This week’s update was delayed slightly due to some travel, but it gave me an opportunity to cover Apple and some other topics in more detail. We continue to be deep into earnings season, but I kept that section light this week to cover other items. I should be back on the regularly scheduled cadence next week.
Earnings
Apple (NASDAQ: APPL)
2Q revenue reported at $90.75B (down 4% YoY). Net income was also down 2% YoY to $23.64B.
iPhone revenue was down 10% YoY to $45.96B; iPad revenue was down 17% YoY to $23.9B; Services (including Apple Music, Apple TV+) revenue was up 14% YoY to $23.9B
The company announced a $110B share buyback which is the largest share buyback by any company in history. If Apple chooses to buy back all of the shares it has said it would, it would own roughly 4% of its own business.
China sales were a significant story up until earnings, but it seems revenue in the region was reported at $16.4B. This was down only 8.1% YoY compared to some analyst estimates showing reduction as much as 19%. The decline, even though it is not as significant as expected, is still material. I would be particular interested to see the revenue breakdown between iPhone vs other device vs services. I have to expect services and other device revenue lagging more than the iPhone. If this is the case (especially on the services front), I would expect the longer term outlook in China to be more of a concern.
Despite less than exciting quarterly results, the share buyback and dividend increase (up 4% to $0.25/share) news helped lift the stock 5% after hours. Services revenue growth still seems to be a bright spot here, and I expect some good momentum through the rest of the year with multiple device refreshes and impending AI news at WWDC next month.
While not directly earnings related, a story came out in Bloomberg this week on potential successors to Tim Cook. John Ternus, the current head of hardware engineering, seems to be the rumored frontrunner. LINK
Arm (NASDAQ: ARM)
The chip designer’s quarterly results crushed expectations with 4Q revenue of $928M (up 47% YoY).
The licensing business grew 60% YoY to $414M driven by AI chip demand. Royalties also grew significantly, up 37% YoY to $514M.
Unfortunately, guidance fell below analyst expectations sending the stock trading down on the news. While the guidance and full-year earnings seemed to be mostly in-line with expectations, the forward price/earnings multiple is around 70, which is certainly very high (Nvidia is around 40 for reference).
While I do think the China risk the company called out in their F-1 is still real, Arm is right at the center of the data center and handset growth driven by AI and should benefit handily.
Qualcomm (NASDAQ: QCOM)
The company reported 1Q adjusted revenue at $9.4B (up 1.2% YoY) and net income at $2.3B (up 36.5% YoY). Handset chip sales were reported at $6.2B (up 1% YoY).
The Android market in China appears to be still very strong with revenue from Chinese phone manufacturers (like Oppo, OnePlus, Vivo) growing 40% YoY.
There was a lot of talk about how the company’s chips are enabling the next generation of on-device AI capabilities, though aside from Samsung’s Galaxy S24 Ultra there aren’t a ton of examples yet.
The US also just announced after Qualcomm’s earnings the licenses for Intel and Qualcomm to sell chips to Huawei have been revoked which I expect will likely impact the next few quarter’s results. LINK
Palantir (NYSE: PLTR)
The company posted revenue of $634M (up 21% YoY) and net income of $105.5M. Palantir has posted a net profit for six straight quarters now.
Despite the solid results, weaker-than-expected full-year guidance sent the stock down 7%. Another example of a company reporting strong revenue and EPS, yet leading to a drop in the stock price this earnings season. As from the last few quarters, growth seems to be shifting from government to private sector.
In his letter to shareholders, CEO Alex Karl said of customers, “They need results now. And we believe that we have the only platform that works.” LINK
Apple “Let Loose” Event
iPad Air: The biggest news here is the introduction of a 13” iPad Air (finally). There is more trickle down from the iPad Pro to the Air lineup, but not a lot truly new here.
iPad Pro: As expected, the iPad Pro was the focus. It is the thinnest thing Apple has ever produced, and apparently would not have been possible without the efficiency of the M4. Up until this 5.1mm M4 iPad Pro, the iPod Nano (7-gen) was the previously thinnest Apple device at 5.4mm. It is also much lighter than the previous iPad Pro (by roughly 100g). Battery life is basically the same as the last generation and is still nowhere near the batter life of the MacBooks (my biggest complaint with my iPad Pro). The other big announcement was the introduction of the new tandem OLED Ultra Retina XDR display that Apple claims is the “worlds best display”. The new Magic Keyboard is now made of aluminum (finally) and looks very premium.
Pencil Pro: There are now an assortment of Pencils in the lineup with a new Pencil Pro announced this week. Apple now has the Pencil Pro, Pencil USB-C, Pencil 2, and Pencil 1. Curiously, the Pencil Pro is compatible with both the M4 iPad Pro and M2 iPad Air. Traditionally, the Pro naming convention was exclusive to the Pro products in the lineup. The new Pro supports some more gestures and provided haptic feedback. Personally, I use the Pencil very infrequently, but for those that draw a lot I’m sure this is a nice update.
M4: As Mark Gurman correctly predicted, the M4 was unveiled this week in the new iPad Pro. As I discussed briefly last week, there has been a major push to get to a more regular cadence on the M-series chips. It has been reported for a while that Apple and TSMC has been trying to move as quickly as possible to the new 2nd generation 3nm process. Apparently the first generation of the 3nm process used for the M3 simply wouldn’t scale, and those chips were prioritized for the MacBooks. The M4 has 4x faster GPU performance than the M2 and 50% CPU than the M2. Curious the comparison was not to the M3, so we’ll need to wait for some real-world benchmarking here.
AI: Between the earnings call and the “Let Loose” event, Apple has been talking A LOT about how AI is coming to everything. Unfortunately not much beyond the hardware that is supporting these features has been announced as of yet. We will likely need to wait until WWDC this summer for anything truly significant.
“Should I buy a new iPad?”: I have received a number of questions from friends and family so here is an abbreviated buyers guide:
iPad Air: If you have been waiting to upgrade your iPad and do not need any of the Pro features, this is a great opportunity to refresh. The 11” starts at $599 for the 128GB model so it is good value for a very solid device. I’d recommend upgrading the storage to at least 512GB. If you are buying it for Mom or Grandma to mostly message and FaceTime the family, the 128GB model should be just fine. Mom may benefit more from the Air than Grandma. Grandma would likely be very happy to have the regular iPad. Both would also appreciate if you called them more often.
iPad Pro: If you are trying to make this your primary computing device to do real work, I would not recommend spending the money here and wait for the MacBook updates later this year. I have a 2022 12.9” iPad Pro that has turned into my preferred device for travel over my MacBook Pro IF I’m not planning on doing real work. It’s an excellent device for light work with no real multi-tasking, but unfortunately is very frustrating if you are trying to run multiple apps. Split View, Slide Over, and Stage Manager have unfortunately not offered the level of usability I would expect. Also, annoyingly, many Apple apps like Notes are just better on Macs still (there is still no calculator on iPad for some reason). If price is no issue and you want something to read email, watch streaming video, do some quick photo editing, etc. on the go then the iPad Pro is an excellent choice. I reserve the right to change this recommendation when more of the AI features launch after WWDC.
AI
Microsoft MAI-1: The Information had a piece this week on development of an in-house AI model with ~500B parameters that should make it able to compete with other top models (for reference, OpenAI GPT-4 has 1.76T parameters). Microsoft has been very quick to invest when necessary to be in a leadership position here, and this may be one of the first significant outputs from the company’s deal with Inflection. It was only a matter of time before Microsoft started to vertically integrate the LLM. While I still feel that closed, general purpose LLMs don’t offer a lasting competitive advantage, it is almost table stakes today for large companies to offer their own. Microsoft can certainly monetize the model through the existing service portfolio at a higher margin than some of the partner models. LINK
Anthropic Team & iOS app launch: Anthropic has now launched a new enterprise plan (Team) that provides access to the company’s models (Claude 3 Opus, Sonnet, Haiku) for $30/user/month. Microsoft offers a Copilot subscription for their 365 suite of products for the same price (on top of base 365 plan pricing), and it seems enterprises have been trying to justify that pricing (LINK). Interesting to see how many early GenAI services are web first and then native apps start to appear. The go-to-market approach to package up an enterprise solution with centralized management, billing, security posture, copyright indemnity, etc. absolutely makes sense, and follows Anthropic’s approach to serve enterprises over consumers. I still am not entirely sold on closed, (mostly) general purpose LLMs being a long term differentiator. Having said that, the 200k context window size across their entire model lineup with reasonable performance is exciting right now especially for software engineering use. LINK
AlphaFold 3: Google DeepMind and DeepMind spinoff Isomorphic Labs announced details around a new version of their model to generate 3D structures of molecules, allowing prediction of interactions and structures like DNA, RNA, proteins, and antibodies. AlphaFold originally launched in 2018 and last updated in 2020. This third iteration now supports more than just proteins which is perhaps one of the largest recent AI breakthroughs in the biotech space. Demis Hassabis (CEO of Google DeepMind) is looking at AlphaFold and related tech to drive “enormous commercial value” and a $100B+ business. Isomorphic Labs complements this model with a collection of other closed models and tools around drug design. I do feel specialized models and a business focused around a particular industry can be truly disruptive vs general purpose LLM-based apps. It helps to have the resources and runway of Google to support the R&D without the short-term ROI requirements. AlphaFold 3 is available publicly on AlphaFold Server for non-commercial use. LINK; BLOOMBERG
Potential AI model China export regulation: There are rumblings that the US Commerce Department is looking to define regulation around export of closed source AI models to China. While there is significant restriction around the export of chips and other related hardware, there is currently (almost) nothing stopping US AI companies selling software or services to anyone. There is already quite a gap in the hardware available to Chinese companies to train leading-edge models from the last few years of regulation, so it is no surprise access to top models trained in the US would be next. There is still a lack of any cohesive AI legislation in the US, but I expect the China dynamic with focus on national security to contribute significantly more than the EU’s legislative approach that focused more on consumer protection. LINK
Amazon Q: The company launched a new LLM-based assistant focused on coding this week. Everyone is getting into the coding copilot business which speaks to both the applicability of this kind of technology to software engineering and the customer desire to optimize productivity and cost across engineering teams. There is significant investment in this space on the venture side (see last week’s newsletter), but more to be told how differentiated any of these offers may ultimately be. LINK
Washed Out’s ‘The Hardest Part’: The first commissioned music video made entirely with AI (OpenAI’s Sora) by a major music label. Very impressive work that does open more conversation on the long-term viability of AI-generated art. I would love to see the prompts used and how much this video actually cost to produce given the length and quality. LINK
M&A & Venture
CoreWeave: The company, which is a specialized cloud provider delivering Nvidia GPU resources, raised a $1.1B Series C round lead by Coatue valuing the company at $19B. The company last raised their Series B last May that valued the company at $2B. CoreWeave originally focused on crypto workloads, but has pivoted well to focus on AI. Competition is growing, however, which is likely why they looked to raise another large round here a year after their previous round. AI funding has slowly been ticking up here with a 4% increase from 4Q23 according to Crunchbase. I expect continued significant growth on the infrastructure side in particular as the software and end user application ecosystem shakes itself out. WSJ; CRUNCHBASE
SoftBank in talks to acquire Graphcore: SoftBank is rumored to be in advanced talks to acquire Graphcore. Graphcore is a UK-based chip startup that was once valued at $2.8B, but has been struggling recently and reported just $2.7M in 2022 revenue and reported recent layoffs. The company was originally seen as significant competition to Nvidia, but unfortunately has been fighting market conditions that have stifled growth of its Intelligence Process Units (IPUs). While the core technology is certainly novel, the company has really had a tough time building a partner ecosystem. Even if SoftBank does purchase Graphcore, I feel it will be quite difficult to find an exit like Arm here. LINK
Silicon Valley Bank (SVB) Capital sale: SVB has agreed to sell its venture business SVB Capital to a new company backed by Sequoia Heritage and Brookfield for roughly $340M (all cash) pending court approval. SVP Capital is the last remaining major operating unit of the bankrupt parent company and has roughly $9.8B in assets under management. This should give the unit a fresh start, mercifully. LINK
Wayve: The self-driving startup based in the UK raised a $1.05B Series C led by Softbank with Nvidia and Microsoft also participating. Wayve utilizes an approach to learn from human behavior they call “Embodied AI” with multi-modal models (known as LINGO and GAIA), and is planning to commercialize to multiple auto and robotics manufacturers manufacturers. No significant customers have been announced yet, but the addressable market is enormous when you look at the landscape of auto manufacturers without anything resembling “mature” self driving tech outside of Tesla. Interestingly, this is the largest AI raise in the U.K. to date. The Nvidia investment and technology partnership is notable here, especially as the next generation of Wayve tech utilizes Nvidia’s Blackwell architecture, DRIVE Orin, and DRIVE Thor. LINK
Silicon
US chip manufacturing growth: The Semiconductor Industry Association (SIA) and Boston Consulting Group published analysis supporting a tripling of US domestic chip manufacturing capacity by 2032. This would bring market share up from 10% today to 14%. This would be the largest increase over the same time period in the world, but also speaks to the long road to acquire significant market share on-shore. Interestingly the report stated that without the CHIPS Act, the US market share would have fallen to 8% by 2032. Overall an early positive sign of the benefit of centralized funding and incentives for private industry in the sector, but there are significant challenges to actually get to that kind of scale including labor and operating costs in many states in the US. The CHIPS Act’s initial $39B infusion will most certainly need follow-on support at the federal, state, and local levels to keep up this initial momentum. LINK
Legal
US v. Google: Judge Amit P. Mehta is presiding over arguably the most important tech antitrust case since the 1990s, and grilled both Google and the U.S. prosecutors in the closing arguments this week. The NYT had some good coverage of both the closing arguments and a profile on the judge himself. LINK, LINK
Also, newly unsealed documents from the US Justice Department’s antitrust lawsuit against Google around the company’s search and advertising businesses have given some more context to a few items I found interesting:
Google paid Apple $20B (2022) to be the default search engine in Safari, and this relationship is now roughly 20% of Apple’s operating income by itself. Rumors pegged the payment at something quite large, but having the actual number released coinciding with Apple earnings this week does put the scale into context. Apple had a total of $388B of revenue and $95B of net income in 2022. Without the Apple ecosystem and Safari, there is no Google deal. Google clearly can monetize this extremely well, and feels like a revenue share. LINK
Emails from Kevin Scott (CTO at Microsoft) in 2019 to Satya Nadella and Bill Gates talking about how concerned he was over the gap in AI capabilities to Google. “And as I dug in to try to understand where all of the capability gaps were between Google and us for a model training, I got very worried.” This ultimately seemed to help spur the investment in OpenAI and further investment in the larger GenAI ecosystem (see below for some more MSFT news this week on their own LLM work). While Microsoft has certainly been visionary in other areas in the past, sometimes competitive fears drive more action than altruism or innovation. LINK
Licensing copyrighted data: Companies are starting to sign deals with news sites and other copyright holders to train their models and/or provide AI-generated content, but there is even more litigation coming for those that do not. As discussed lat week, I still do not expect we see any real outcomes from this litigation for quite some time or legislation in the US or abroad to address copyright appropriately.
Google signed a deal with NewsCorp LINK
OpenAI signed a deal with Financial Times (FT) LINK
Alden Global Capital (owner of Chicago Tribune, Orange County Register, and 6 other publishers) is suing Microsoft and OpenAI LINK
UK legislators call the government approach to copyright related to AI and LLM development as “inadequate and deteriorating” LINK
State-specific AI legislation: Interesting research on a variety of AI bills being proposed across 10 states to address the technology in a variety of contexts. While seemingly a meaningful step forward, many of the bills contain some fairly significant loopholes that would limit any accountability at all. Unfortunately many of these bills stand a real chance at being passed this year which would likely provide little or no real governance. These states are trying to do the right thing, but sadly are missing the mark and may lead to a patchwork of ineffective regulation similar to the state-specific privacy laws we have today. LINK
Other news
Microsoft security overhaul: Off of the heels of a variety of security issues (to put it mildly), the company is overhauling its security culture and tying executive compensation to performance. For better or worse, Microsoft can be a single point of failure for many organizations including the federal government. This evolution will take some time as many business units within the company are rather fragmented. Trust is critical especially for the largest companies in the world using Microsoft’s software and services, but I do not expect significant material impact to Microsoft’s business in the short term even if there are additional breaches due to how complicated it would be to actually transition away from their services. LINK
Tech pandemic hangover continues: The Financial Times published a story this week detailing how 50 companies that thrived during the pandemic have since lost $1.5T in market value since 2020. Twilio, Zoom, Longi, Sea Group, Peloton, and RingCentral have had some of the biggest swings. The lesson here seems to be to never underestimate how market conditions like interest rates, consumer spending, return to office, etc. can change, and companies should be nimble enough to regress back to the mean quickly. It is a good reminder profitability trumps growth and to not get caught up in the moment and assume external (and in this case unprecedented) conditions will be permanent. LINK
Continued Peloton struggles: CEO Barry McCarthy stepped down this week after 2 years with the company. Peloton also laid off 400 people (roughly 15% of its workforce), which is the fifth reduction in force since the company’s peak of 8,600 staff in 2021. It has been a rocky road to restructure cost, remedy supply chain issues, and right-size demand forecasting since the pandemic. Shared are down 97% since the end of 2020 which has basically erased $43B in market value. I was hopeful the restructuring plan the executive team was executing against would help right the company, but it seems there are still some major issues here. Another layoff unfortunately isn’t the long term fix to the systemic issues they are clearly still facing. It’s truly a shame since their struggles seem to stem from operations vs product issues. LINK
Cloud provider growth & market share update: According to Synergy Research, cloud revenue grew 21% YoY in Q1 2024 to $76B. The US is still the largest cloud market, and grew 20% in Q1 2024 (and is larger than the entire APAC region). Another report from Altimeter also validated the rebound from what was a rather tepid 2022-2023. AWS is a $100B run rate business with roughly 31% market share. Microsoft Azure is a $76B run rate business with roughly 25% market share. Google comes in with roughly 11% market share. AI has driven a renewed interest in what has been a relatively mature industry for the last couple of years. There is still some significant growth in the tier-1 and 2 cloud provider market even with the 3 major players continuing to own 2/3 of the market. While I expect the US to continue to have the largest scale for some time, there is a lot of growth potential in Asia in particular. SYNERGY; ALTIMETER
Asia Pacific data center growth: Current M&A deal volume in 2024 has reached $840.47M which is 50%+ of the global total so far. Analysts expect 2024 to surpass the $3.45B record high 2023 deal volume. Another data point that validates that a) data center spending is incredibly sticky and b) AI is driving an insatiable hunger for quality data center capacity. This reporting comes off of the heels of news last week that Microsoft was investing $2.2B in Malaysia on top of the company’s previously announced $1.7B investment in Indonesia. LINK; LINK
TikTok music deal: After quite a bit of posturing, Universal Music Group (UMG) and TikTok reached agreement to license music back on the social media platform. Interestingly, Taylor Swift allowed her music back on the platform last month ahead of this deal being announced in a somewhat puzzling move given her support of smaller artists. Ultimately there are clearly benefits to being on TikTok, especially as a larger artist, though unclear how successful smaller artists will be even with this new deal. LINK