• 2Q24 results were within our expectations. 1H24 revenue/PATMI was at 52.2%/56.8% of our FY24e forecasts. Revenue declined by 4% due to a 10.5% YoY drop in iPhone sales. AAPL unveil record $110 billion buyback.
• AAPL’s AI trajectory remains uncertain as the company refrained from disclosing additional details. Their disclosures on the forthcoming “Let Loose” iPad event (May 7th) and the Worldwide Developers Conference (June 10th) will shape the company’s short—and long-term outlook.
• We upgraded to an ACCUMULATE rating from NEUTRAL due to share price losses. Our target price remains unchanged at US$194, with a WACC of 6.5% and a terminal growth rate of 3%. There is no change in the forecast.

The Positives

+  Strong gross margin delivery. AAPL’s 2Q24 gross margins of 46.6% (+2.3% YoY), beat its guided 45-46% range, despite a decline in revenue. The margin expansion is driven by 1) a higher mix of Services (e.g., Google payment, with practically 100% gross margin) and 2) a higher mix of Products (customers preferring premium models). Product margin declined by 10bps, mainly due to the decrease in iPhone revenue.

The Negatives

–  Weakness persists in revenue performance. AAPL reported revenue of US$90.8 bn, marking a 4.3% YoY decline, reflecting persistently low demand for its products. iPhone sales have declined for the second consecutive quarter, dropping by 10.5% YoY. This decline is primarily attributed to weak performance in the Chinese market, with a decrease of 8.1% YoY, influenced by China’s slowing economy and increased competition from local rivals like Huawei. Although the decline was less than expected, AAPL’s revenue performance overall has been sluggish. Compared to 2Q21, its revenue in 2Q24 has only increased by 1.3%. The company’s guidance for 3Q24 also remains weak, with an expected revenue growth of low single-digit YoY. We estimate iPhone to remain flat or decline by single digit YoY in 3Q24e based on guidance.

–  AI strategy still shrouded in mystery. Unlike other Big Tech rivals who are very transparent with upcoming AI features, AAPL lags behind with clearer AI strategies. Despite assuring investors that AI has been deeply embedded within its software and services, the company has not made a big splash in the AI space yet. Management has indicated plans to unveil more details in the ‘weeks ahead,’ presumably waiting until its Worldwide Developers Conference on June 10^th. Whether AAPL can capitalize on the AI boom and unveil new AI features in the upcoming iPhone will influence the short & long-term outlook for AAPL.