Source: Zhongtong Finance. Nvidia, the AI chip leader and dubbed by Goldman Sachs as the 'most important stock on the planet,' can be considered as the most expensive stock in the S&P 500 Index, with its stock price up to 23 times the expected sales for the next 12 months. However, despite Nvidia's high valuation, there is still a question that Wall Street finds hard to answer: in the era of booming artificial intelligence, what kind of spectacular revenue growth will this more-than-$3-trillion market cap chip giant present in the coming years? This is also an important factor that leads analysts on Wall Street to universally raise Nvidia's target stock price. Last week, Nvidia briefly won the title of 'world's highest market cap listed company,' and its market cap may reach the $5 trillion mark.

$Apple (AAPL.US)$The third quarter financial results will be released after the US post-market trading on August 1. The market expects that the company's Q2 revenue will reach $84.39 billion, compared to $81.8 billion in the same period last year, with an EPS of $1.34, compared to $1.26 in the same period last year.

Performance Review

In the previous quarter (Q2), Apple's revenue was $90.75 billion, which exceeded the expected $90.01 billion, and its earnings per share were $1.53, higher than the expected $1.50. At the same time, the company announced that the board of directors authorized the largest ever $110 billion share buyback, a 22% increase compared to last year's $90 billion. The company also approved a dividend of $0.25, leading to a 7% surge in the stock price on the day of the earnings release.

Apple achieved positive growth in the Mac product line, especially the new MacBook Air with M3 chip which drove sales growth, increasing by 3.9% to $7.451 billion year-on-year. However, the sales of iPad and other hardware products such as wearable devices, home and accessories did not meet expectations. The sales of iPad decreased by 16.7% year-on-year to $5.56 billion, lower than market expectations.

The service business continues to perform well, with revenue growth of 14.2% to $23.9 billion, exceeding the market expectation of $23.37 billion.

Outlook for the third quarter

In Q2 earnings report, Apple did not provide performance guidance, but CEO Cook hinted during the conference call that the overall sales growth rate of the third quarter is expected to be "low single digits".

Will AI be the next "ace" for Apple?

Based on its performance in the previous quarter, investors are expected to closely monitor the performance of the iPhone business, especially since the company continues to face challenges in China. The market currently expects that the sales of this business will further decline to $37.7 billion.

According to the latest report released by Counterpoint on July 15th, the global sales of smartphones increased by 6% year-on-year for the third consecutive quarter.

However, Counterpoint's report expects that the global iPhone sales of Apple will remain stable, with strong growth in Europe and Latin America being offset by weak sales in China, due to the intense competition faced by the company in China, including from local Chinese companies such as Huawei. The latest report released by Canalys, a research institution, also showed that Apple's shipments in the Chinese market in the second quarter of this year fell drastically and have dropped out of the top five.

In April 2024, Huawei released the Pura 70 series of smartphones, which continue to challenge the growth of Apple in China. In the 2023 fiscal year, Greater China accounted for more than 18% of Apple's total revenue, making China still a very important market for Apple.

According to Visible Alpha’s general expectation, analysts expect that Apple's sales in Greater China in the third quarter will decrease by 2.6%.

However, CFRA analysts claim that the third quarter may mark the end of Apple's sales decline and will usher in a recovery. The bank's analysts believe that Apple's "fate in the region is changing" due to increased shipments of iPhones in China driven by price discounts.

CFRA expects that the sales data of iPhones in China will represent a low point for the company in terms of revenue before the expected launch of the new iPhone 16.

Morgan Stanley analyst Samik Chatterjee even gave a more optimistic forecast and put Apple on the list of "actively catalytic observations" before the financial report was released. The analyst stated that Apple is in a favorable position to capitalize on the upcoming artificial intelligence cycle, especially through iPhone and overall revenue performance.

Chatterjee stated, "We expect Apple to reassure investors that the upcoming AI upgrade cycle will formally start in the 2025 fiscal year (ending in September) and further advance into the 2026 fiscal year, which will drive better-than-expected revenue driving factors in 2024 fiscal year with a more robust launch platform."

He expects that iPhone sales and total revenue will both exceed market expectations, which could alleviate investor concerns about Apple's valuation. Chatterjee expects that Apple's third-quarter revenue will reach $85.3 billion, and earnings per share are expected to be $1.38, both of which are higher than the market's general expectation.

Strong growth in the service business

Driven by the growth in App Store sales and subscriptions, the service business is expected to continue to grow strongly. Moreover, the gross margin of this business may also increase due to the sale combination of high-quality products and higher service sales.

In the previous quarter, the proportion of service business to total revenue has reached more than 26%, which has given analysts hope that the business will become Apple's new growth engine in the near future because Apple has significant advantages in the service market, including:

Apple's large user base of devices allows it to further develop its subscription, app store, payment and other services, and only Apple has the ability to use its devices to expand its service business;

Apple has been integrating artificial intelligence into its applications, hardware, and service ecosystems. On June 10, OpenAI and Apple announced a partnership to integrate ChatGPT into Apple's experience, including iOS, iPadOS, and macOS. In the future, Apple may integrate more artificial intelligence features into its operating systems and hardware to drive more subscription revenue growth;

Investors will also be watching for updates to Apple's own generative AI software, Apple Intelligence, which could trigger a significant device upgrade cycle.

Recently, a study by Counterpoint Research also showed that by 2025, Apple's service business may account for a quarter of the company's revenue.

According to research, 2025 may be the first year for Apple's service business revenue to break through the $100 billion per year mark. Analysts believe that despite regulatory challenges, Apple's total revenue is expected to exceed the $400 billion mark for the first time in 2024, mainly due to growth in its hardware and services departments.

Although the iPhone will still account for half of Apple's revenue, its service strategy is paying off. In 2019, Apple announced several new services, and a year later, the company launched the Apple One subscription service, dividing all of its services into three different tiers.

Counterpoint says that the App Store, Apple Care+, Apple Music, and bundled subscriptions like Apple One have brought Apple inflection point growth. In addition, the growth of the iPhone in emerging markets will also help the future growth of other Apple products, as many consumers who enter the iOS ecosystem as new users become increasingly dependent on the Apple ecosystem, they may spend more time and money on other Apple products.

This means that even if Apple's iPhone sales slow down, its service business will continue to add value to the company and its products.

However, it is worth noting that prior to the financial report, there were reports that Apple Intelligence would be released later than expected and would not be released at the same time as the iPhone and iPad software updates, and is now planned to be released to customers before October. Apple previously said that these new features could help boost sales of the new iPhone this year.

Despite this, Chatterjee believes that the AI cycle provides Apple with untapped opportunities, particularly in improving profit margins, increasing iPhone sales, and the possibility of extending upgrade cycles beyond the 2026 fiscal year.

Editor / jayden