Apple, one of the world’s most valuable and innovative companies, is at a pivotal moment in its history. With new expectations for iPhone shipments, a clear but delayed AI strategy, and a recovering market presence in China, Apple is poised for significant growth. This blog post delves into the current state of Apple, examining the factors driving its resurgence and the challenges it faces.
Recovery of Production Plans to Average Levels
Recent reports from Chinese media indicate that Apple’s initial production orders for the iPhone have expanded to up to 90 million units. This is a significant increase from the expected 82 million units just a month ago. To provide some context, Apple’s initial production orders maintained around 90 million units in 2021 and 2022 but dropped to 85 million units in 2023 due to weaker sales in China. This increase marks a return to average production levels.
The consensus for iPhone shipments in 2024 had been downgraded from 225 million units in July 2023 to 221 million units in May 2024. However, this figure recovered to 223 million units in June, reflecting growing optimism about Apple’s market performance. This recovery is crucial for Apple’s supply chain and stock prices, which have shown positive reactions to these developments.
Apple’s Justified Confidence
Since the keynote speech at WWDC 2024 on June 10, Apple’s confidence has been on the rise, and investors are beginning to believe in the company’s revival. During this period, Apple’s stock price increased by 18%, significantly outperforming the S&P index (4%), the Philadelphia Semiconductor Index (7%), and Nvidia’s stock price (8%). Hon Hai (Foxconn), one of Apple’s key suppliers, also saw a 25% increase in its stock price.
Several factors contribute to this renewed confidence:
- Expectations for Apple AI: Apple’s AI initiatives are expected to stimulate the device replacement cycle.
- Rebound in iPhone Shipments in China: iPhone shipments in China rebounded from May, driven by the 6/18 shopping event.
- Increase in Initial Production Orders: The boost in production orders reflects Apple’s optimism about future demand.
These factors indicate that Apple’s strategic moves are beginning to pay off, reinforcing investor confidence.
Only the Consumer’s Pocket Situation Has Changed
Ahead of the 6/18 shopping event, Apple held an unusual discount event from May 20 to 28. This led to a 40% year-on-year growth in iPhone shipments in China in May and a 12% increase during the week of the 6/18 event. However, it is important to note that the discount rate was twice the usual level, at 20-25%. Despite this, sales growth during 6/18 was still negative.
Investors seem relieved that Apple has managed to secure shipments in the Chinese market, although the underlying economic situation for consumers remains challenging. Nevertheless, the loyalty of 2.2 billion iOS users worldwide remains strong, providing a solid foundation for Apple’s market presence.
Apple’s AI Service is Indefinitely Delayed
Apple’s AI strategy, which includes encrypting customer data and applying it to competitive AI applications, holds great promise. However, the introduction of AI services has been delayed. Non-English services will not be launched this year, meaning that Chinese, Japanese, Spanish, and French AI services will not be available for the time being. In China, Apple is exploring collaboration with Baidu instead of ChatGPT, but negotiations have not concluded. In Europe, concerns about violating the Digital Market Act (DMA) have also delayed the launch of AI services.
Uncomfortable Disparity Between Direction and Speed
While Apple is expected to dominate the AI market by 2026-2027, the current pace of AI service introduction is slower than anticipated. Several factors contribute to this:
- Customer Data Utilization: Apple has started using customer data for AI applications.
- Collaborations with AI Powerhouses: Apple is actively collaborating with companies like OpenAI, Google, and Baidu.
- Specialized AI Hardware: By 2026, processors and memory specialized for AI are expected to be integrated into Apple’s devices.
From an investment perspective, the stock outlook for Apple is favorable, with expectations for 2025 being higher than 2024, and 2026 even higher than 2025. However, the iPhone replacement cycle may not work as well in 2024 due to minimal hardware changes in the iPhone 15 Pro, early sales driven by discounts, and the lack of AI services for non-English-speaking users.
The disparity between Apple’s clear direction toward AI dominance and the slower-than-expected implementation complicates the stock price outlook. Investors must decide whether the current stock price reflects future AI dominance and device sales growth or the immediate sales boost from the replacement cycle.
Differentiation of Parts that Raise Prices and Those that Don’t
Price increases are anticipated for certain components, such as logic and communication semiconductors (AP, Baseband, and WiFi). TSMC’s 3nm wafer prices are expected to rise by more than 20% compared to the previous year. Additionally, the cost of DRAM is expected to increase by 40% in Q4 2024 compared to the same period last year. The supply of Sony’s image sensors will remain tight, contributing to higher costs.
In contrast, competition for display and camera parts is expected to intensify, potentially limiting price increases for these components. Overall, Apple is likely to accept increased material costs while striving to keep prices stable for consumers.
The Inevitable Rule of the Tech Cycle
The tech stock cycle can be likened to a wildfire: while it’s challenging to predict where it will start, the entire market will eventually feel its effects. The tech cycle that began with AI accelerators and high-bandwidth memory (HBM) is expected to spread to device demand through general-purpose parts.
Historically, companies like TSMC and Apple have seen significant profitability during different phases of the tech cycle. The current cycle is likely to follow a similar pattern, spreading from services and infrastructure (B2B) to devices (B2C) due to differences in development periods and customer characteristics.
Apple’s current position is a blend of promising growth prospects and significant challenges. The recovery of iPhone production orders to average levels and the growing confidence among investors signal a positive outlook. However, delays in AI service introduction and the economic challenges facing consumers pose hurdles.
From an investment perspective, believing in Apple’s direction and investing now requires patience and a long-term view to withstand short-term volatility. Apple’s strategy to dominate AI and the tech cycle’s inevitable progression suggest that those who invest with a long-term perspective could see substantial returns.
In summary, Apple’s journey towards growth is marked by strategic moves, market adjustments, and the ongoing development of innovative technologies. As the company navigates these challenges and opportunities, it remains a focal point for investors and consumers alike, continuing to shape the future of technology.