix and all that.
So there are a lot of other levers that they can pull. But at this point, it is definitely a disappointment that two areas that we were concerned about did disappoint.
JOSH LIPTON: And-- and on the call, what would be your top question for Tim Cook and Luca Maestri now? Is your top concern what top line growth looks like over the next few quarters? Is it margins hanging in there? Which they did, by the way. We should call that. 45.9%, that was a beat. But what would be your top questions for them?
SANTOSH RAO: Well, I think that's a big-- I think we want to know, what's the next catalyst. I mean, that's the biggest issue with Apple. You're trading at 30 times earnings, revenues are kind of down flat to down, the market's giving you the benefit of doubt, but what is the next catalyst? What are you giving us?
So I want to know what's going on in China. I want to know what's your next-- how you are-- what's your strategy with AI as it relates to your whole mix, product mix? So I think those are the big issues that we need to know, the market needs to know.
Because they're behind the curve compared to the other mega stocks and mega tech stocks, the magnificent seven or six that we are talking about. So I think these are trailing, but they always get the benefit of doubt. They have been getting for a long time. But at some point, the patience is going to run out.
Yes, there are few things that they can pull. You don't bet against Apple when they are capable of doing a lot of things. They have the resources. They have the intelligence to do a lot of stuff. But they need to execute. They need to show the numbers.
And at this point, we need to know China, AI, and the whole services, why did that drop also. So I think we need to know that as well. So I those are the three areas I definitely want to know, because those are the anchors of this business.
JULIE HYMAN: And I assume you don't think that the Apple Vision Pro is the next catalyst.
SANTOSH RAO: I think it's too early. It's definitely useful. I didn't see the units yet. I think it's just getting started. It's starting selling I think this week. So it's really too early to say. I think the first wave is just going to be just priming the sales channels and everything.
The next version is really going to be the real one where you can see some uptake. The price tag is still pretty high. So I don't think you're going to see that, but definitely it's the next product. They need to keep inventing, because their core signature product is stalling.
So they need some more-- some more energy in the mix. And I think that will be there. It it'll take a while, though, long time. It's very small. It-- to move the needle, they'll have to sell a lot, and that's going to take some time.
JOSH LIPTON: Analysts say they've been-- Apple's been kind of quiet when it comes to Gen AI, generative AI. Now, Apple doesn't, unlike some rivals, it doesn't-- Tim Cook doesn't talk about what's in his pipeline. So perhaps they have something cooking. What would you-- what do you think could be coming for AI for Apple?
We've had some folks saying, listen, AI-enabled iPhones are on the way. Maybe it's this year, maybe it's next. But what's your take? What's your best guess?
SANTOSH RAO: Yeah, absolutely, they have to do it. I think 2025 is when you're really going to see those numbers in full swing, that Technology incorporated in full swing. But think in WWDC we're going to get an idea as to how they're progressing, what is their strategy.
We-- they've already said that they want to incorporate that. They're investing, I think they put aside a billion investing in that category of trying to improve it. They have their own LLM, they're developing that. So I think they will come to the market with a good AI strategy.
We just need to know, we need that to be very well articulated. At this point, we don't know that. But they're capable of doing it. The Siri can be upgraded. All their products can be upgraded. We can get that generative AI into all their product mix, just like Microsoft and Google have done.
So I think a lot of capabilities, a lot of opportunities. They will get the benefit of doubt. So I will wait. So at this point, disappointing, yes, but I don't think it's a-- a huge miss in the sense that their prospects ahead are still good.
JOSH LIPTON: Final question. So they missed on China. Obviously, Apple has put a lot of time and effort into India. How excited are you about that market? Both, by the way, as an end market for Apple, but also as a growing key link in its supply chain.
SANTOSH RAO: It's a huge thing. I Think ex-China, India is the biggest market. And India is making every effort to make sure that they do a good job. And last I read, they're going to increase the production level there.
So I think that's-- it has the-- it has the manpower, has the intelligence to do-- to take over from China. Of course, China is a very huge base. It's going to take a long time to replace that. But India is a good thing.
And China has its own issues. There's nationalistic spirit. There's Huawei nipping at their heels, all that going on there, so India is a good away, take away from there, and they will benefit. Anything China loses, India benefits.
JULIE HYMAN: Santosh, thank you so much for that instant analysis here, as we sift through all of these many numbers. Thanks so much, appreciate it.
