Apple showed off its new iPhone 15 line and Apple Watch . Needham Senior Media & Internet Analyst Laura Martin says the event itself was “very sleep-able through. Nothing’s new. Nothing’s exciting.” However, Apple (AAPL) took “a very heavy-hand on their environmental pledge to be carbon neutral by 2030” and added several features to their devices related to safety, both of which, Martin says, shows the company “put a lot of money into the brand of Apple… because the product iterations were very mediocre.” One area where Apple hasn’t been showing off much is generative AI. Martin says Apple is “pretty far behind” three “arms dealers,” Microsoft (MSFT), Google (GOOGL), and AWS (AMZN). “Those three cloud companies, it’s our opinion, will end up twice as big as Apple in the end,” Martin says.
Video Transcript
RACHELLE AKUFFO: Well, Apple’s big fall launch event failed to excite most analysts, but it certainly surpassed investment firm Needham’s expectations. In her latest note, senior media and internet analyst Laura Martin said the tech giant’s annual event checked off all the boxes by showing economic value that commands a higher price point, lowest customer acquisition cost, and lowest churn. Let’s bring her in to discuss this.
It’s Laura Martin, Needham’s senior media and internet analyst here. Good to have you on the show here. So in terms of how you would rate the success of Apple’s event from an investor perspective, how would you say that Apple did?
LAURA MARTIN: So, you know, I do think the product launch was very sleepable through. Nothing’s new, nothing’s exciting, exactly. I agree with you. I do think what they focused on, though, is they took a very heavy hand on their environmental pledge to be carbon neutral by 2030, including a video where Tim Cook was sort of embarrassingly talking to mother nature and apologizing for his carbon footprint.
And they really did also add several features that locked down on safety, which was their brand theme last year. Remember, the Ultra can hit an SOS signal from 8,000 foot mountains regardless of whether you have a cell signal, so sort of always connected via satellite. This year, two years’ free roadside assistance through AAA, again a safety issue, and then lots of talk about the watch is now carbon neutral. Both the Ultra and the normal watch, on the packaging you’re going to start to see a logo saying Carbon Neutral for that product, and they’re going– they really focused on saving the planet, saving people’s lives. They really put a lot of money into the brand of Apple yesterday, because the product was very– the product iterations were very mediocre, I felt.
RACHELLE AKUFFO: And you raise a good point about the brand. I mean, but I do want to ask you. I mean, here we are in the middle of this sort of era defining moment at the beginnings of generative AI, which has the potential to touch every aspect of our lives. How we live, how we work, how we manage our data. Where is Apple in this conversation?
LAURA MARTIN: So I think it’s pretty far behind three companies, which I think are arms dealers, which is Microsoft with OpenAI, Google with its three large language models, and AWS, which is owned by Amazon, which is going to house third party large language models. So those three cloud companies it’s our opinion will end up twice as big as Apple in the end. Apple will integrate generative AI into its own business, but my opinion is every American company to survive will have to use generative AI to either lower cost or accelerate the product introduction focus, because generative AI writes code. So you can tell it to write a code to introduce a new product in blue for 12-year-olds and it can do that for you, that first draft.
So product iterations and introductions are going to accelerate, so you have to use generative AI and you have to use a large language model. These large language models are a trillion inputs, so they’re really– and they’re housed at these big cloud companies Apple’s going to use generative AI for its own business, but it’s not going to share in a 30% fee on every company that’s using its large language models, because it doesn’t have them available to third parties.
RACHELLE AKUFFO: So then when you factor in the fact that Apple isn’t going to be the biggest beneficiary of generative AI, what is the investment thesis short term versus longer term, when you factor in sort of Apple’s ecosystem, as well as some of the challenges that it’s having, say, with macro issues coming out of China?
LAURA MARTIN: Right. So near term what it has is sort of a monopoly on the 15% wealthiest people in the world. The nearest term risk is 20% of its revenue comes from China, and it sort of feels like Apple’s being used as a pawn. We’re threatening to kick out TikTok. Montana’s banned TikTok. Sort of as a quid pro quo, China is saying, fine, Apple can’t be used in any government facility.
So Apple’s being used as a pawn in a way, the way because of our aggression towards TikTok, which is technically a Chinese company. That puts 20% of Apple’s revenue at risk. Assuming that that doesn’t affect sales in China, then the outlook for Apple is just to continue the way it is, and its growth will be just sort of same as traditionally, but it won’t get the upside growth of the big cloud providers that are underscoring or undergirding the generative AI growth rate.
RACHELLE AKUFFO: And as you mentioned– and as you mentioned your expectations for Amazon, Google, and Microsoft to grow their market caps beyond Apple’s, what could potentially throw a wrench in that trajectory?
LAURA MARTIN: Regulation, for sure. I mean, EU regulators have said they’re going to regulate generative AI fast because they don’t know the harms it can do. And in the US, right now the US is doing soft regulation, which is it had the FAANGs sign letters of, like, self-governance around generative AI, but if a regulator steps in here and says that generative AI, because of the ethical concerns or the data concerns or– you know, and severs the link between the first party data that Amazon, Google, and Microsoft have and its use in their large language models, like, that would really slow their growth compared to, like, Apple, which is just going to use it for itself.
RACHELLE AKUFFO: Certainly be interesting to watch how that all plays out with regulators. Laura Martin, great having you on. Needham senior media internet analyst. Thank you for your time this morning.
LAURA MARTIN: Thank you.
