Apple earnings underline Apple Intelligence is key: Analyst

Apple (AAPL) reported the results for the third quarter, with revenue beating estimates as earnings per share (EPS) fell short. D.A. Davidson managing director Gil Luria joins Asking for a Trend Host Josh Lipton to discuss the results and why he’s bullish on the iPhone maker.

“Apple hasn't really grown iPhone sales for the last three years. Expectations now are that it can actually grow at 5% to 10% for a variety of reasons, but really, the important one is Apple Intelligence,” Luria says.

The analyst notes that the artificial intelligence (AI) features are key to Apple’s growth. He says “if they can't roll out these Apple Intelligence features in a timely way, if consumers don't have as positive experience as my early experience [with Apple Intelligence] has been, then it's going to be harder to compel people to upgrade even if there is an aging phone base.”

Watch the video above for more on Luria's read on Apple’s third quarter results, including sales in the China region, what the company needs to do to ease investors’ worries, and more.

To watch more expert insights and analysis on the latest market action, check out more Asking for a Trend here.

This post was written by Naomi Buchanan.

Video Transcript

Well, for more uh on Apple's fourth quarter, let's bring in D A Davidson, the managing director, Gil Luria Gill.

Um great to have you on the show.

The numbers just crossed the wire.

I'm interested to get your, your instant analysis.

Gil what do you make of this print that it's very important that they met and slightly exceeded expectations on iphone.

As you've been discussing, the Apple Intelligence features had had yet to be released at the time the quarter ended, they've been starting to trickle out since and expectations for, for iphone have gone up considerably since worldwide developer conference.

So the fact that without those features, they've been able to start achieving the, the high growth expectations is very encouraging and as the upgrade cycle happens, it will draw with it services revenue.

So it will be iphone will accelerate first and then it will drag with it, more services revenue.

OK.

So Apple Intelligence really driving this ecosystem there.

So how much of a driver do you think it will be over the next year?

Because as we were just discussing still early days, we still have a lot to roll out here.

Yeah, so if Apple hasn't really grown iphone sales for the last three years, expectations now are that they can actually grow at 5 to 10% for a variety of reasons.

But really the important one is Apple Intelligence.

I've started using it on the phone last couple of days and the features are compelling, uh being able to record a call and see the transcript immediately, uh seeing emails and being able to summarize them, respond and do the editing based on um the generative A I on those responses.

Uh You know, I I have kids, I get these really long multi page emails from the school.

I was able to click on it, summarize it, respond and then edit my response to be a little bit more friendly than I would have otherwise responded.

And these are brand new tools that were integrated into my experience.

So these tools are compelling and as consumers start seeing them, they will encourage each other to upgrade their funds.

You know, I want, I want to drill into China for a bit as well.

15.03 billion.

I don't know if that matches up with what you were looking for.

Um You know, I talked to Luca Maestri about that.

He said listen results there.

Uh flat year over year which he said was an improvement from earlier in the year.

One question I had G when Apple intelligence gets turned on over there in China, how if at all, do you think that could change its competitive position in that market?

China is the most competitive market in terms of uh the feature functionality of the other phones.

And so it's especially important in that market that Apple has the most innovative feature functionality.

The the Chinese market is very much dependent on that for growth.

The number itself is a relief.

There were reports from various sources as there often are that Apple will disappoint in China that didn't happen.

And again, before any Apple Intelligence features, once those are rolled out, Apple will have a little bit more tail wind in this market, which is again, not only the most competitive but also the most volatile in terms of the results.

For Apple G, we'll have the call coming up soon, guidance will be provided on the call.

What do you think investors need to see there?

Positive commentary about the the next fiscal year, the holiday season, how they're going to promote the iphone, how their carrier partners are going to promote it, the rate at which the Apple Intelligence features are coming out that's really important because again, this all goes back to can the iphone grow 5 to 10% if it can, they will meet expectations and that will drag revenue from all the other lines like wearables like services.

So that, that commentary about what they're doing to promote iphone for next year.

What rate they're gonna be able to introduce new features will be critical.

G I want to talk about margins as well.

46.22 that beats consensus, which was more like 46 02.

So margins hanging in there, Gil and certainly compare where they were a few years back.

What do you make of that?

What does that suggest to you?

That's another place where the iphone sales really matter.

The, the upside there is because they had uh iphone sales.

They've been able to keep the price points, keep the mix going up as long as they can do that, the whole margin profile of the company will benefit and they can increase margins with this product cycle.

Again, that's why the iphone is so critical gay.

You have a buy on this name.

What would be on your wall of Worry for Apple?

What would be the risk to consider if they can't roll out these Apple Intelligence features in a timely way.

If consumers don't have as positive experience as my early experience has been, then it's gonna be harder to compel people to upgrade even if there is an aging phone base, even if they do promote it to get that type of meaningful growth.

5 to 10% in iphone, the features have to be compelling.

People have to like using them.

They can't deplete the battery, they have to work seamlessly when they introduce the Chad GP T integration that has to work really well, iphone.

Users have high expectations.

They're not into experimenting, they want things to work the first time.

And gail if we take a look at after hours moves, we're down a little over 1% at this point.

1.5% stock is jumping around a bit.

What do you think is driving shares to the downside?

Is, is it that, that Miss we saw in China and the Miss we saw in services in your view.

What do you think investors wanted to see that they didn't in this print?

I think the shares are up about 15 20% since worldwide developer conference in June.

So expectations for iphone growth were very high and again, they slightly exceeded them, but some investors expected there to be a more meaningful contribution.

Uh even just from the hype around A I and so that's maybe a slight disappointment.

I would imagine if they give the positive enough commentary on the call shares may reverse course by tomorrow.

Gay.

Always great to have you on the program.

Thanks for joining us, sir.

Thank you.