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Earnings, AI and Apple's Push To Be A Bank
How far can innovation take them?
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“Innovation distinguishes between a leader and a follower.”
- Steve Jobs
Taking a bite out of the banks
Apple AI… or the lack of it
A quick rundown
Let’s start with a quick rundown of the Apple earnings yesterday.
Revenue fell 2.5% to $94.8 billion. That was better than the $92.6 billion analysts predicted. Apple itself had projected a decline of roughly 5%.
EPS came in at $1.52, compared with a $1.43 estimate.
Product sales came in at $73.93 billion against $71.91 billion. This shows that Apple is recovering from a tech slump that has affected the computer and smartphone industries. In the second quarter, $51.3 billion in sales was generated from the iPhone, its flagship product, topping analyst predictions of $49 billion.
The iPhone performed better than expected in the quarter, helping offset weakness in the company’s lineup. It’s a particular relief for investors after Qualcomm, QCOM 0.00%↑, a key Apple supplier, raised fresh concerns about phone demand earlier this week.
The other positive news for investors was the share buyback. Apple announced plans for $90 billion in stock repurchases, the same as last year’s plan. The company also raised its quarterly dividend by 4% to 24 cents a share.
Finally, the push going forward is clearly in India, with retail store openings being pushed and production capabilities assessed. After all, the business is still incredibly reliant on China for manufacturing.
The tech giant’s ventures into financial services signal greater ambitions to take on Wall Street.
Apple Pay Later, its ‘buy now, pay later’ product, is the first instance of Apple directly lending to consumers from its balance sheet. In addition, Savings, a high-yield savings account, offers US customers a 4.15 per cent interest rate, ten times the national average.
The deposits will sit with Goldman Sachs, a licensed bank that has access to US government-backed insurance. The question for banks and other providers of financial services is how worried they should be about a tech company with 1.2 billion iPhone users, a $2.6 trillion market cap and a history of disruptive innovation making moves onto their territory.
Apple's scale makes even the world's largest banks look little. Its services division alone, where it earns recurring subscriber revenues and App Store payments, generated $55 billion in profit last year, higher than JPMorgan and Citi combined. And the company hasn't been shy about its ambitions in this space, with job ads speaking of “transforming the industry in payments, transit and identity.”
Jamie Dimon, the chief executive of JPMorgan Chase, believes the risk is obvious enough to classify Apple as a bank. In June last year, he stated, “It might not have insured savings, but it's a bank. If you move money, hold money, manage money, or lend money—that's a bank.”
Last month, Dimon issued another warning to investors about the impending danger, claiming that “large tech companies” have “enormous resources in data and proprietary systems” that “all give them an extraordinary competitive advantage.”
American Express CEO, Stephen Squeri, acknowledged to analysts on Thursday that he is also “paranoid” about companies like Apple and Amazon, which he dubbed “phenomenal” firms with solid consumer ties.
Apple typically expands into new sectors not through flashy acquisitions but by incremental steps that give it a sustainable advantage over time. In finance, the fruits of Apple's slow-burn strategy are most evident with Apple Pay, its wireless payment technology meant to “transform mobile payments” when it was first announced alongside the iPhone 6. Adoption was slow in its first years, but by 2020, adoption had reached 50%, and by 2022, adoption had hit 75%.
Apple is playing a long game in finance and payments, and its current moves are laying the technical groundwork for taking a more significant share of the market.
Apple CEO Tim Cook said several AI issues need to be sorted, but it has enormous potential. They will continue to weave AI into their products on a thoughtful basis.
Apart from that, there wasn’t much more said on the topic that has been the talk of the year. This contrasts other tech companies' earnings calls over the last few weeks.
But it’s no surprise. Apple does things slower but gets it right the first time. So maybe the Apple AI talk is one to be looked forward to in the future.
The stock is (currently) up 1.8% in after-hours trading.
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