Apple Nears New Highs… And The Second Half Playbook 7/1/24

0:02The Nasdaq sitting at its 21st record close of the year. and we are live from the Nasdaq Market Sight in the heart of New York City's Times Square. This is Fast Money. Here's what's on tap tonight. Golden Delicious. Shares of Apple setting a record close today, soaring nearly 3 % on some bullish data out of China. Can the tech giants' run keep going, or is there danger lurking from its overseas prospects? And banking on gains. Shares of J.P. Morgan hitting an all-time high today and bringing other big banks along with it. Is this a group you should continue to bet on, or is a run overdone? Plus, Tesla charges up ahead of its Q2 delivery report.

0:34Amazon heads to new highs, what its cloud CEO has to say about future growth, and Boeing gets a boost as it takes a step closer to buying back Spirit Air systems. I'm Melissa Lee, coming to you live from Studio B at the NASDAQ. On the desk tonight, Tim Seymour, Karen Feynman, Dan Nathan, and Julie Beal. We start off with Apple, gaining more than 2%, setting a new record close. iPhone shipments in China staging another strong month, rising 40 % in May, according to a Bloomberg calculation. That amidst steep discounts ahead of China's pivotal 618 shopping festival. But analysts at UBS throwing some cold water and expectations for a broader recovery in the tech giant's third largest market.

1:11Those analysts estimating China iPhone sales rose less than a percent in May, while the country's overall smartphone market grew by 11 percent. That taking a bite out of the iPhone's market share, iPhone maker's market share, which analysts say came in at 15.3 percent, down sharply from a year ago. while Huawei and other Chinese OEM saw some acceleration. So could the mixed demand picture in China put a damper on hopes for an AI-driven iPhone upgrade cycle? We should also mention that part of the reason for the uptick that we saw in the past month, in the most recent month, is because of heavy discounting, which a lot of analysts said, you know what, with heavy discounting, you can gain that share, but at what cost?

1:49Yeah, so to your point about Huawei, I think their sales in Q1 were up nearly 70 % year over year. So Apple in the last quarter, their sales in China were down 20 percent. So here we are. You know, we have this data for the last two months or so, up 52 percent, up 40 percent. And again, that's 20 percent of Apple's total sales. So to me, you know, Apple doesn't do heavy discounting anywhere else in the world, you know. So they're obviously very focused on this Chinese market and retaking some share versus Huawei. But I want to think about Apple intelligence. I want to think out, let's call it two quarters, three quarters, that sort of thing, where people are very excited about Apple right here, you know, because of the opportunity for an upgrade cycle here in the U.S.

2:30But I don't think the reasons that people might upgrade here in the U.S. are what Chinese users are going to upgrade for. I don't think Apple intelligence is going to be something that makes it past the Chinese firewall that they have there. So to me, if you're going to have a discount to try to get back share, that's obviously going to weigh on margins a little bit. So I just don't think it's that interesting. The last thing I'll say is that the stock has had this huge move, right? It's up 32 % or so from the lows in April. It's still only up 13 % in the year. So it's lagging the NASDAQ, which is up about 17.5%, the S &P 500, which is up 14.5%.

3:06So to me, I think the stock is probably fully valued here. I think two to three, I think to your point, two to three quarters in terms of the AI story playing out here in the United States, at least, or other markets out of China, I think that's almost optimistic. I mean, I think that the most bang for your buck you'll see is when there is a bigger adoption of this latest phone, a bigger adoption of AI. And it's not clear right now how how deep that adoption could actually be if you're only going to get it with the highest end phone in this first upgrade cycle. But it's it's Apple. And we understand this.

3:35There's two point two billion devices out there. And either way, there's two 50 a year. They're going to have to refresh. And if you think about this move in Apple stock, Dan's pointing out it's been a huge move. It's outperformed the S &P. We know we're at all time highs in markets. It's outperformed the S &P by 20 percent since April 10th. But even since it's had this move. And if you look at that kind of flagpole breakout chart, tech geeks and whatnot. I mean, it's actually really impressive what to me it's done in the last 10 days since that move. It's outperformed the S &P by 4 percent. So go back to China.

4:05I don't think you know, I think we've priced in that China is a difficult place. This this move in Apple is all about, I think, this refresh cycle. And I give the UBS analyst credit because they bring up some really important points. I mean, Apple's share loss in China is shocking. It's 550 basis points year over year. It's a market where the growth is about 11 percent a year and they're growing 90 basis points. So, yeah, off of a low bar, it was up 50 percent in April, up 40 percent in May. These are really big, impressive numbers. But the fact is they're losing market share to Huawei. In fact, they're now behind Huawei, which is 15.6 versus Apple's 15.3.

4:41But if you own Apple here, you know China's a problem. I think it will continue to be a problem. But as someone that's actually added to Apple shares, you know, a few different times over the last 45 days or so, I actually think that Apple does look interesting. And I do think this refresh is interesting. What UBS is doing on multiple is maybe the most important thing for the stock. They're putting a 27 multiple on it, which they say is the five-year historical kind of premium to the market. And that's – I respect that. I respect that because I don't think Apple necessarily deserves a huge premium here.

5:13And that's what it's had. Yeah. Do you think it deserves even that, Karen? Well, I think you got to back out that it's a hardware company primarily in revenues. Right. So whatever the number is, 70 percent, let's say a little more in the hardware business. And what are hardware multiples? Significantly less than that. So when you back that out, then you are looking at something much higher than 27 for the rest of the business. Much higher. So the other thing is I'm not quite sure that we've seen the how is it going to monetize AI, right? I'm not clear on that, which is sort of the bigger story, you know, at large on AI.

5:52What? For everybody other than NVIDIA. Well, we know on NVIDIA. NVIDIA is going to monetize it by selling. Well, Microsoft is selling, right? Right, selling. That's a monetization. So that's mine. But this is, I agree, it's not charging per se for Apple AI. Right. Now they would say, all right, well, we're going to have so many AI enabled apps that, you know, that our service revenue is going to go way up. That may be. Maybe it's just, you know what, I have not been an Apple bull for I don't know how many points, 10, 10, bunches of 10s of points. So I don't know. I feel like a lot of this is getting priced in.

6:25Yeah. Julie, where do you how do you feel about the valuation at this point? I agree that the valuation is challenging, right? But I mean, as a long-term holder, I think I've owned Apple personally for 11 years. And to me, the opportunity in AI actually is really clear. It's exactly what happened with Google and Search, right? Google pays Apple in order to have Search as the default feature. And I'm pretty sure that OpenAI will be doing a similar situation. I'm pretty sure it's actually going to go to whoever the highest bidder is. And that is because they want to be able to monetize the absolute best user base of any iPhone, right, the higher end user base.

7:02So I think that their positioning and their ecosystem is what is going to actually enable them to generate a lot of revenue from that user base. And I think that it is pretty unique because it's a near term revenue that I think we have better clarity on. And it's very high margin. Can I ask you a question, Julie? I had thought OpenAI was not paying. They're not paying right now, but I would have a good feeling that, like, the way that I look at it is the competitive dynamic is such that Google has 90 % plus market share of search, and they still feel the need to pay to be on Apple's platform. So I think that it will probably make sense for any of the open AI and competitors to be paying to be in front of that user base.

7:47It's a really compelling user base. I understand that, Julie. I mean, that line of thinking. But does anybody say X points of Apple's multiple is the revenue that Google is paying to Apple? Or is that part of anybody's bull case when investing in Apple? Because I feel like it's not. And so if that's not going to be, then why would a revenue stream from AI, an AI provider paying Apple? Why would that be part of the bull case? I mean, I think we've talked a lot about services as being a pretty important part of the Apple story in terms of being able to support this kind of a multiple, right? And so the revenue that Google pays them is within that services bucket.

8:24So I think everything that's not hardware should, by virtue of the size and the scale of the business, be higher margin than the hardware. And it tends to be recurring in nature. And both of those things mean that investors are going to be willing to pay a premium for that. Julie, I just want to say I love seeing you in the Wall Street Journal this morning. That was fun. That was it. That's it? That was it. Kudos to Julie. Yeah, I'll just say this. I mean, you know, Julie could be right. But, you know, I think a lot of folks believe that a lot of these models are going to become very commoditized, right?

8:54And so if you think about Google's relationship right now with Apple, they pay to be the default search. On Safari, I think that if anyone's going to pay, it would probably be Google at this point, because they know that they're not in the driver's seat relative to what open AI has been able to produce right now. So that relationship seems a bit sticky. And if I'm Google, I also want to defend that moat of search in a way. You know what I mean? So, you know, to me, I think it makes more sense. And it's probably something that is easily integrated into the Apple ecosystem. But even putting aside AI for just a moment in terms of its China market, if you were to mark down the China market, knowing that, as you said, China is going to be a difficult place for quarters to come.

9:35Probably even worse, as we enter full swing in the political season, I think tensions between the U.S. and China are destined to be a little bit shakier. And therefore, there could be informal boycotts, as we've seen with even just state agencies saying you cannot bring an iPhone into work anymore. I mean, things like that make a difference at the margin. So at what point do you start saying that's going to hit Apple in terms of what we should value it at? I think we've seen that in Apple's growth. I think we've seen it in the lack of growth. I think we've seen, you know, how many successive quarters did we have of essentially no growth or actually declining growth.

10:11And I think it gets back to I think it's enough for a stock, by the way, that underperformed the market dramatically for a long time. In other words, that 185 level was a level you had back in 22. Well, the market's gone to all time stratospheric highs, the second most whatever whatever place it's been in one through three, but mostly one or two. This is arguably one of the most important companies, if not the most in the world. You have to make an argument that you should be getting credit for all these other devices, AI stuff that's not in this current phone. You're going to have to get a new Apple phone.

10:41It's that simple. And it gets into this refresh dynamic. Shouldn't be all that exciting. Hardware company, I get it. But the margin on software continues to grow, and it continues to be a big part of why they get more than they do. I'm not saying anything has really changed here, but we all know that the current phone is not what the next phone is going to be. And people are going to want to buy that phone. It's really simple. It's nice. You get a little snapshot. a little taste of it right now that's being dropped in through a software upgrade. But ultimately, this is about a refresh cycle. And I think if you're talking about Apple, talking about 2.2 billion devices that need to be refreshed.

11:13But the 2.2 billion includes the devices in China, correct? Yeah. And so let's say that AI, Apple intelligence, is a reason for people to upgrade to a new Apple phone in the United States. Then the same would be true in China. People want AI. They can't get it on an iPhone. So they will go to another device. and we'll start losing part of that 2.2 billion base, at least in the China market. So at what point do you start saying, you know what, that share is going to Huawei? Because as much as it's an upgrade cycle, you know, driver in the U.S., it's going to be one in China and Apple is not going to be part of it.

11:48I don't know how the upgrade cycle is going to. I mean, a lot of times you get excited about an upgrade cycle and it starts off kind of slow and then seems to gather momentum later. I don't know if that maybe it'll start off with a bang and continue. I don't know. I'm a little hesitant that the upgrade cycle will be as robust as this move seems to reflect. For more on Apple, let's bring in Gene Munster of Deepwater Asset Management. Gene, great to have you with us as always. And so I'm wondering, you know, it's been a while since we've spoken, a while since WWDC. And how are you thinking now about that upgrade cycle?

12:22Is it going to move the needle in terms of changing it from what it currently is, which I believe is 36 to 40 months, to something shorter? Are people going to want to upgrade? I mean, definitely they're going to want to upgrade. I think the panels accurately described what the next one, two, three years are going to look like. I'll put some numbers around that. Is that in the June quarter, the street's looking for about 3 % growth. If China actually does well, it might be four. So call that a percent upside. That's the near term. And then the growth goes to four or five and then 7 % for calendar 25.

12:56So we have this kind of accelerating growth. And the piece that I can add, Melissa, related to how to think about this cycle is that I think ultimately the growth for next year is going to be 10 % or greater. And ultimately, if that plays out, and I think Julie was talking about the margin impact, that's a really important piece here. We're going to see record margins from Apple late next year. They're the only mega cap company that is scaling AI at an efficient rate in the near term. and you put those two together, I think you're going to see some nice 15, 20 percent upside to Apple earnings.

13:29And so I want to just focus on that cycle piece. But I think there's a much bigger story for longer term investors, and that's really what's beyond the cycle. Getting to our China conversation, since those are the numbers we sort of got, you know, today, Gene, that helped the stock along. I'm wondering how you think about the China upgrade cycle there for AI, because if it's going to be a boom in a driver here in the United States and elsewhere in the world, I would imagine Chinese consumers also want an AI-enabled product, and they're not going to get it from the iPhone, at least at this point.

14:02So how do you think about Apple continuing to lose market share, and at what point it'll be material in terms of how you think about the company's valuation? So Apple's been losing share. They discounted by about 10%. We see an acceleration. the data was showing 40, 50 % year-over-year growth for the first two months of the quarter. And so that tells me that the price elasticity is working in China. You bring up this missing piece around the large language model. Could it be Baidu? Could it be another party? But they're going to fill that void. They will make some announcement in the months ahead.

14:37It was deafening the silence around China related to the LLM, but they're going to fill that. So I think investors can rest well knowing that that piece will be put into place. And the opportunity ahead of Apple over the next many years is so much beyond China. I'll just give one quick example of that. Mac 9to5 today published something about a patent that Apple has that they're working on to have cameras on AirPods. Now, you may wonder what's that all about. At the end of the day, that essentially will allow you to use computer vision. You don't have to wear glasses. Some of the demos that Google showed a few weeks ago, this would be an example of another product that could be really powerful beyond 26.

15:19And I think an example that the Apple story is much bigger than China. Hey, Eugene, it's Tim. And how about just giving us the dropping services revenue and that percentage of the segment mix for Apple? And it's hard for me to believe that Apple intelligence or where we are in a world of AI and Apple devices that are now able to compute more, but obviously that this doesn't translate into software and services. What's your view? Does this remain static? Does this piece of the pie grow proportionately? Because it's seemingly stalled of late. We know it's great margin. It's part of why Apple is re-rated.

15:54Where do you go with services? So if you take this approach that they're going to give away, if you look at just GPT, for example, and version one here, And then eventually they will charge, OpenAI will charge for a premium version of GPT. But if, let's say, 15 % of iPhone owners upgrade to that, that alone right there, so that's a very clear, reasonable use case for AI here. That alone would add about$5 to$7 billion a year in operating income. And they're currently running about$100 billion. So to put some numbers around what you're talking about, Tim, think of this as a 5 % 7 % impact just around kind of this first chapter around how services can be impacted by AI.

16:37Gene, always great to speak with you. Thank you. Gene Munster. We should note, by the way, that Needham had a report out today saying that they might raise the price of the highest end iPhone in order to subsidize a lower cost model eventually. So that's sort of out there, too. Yeah. Gene's take on China is kind of interesting. So, you know, if there's a 2.2 billion installed base globally, I think that includes iPads, too. so it's not just iPhones. You know, there's some estimates that there's 300 million iPhones in China. And so if Baidu were going to be, to your point, if it's not going to be, you know, we know that Google's not there.

17:09We know that, you know, a lot of U.S. internet companies are not there. If it was Baidu, I mean, that's something that was kind of reported on. It was kind of rumored or whatever. Then Baidu is kind of a screaming buy, if you think of it. It's trading at about eight times and there's not a whole heck of a lot of expected growth. I think maybe 5 % next year in EPS and probably low single digits in earnings. but it's a 59 % gross margin company. And if you have access to that sort of installed base in China, that could be an interesting competitive advantage. Yeah. Julie? Yeah, I agree, actually.

17:39I think that the ability, I think Apple's positioning and its ability to leverage its user base such that everyone else can spend as much money as they want, the hyperscalers, all these guys, all the large language models. And we're actually going to charge you for the benefit of accessing our servers. I think that's a better business model. than these more uncertain use cases of AI that we've seen so far. Coming up, J.P. Morgan at all-time highs. The big bank now at more than 20 percent already this year. But will the second half be kind, as kind, to the financial space? We'll debate that and check out shares of Tesla charging higher.

18:13Why investors are piling into that name ahead of the EV's deliveries report tomorrow. Don't go anywhere. More Fast Money in two.

18:23This is Fast Money with Melissa Lee, right here on CNBC.

18:36Welcome back to Fast Money. Shares of J.P. Morgan hitting all-time highs today. The big bank up more than 20 percent so far this year, over 40 percent in the last 12 months. It's not the only big bank seeing strength today. Goldman jumping more than 2.5%, closing within$10 of its record. Bank of America touching its highest level in more than two years. But will the second half see these names climb even higher? And, of course, a lot of these banks today came out with statements relating to the stress tests and increasing dividends, et cetera. Yeah, I think they can. And you talked about the performance of J.P.

19:07Morgan. I think it's extraordinary in the year of AI that J.P. Morgan has outperformed the S &P by 14%. I mean, that's incredible. And I realize it may be a perfect place to put your dots down on a chart, but I'm just going back a year and I'm thinking about the market we've had. And it's been in a market that I think at times people really question where banks are positioned. So I know going into earnings in 10 days, I don't really want to see the banks reaccelerate, but that's exactly what they've done. They're going to have a nice jump into earnings. And I think we're going to need to see both some guidance in terms of NIMS that is better.

19:42I think we're hearing bits and pieces, J.P. Morgan specifically. I think recently one of the investor conferences talked about both their banking and their markets businesses have been a bit stronger. So, you know, price to tangible book, not really that cheap. But at a time when banks are re-rating, I think you stay in the money center banks. And I like Citi and Bank of America a little more. Yeah, I agree with much of what Tim said. I don't like the setup going into earnings to have it run into earnings that hasn't historically been good. But at a little under 12 and a half times earnings, that's probably about its 15 year average, give or take.

20:17And you talked about capital markets and banking. That's been good. But also asset management. When the market's up, asset management, that's good as well. We talk about AI and how it will make companies more efficient. I think banking is definitely one of those areas that we could see some efficiency. And I like it right here. Well, it's interesting, you know, back on April 12th when they reported that Q1, The stock sold up 6.5%. To Tim's point, investors were disappointed about net income, right? And so when you think about the 10-year yield, I'm just using this as one basis. It was basically trading on April 1st, the start of this quarter, at 4.2%.

20:52It went up as high as 4.75%, ended the quarter down at 4.2 % or so. You know what I mean? So when you think about this, it's kind of interesting to me, like, how are they going to guide? What happened in the quarter? And is it likely? Now, the stock's much higher. I think they were at$196 when it reported on April 12th, went down to$180. Now it's gone all the way back to$206 and making new highs. So to me, we know that Jamie Dimon has been somewhat cautious, you know what I mean, over the last year or two on a lot of these issues. So this could be an interesting one to kind of set the tone for earnings season.

21:24Yeah. Julie, where do you stand? I completely agree with Dan. I think hearing how Jamie Dimon talks about what's going on in the economy, I think his comments are usually pretty prescient. And he's been pretty gloomy. So I think the backdrop for expectations for the economy should be pretty soft. The big question that I have is what are banks doing in terms of reserves for credit losses? Because I think we all kind of continue to worry about what's happening in credit markets, in commercial real estate and outside of that. That to me is the place where there is the most risk in the financial markets right now that I don't think we talk about enough.

21:58All right. There's a lot more Fast Money to come. Here's what's coming up next. We're plugging into Tesla as shares surge with deliveries on deck. Why investors are charging into that stock ahead of those numbers. Next. Plus, after a strong first half, can stocks continue their big run? Our next guest says it might be time to hedge your bets. Why now may be the cheapest time to do it. You're watching Fast Money, live from the NASDAQ market side in Times Square. We're back right after this.