• Apple’s run of trouble with AI is continuing as a good proportion of the much-hyped Apple Intelligence services are being delayed again in yet another sign that Apple is still struggling with AI raising the possibility of an acquisition to plug the gap.
• The good news is that AI is not yet needed to sell iPhones giving Apple time to sort the mess out, but this does give Google an opportunity to take the fight to Apple.
• Both the “more personalised version of Siri” (which I take to mean powered by an LLM) and certain Apple Intelligence services such as “on-screen awareness” are taking “longer than we thought” to come to market as testing has revealed that they don’t work very well.
• This news comes at the same time that Bloomberg is reporting that Apple is in licensing discussions with Google that it reports could see Gemini power the iPhone.
• I think that this is a very unlikely outcome as:
  • First, competition: where Google’s ecosystem is Apple’s main rival in the smartphone business.
  • Google and Samsung are currently working hard at integrating Gemini functionality into Google’s ecosystem services on Samsung devices meaning that if Apple were to follow suit, iOS could lose some of its differentiation.
  • If AI becomes a differentiator in the user’s decision to live his or her life with Apple or Google, then this loss of differentiation could be disastrous for Apple’s gross margins.
  • Instead, Apple needs to have a service that is distinct from Google’s to prevent user perception that the quality of the two user experiences is converging.
  • Second, control: which is something that Apple has gone to great lengths to preserve and extend.
  • Apple is one of the most vertically integrated technology companies in the world, and its focus on its own silicon for processing, graphics and now modems is a sign of how important this is.
  • Hence, if AI is going to be important, the last thing Apple is likely to do is cede the foundation of its AI service to a 3^rd party and least of all its biggest competitor.
  • Consequently, I think that Apple will either build or acquire a complete system over which it will have complete control.
• The net result is that I suspect that these discussions are about adding Gemini as another option alongside ChatGPT as an external source when the request falls outside of the scope for which Apple Intelligence has been trained.
• This would be completely separate from Apple Intelligence and would have no impact on Apple’s competitive position.
• Consequently, I think that Apple will continue to develop its in-house system for AI or acquire one of the other players when they inevitably get into financial trouble.
• The good news is that Apple has time to sort this out as AI services on smartphones are not yet differentiating factors.
• However, Google is moving to infuse its digital ecosystem with Gemini and if users start to appreciate these services, that will start to put pressure on Apple to deliver.
• This requires that Google ensures that the best that it has goes onto Samsung devices and those from its Chinese partners rather than favouring its own in-house brand, Pixel.
• This is because Pixel is a rounding error in the smartphone market and so any new and differentiating features that are exclusive to Pixel are likely to go unnoticed by the average smartphone buyer.
• Google appears to have realised this and has been working more closely with Samsung but to see real impact it will also need to be quick to offer its latest and greatest on Chinese smartphones.
• Hence, I think Apple has some time to get this right but it is clear that it is struggling relative to its competitors and the other AI services that are available in the cloud.
• It looks to me that the main problem is orchestration which is the software link that allows the agent to access the apps, services, websites and APIs that it needs to be able to fulfil user requests.
• Hence, I think that this is a solvable problem but in the meantime, Siri remains as awful as ever and is only ever activated when I accidentally long press the side button.
• Time, however, is ticking.

• Alibaba looks like it will be the launch partner for Apple Intelligence in China but the system that Apple has created remains replete with privacy features that are likely to have to be compromised if Apple wishes to launch its service in China.
• Alibaba’s AI ambitions have been boosted by the possibility that it is working with Apple to provide Apple Intelligence for the local market which is a ringing endorsement of both the quality of its Qwen model and its neutrality.
• This will not be Qwen powering Apple Intelligence but simply replacing ChatGPT as the external location that Apple Intelligence points to when the user asks for something that Apple Intelligence is not equipped to deal with.
• This is a major boost for Alibaba which has been struggling with its core ecommerce business in China as a result of weak domestic consumption and aggressive local competition.
• Alibaba was one of the first to start producing generative AI and the fact that Apple has selected Qwen over Baidu’s ERNIE has given the market confidence that Alibaba will be one of the AI players in China.
• Despite this, Apple Intelligence in China is fraught with problems as the privacy features that it launched so proudly outside of China and the EU.
• Apple Intelligence is similar to CoPilot in that it consists of a runtime where a number of small language models (SLMs) have been trained to carry out specific tasks such as writing emails, drawing emojis and so on.
• When the request needs a bit more computing power it processes the request in conjunction with a completely secure server that no one, not even Apple has access to.
• This ensures that data used in prompts remain completely private even if they are processed in the cloud.
• It is only when a request is made that both the SLM and the LLM in the secure server can’t handle that the request is sent with the user’s permission to the public server of ChatGPT (Qwen in China’s case) to get an answer.
• The problem with Apple Intelligence in China is not Qwen which has already been approved by the regulator but with the data being processed on the device and in the secure server.
• To get this approved, Apple will need to allow the state to get access to all of the private data processed on its secure server which goes completely against how the server was built and created in the first place.
• One way to get around this is to scrap the private server in China altogether and do everything that is not processed on the device on the public server running Qwen.
• This will completely trash any claim that Apple can make to being an advocate for privacy in China, but then again the majority of Chinese citizens seem to be comfortable with the idea that the CCP is constantly checking in on their activities.
• For Apple, it is a trade-off of tarnishing its privacy reputation or having one of its core differentiators unavailable in China.
• Given the competitive environment in China where Apple has been losing market share and reporting weak numbers from China, it appears to have chosen its revenues over its reputation.
• The real winner here is Alibaba which gets a big boost for its AI reputation and one can only hope that this is the catalyst that returns Alibaba back to a more sensible valuation.
• Alibaba remains by far the cheapest e-commerce company in the world and if it gets a bit of AI pixie dust sprinkled over its valuation then there is a lot more upside to go.
• I have been waiting for a turnaround in Alibaba with my battered position and I can only hope that this is it.

• Apple reported good results as the promise of Apple Intelligence has generated a mini-upgrade cycle, but it was not nearly enough to return the company to the kind of growth that its valuation demands.
• FQ4 revenues / Adj-EPS were $94.9bn (+6% YoY) / $1.64 slightly ahead of consensus at $94.4bn / $1.60.
• iPhone revenues were $46.2bn (up 5.4% YoY) driven by upgrades in the West and stabilisation in China after several quarters of weak performance.
• Apple is claiming that the promise of Apple Intelligence is resonating with owners of iPhones that can’t support the new feature which it says is driving upgrades leading to the iPhone 16 shipping more in its first 8 days of availability than the iPhone 15 did last year.
• This will have only had a very small impact on FQ4 24 but will have been a key ingredient in the more positive commentary surrounding its expectations for FQ1 25.
• Stabilisation in China was also a factor where it appears that nationalistic market share loss to Chinese brands has slowed down.
• However, this was not enough as the company forecast of “low to mid-single digit” revenue growth was less than the consensus estimate of 7% YoY.
• This is a very marginal miss which is reflected in the fact the shares sold off just 1.4% in after-hours trading which in the grand scheme of things is little more than a rounding error.
• However, these results are symptomatic of a hugely successful company with a growth problem.
• This is not necessarily an issue on its own but when one is trying to justify a 2025 PER of more than 30x, hard questions start to get asked.
• This is why I continue to be indifferent to the shares.

Amazon Q3 24 – Big spender

• Amazon reported excellent results as streamlining efforts paid off, but this will be immediately invested in data centres with $75bn this year and even more in 2025 which will have Jensen Huang rubbing his hands with glee.
• Q3 24 revenues / operating profit were $158.9bn (up 15% YoY) / $17.4bn nicely ahead of estimates of $157.3bn / $14.7bn.
• The main driver of the better-than-expected results were AWS where margins improved to 38% and International ecommerce which reported a profit once again in what is hoped to be a trend.
• This puts trailing 12-months operating cash flow at $112.7bn which is up 57% YoY which is how Amazon can afford to spend even more money on its data centres.
• Andy Jassy describes generative AI as “a really unusually large, maybe once-in-a-lifetime type of opportunity” explaining how it can remain comfortable spending over 2/3rds of operating cash flow on capex.
• This number is expected to rise again next year meaning that the company will need to keep streamlining its operations wherever it can.
• AWS revenue grew by 19% YoY meaning that it is losing ground to both Azure and Google Cloud, but this is not unexpected given how much bigger it is compared to its competitors.
• However, it has not seen as much growth acceleration as the other two, implying that Microsoft with its OpenAI technology and Google with its homegrown Gemini foundation model are conferring an advantage to them.
• As long as the 38% operating margin remains intact, this is clearly money well spent which is why the market remains unconcerned about this massive spend and sent the shares up 6% in after-hours trading.
• The real winner from these results and those of Microsoft and Google is Nvidia where the company is clearly selling as many chips as it can make and earning 75%+ gross margins at the same time.
• Nvidia is growing faster than Amazon and trades at a lower PER multiple which is why I would rather own Nvidia over Amazon if I had to choose between them.

• With Apple Intelligence being the big new feature which will come to all iPhone 16 versions and the iPhone 15 Pro, Apple relied on the tried and tested camera features and faster silicon to entice users to pay up for the Pro version.
• Once again, has just about done enough to hang onto its position at the top of the market.
• The September event saw updates to Apple Watch, AirPods and a new iPhone.
  • Apple Watch: Here, Apple spent for more time on new colours, materials and faces than on new features but there are few new bits and pieces.
  • Sleep Apnoea detection comes to the Apple Watch for which Apple expects to get FDA approval shortly and the water sport features previously exclusive to the Ultra have been put into the regular version.
  • The Ultra 2 was released in new colours but that was pretty much it as blood pressure and blood glucose monitoring which, in my opinion, are killer use cases remain distant dreams.
  • AirPods where the obvious hearing aid functionality has finally made it into a consumer device.
  • This is being made available on the new AirPods Pro and is something that the headphone industry has been procrastinating about for years.
  • Machine learning models make it easier to assist the user’s hearing once a test has been taken, and I suspect that this will trigger a rush by the industry to follow suit.
  • This is a good upgrade to the AirPods Pro and with 1.5bn people in the world suffering from some degree of hearing loss, there is a good market for this product.
  • iPhone 16 where the main feature is the new camera control button.
  • This allows the camera to be accessed with a physical click and then a picture to be taken.
  • The button can also distinguish between a regular click and a light click which brings up a series of controls which can be selected and controlled by sliding a finger along the button.
  • This is classic Apple user experience magic and is probably the biggest reason to buy a new iPhone this holiday season.
  • iPhone 16 Pro where apart from the extra camera, and a better silicon chip, there is not much that makes it stand out from the iPhone 16 and iPhone 15 Pro.
  • 4K at 120 frames per second is a nice upgrade as is the ability to adjust tone and lighting dynamically.
  • Games also received an incremental upgrade but once again these features do not provide a big incentive to make the upgrade.
  • Apple Intelligence where very little has changed since WWDC where the commentary was largely a recap of what was said in June.
  • June was about the software and this event launched four more devices that will be able to support Apple Intelligence.
  • However, these features will be rolled out very gradually and not at all in the EU which sets up an interesting game of chicken between Apple and the EU where I suspect the EU will blink first.
• The net result is that Apple is doing just enough to maintain its edge at the high end of the market.
• It brings in new features that its rivals have had for some time but it is definitely leader when it comes to health an wellness with ECG, fall and crash detection and now sleep apnoea and hearing loss.
• This is why I think that the most interesting launch was the new iPods Pro as this may well change the headphone industry once again.
• It remains to be seen how useful Apple Intelligence is and what impact it will have in the hands of users.
• Apple shares were indifferent to the event in a sign that Apple is simply chugging along at the top but with the shares on 33.0x 2024 PER I remain uninterested in having a position.

• While Apple Intelligence got all of the attention at WWDC, an extraordinary amount of content was provided to developers on how to develop apps for VisionOS for a product that has almost no users.
• This would appear to be counterintuitive until one considers that in the very long-term some form of augmented reality (AR) may end up replacing the smartphone meaning that Apple needs something ready to go or face going the way of Nokia, Ericsson, Blackberry and many others.
• The Apple Vision Pro is Apple’s first foray into the Metaverse and although it is without doubt the best experience available by far, sales have been disappointing.
• I don’t think that this is necessarily due to the price tag but more to do with the horrible compromises that Apple was forced to make to get the experience where it wanted.
• These include a large device that is front-heavy, 2 hour battery life meaning that it needs to be plugged in most of the time and the fact that Apple was forced to implement its experience back to front.
• Apple thinks of this device as AR but the reality is that the Vision Pro is a VR device in that reality is superimposed on the virtual world rather than the other way around.
• True AR is where the virtual world is superimposed on the real world, but this is so technically difficult to do right now, that Apple had to do it the other way around which is what I mean by back to front.
• Despite all of these problems and weak sales, Apple dedicated many of its WWDC sessions to teaching developers how to write apps for Vision OS as well as upgrading its tools and capabilities which appears strange for a device that has very few users.
• I think that Apple’s strategy is to prime its ecosystem to be ready to switch to AR should The Metaverse start to take off to ensure that whatever it loses in smartphone sales is made up by Metaverse devices.
• Furthermore, I think that Apple is also leading the way in terms of how AR should be implemented by splitting the processing of the virtual and real world into two completely different systems.
• This is because interpreting reality is very latency intolerant and hence requires a real-time system whereas the virtual world is much more forgiving.
• Hence, the optimal solution is two systems which create the two worlds separately and then overlay one over the other.
• This will also make it much easier for Apple to switch from VR to AR when the technology is ready for it to do so which I think will be around the 2026-to-2028 time frame.
• I think that the Apple Vision Pro is successful because it is fulfilling its function which is to be an insurance policy to prevent the kind of implosion that Nokia suffered between 2007 and 2012.
• If developers are familiar with how the system works and how to program for it, then Apple will be one step ahead of the competition for AR.
• The current leader is Meta which makes devices that are far cheaper which means that it has sold far more devices and has a much larger installed base but its system is not that well suited to be migrated to AR.
• Consequently, I expect that Apple is not about to ditch the Vision Pro system but will continue developing it just in case it is needed.
• Given the gargantuan size of the iPhone business and the peripheral businesses that it enables, spending a few billion a year on developing a Metaverse offering just in case it is needed is a worthy and successful investment in my opinion.
• Furthermore, it is a rounding error in the accounts and investors will barely notice its impact.
• That being said, Apple is not suddenly an AI company and the recent rally only serves to reinforce my view that the valuation of the company is too high and that there are much better bargains to be had elsewhere.

Apple FQ2 24: Bounces off the bottom.

• Apple reported reasonable results and predicted a better FQ3 as the stabilisation in the smartphone market and continued growth in the services business are arresting the revenue decline.
• Apple also sprinkled its commentary with as much AI as possible promising that it would share “some very exciting things with our customers soon” raising expectations that it intends to slay the generative AI bugbear at WWDC in June.
• FQ2 revenues / EPS were $90.8bn / $1.53 just ahead of forecasts of $90.4bn / $1.51 and the company guided better for FQ3.
• Here, the company overall is expected to grow by low single digits (1%-3%) and within that services will grow at double digits.
• Signs of stabilisation and the promise of answering generative AI critics within a month came as a relief and the shares rallied 6% in after-hours trading.
• Most telling of all is the massive $110bn stock buyback program which is a sure sign that Apple is now a middle-aged company and that growth from here is going to be very hard to come by.
• It will still continue to have the most valuable digital ecosystem, make the best smartphones, and print cash like there is no tomorrow, but real growth does not look like it is coming back.
• There is nothing wrong with this, but Apple will struggle to justify the 25x FY2025 PER multiple that it trades on and buying back $110bn of stock will help reduce the multiple without the share price having to fall.
• Hence, I think that the share price could easily underperform EPS expansion making this a lacklustre, albeit pretty safe place to invest which is not for me.

Peloton Q3 24: All hands on deck

• It is always dangerous to send a CFO to do the CEO’s job, but I thought that this was an exception and I got it badly wrong.
• Peloton reported relatively reasonable results, but CEO Barry McCarthy’s tenure has come to an end as the board is giving up on his ability to turn the ship around and is looking for another captain.
• Peloton has also announced a further $200m cost reduction program that will reduce headcount by another 15% which is an admission that the strategies for growth put in by Mr. McCarthy have not delivered as expected.
• In his defence, I think that some of the partnerships he put in place set the subscription business up well, but they have yet to deliver the value expected.
• The company is also engaged in restructuring its debt position in another admission that things are not going well at all.
• Q3 24 revenues / EPS were $718m / LOSS$0.45 broadly in line with forecasts of $718m / LOSS$0.36 but no one was paying attention to these.
• The only thing that matters is cash flow from operations and here the FQ3 24 numbers are still red at $99m but this is much improved from the $332m that left the business in the same quarter last year.
• The problem is simple, the business is carrying far too much general and administrative expenses for a company of this size, and it needs to be cut which is what has been announced.
• At its heart, the core subscription business is fine with 3m subscribers remaining pretty loyal, paying every month and delivering 68% gross margins.
• I think the problem boils down to Mr McCarthy wanting to fix the business and return it to growth all at the same time.
• What I would have preferred to see would have been a clean-up where the finances stabilize and generate cash so that the debt can be dealt with and then using those proceeds to invest for growth.
• Mr McCarthy didn’t really have that kind of time which is why I suspect he made the choices that he did.
• If one extracts the subscription business this is easily worth $4bn – $6bn on its own and the problem has always been cleaning up the mess that surrounds it.
• The problem is that the mess is much greater than expected and Mr McCarthy’s inability to execute the clean-up leaves the shares at all-time lows.
• What the company needs now is a hard-nosed fixer who will make the changes required to stabilize the business and at that time, I suspect a sale to private equity or a larger fitness player is probably quite likely.
• I bought a small position in Peloton at $6 and am now faced with the prospect of doubling up, getting out or doing nothing.
• There is still plenty of upside in the company but whether this will accrue to the shareholders or the debt holders is not clear.
• One for careful consideration.

• Mercedes Benz has confirmed that it has no plans to support the next generation of CarPlay as it has realised that letting Apple take over the infotainment domain will destroy its ability to monetise digital services in the vehicle.
• Ola Källenius was very clear on the Decoder podcast answering “the short answer is no.” when asked if Mercedes Benz would support the next generation of Apple CarPlay in its vehicles.
• This version of CarPlay was announced at WWDC in 2022 and marks Apple’s move from simply mirroring the smartphone on the vehicle infotainment screen to taking over the instrument cluster as well as other screens in the vehicle.
• The instrument cluster has to run at a much higher level of reliability than the media or navigation functions and as such cannot be safely run on a smartphone.
• This represents a titanic shift because it would mean that far more of Apple’s hardware and software would need to be built into the vehicle and could obviate the OEM’s digital user experience entirely.
• The obvious endgame here is that OEMs leave a hole in the dashboard which Apple then fills with its infotainment offering upon which it could make iPhone-like margins.
• This is a far more viable business model than making the vehicle in its entirety and is what I think Apple has been quietly aiming at for years.
• However, no OEM wishing to make any revenues from digital services will sign up for this as with Apple running all of the digital services in the vehicle, there is no route for the OEM to generate revenues.
• In short, the OEM will have become an app developer for its own vehicle and nothing more.
• In the long term this is a death sentence because as electrification and autonomy drastically reduce demand for automobiles, OEMs will need other revenue streams to survive.
• I have long argued that the best opportunity here is digital services and for this, the OEMs need to have their digital services in the vehicle.
• Mercedes is not going as far as GM in terms of removing CarPlay completely but by supporting smartphone mirroring only, Mercedes will offer far more functionality and integration with the vehicle that will help to entice the user to keep the smartphone in his or her pocket.
• This comes as very little surprise to me as when Apple announced the list of OEMs who were “excited to bring this new vision of CarPlay to customers”, most of those who were mentioned were surprised to be on the list and reacted more with horror than excitement.
• Although Mercedes Benz has a long way to go in terms of delighting users with digital services as opposed to beautiful vehicles, this is undoubtedly the right move and will allow Mercedes to earn revenues above and beyond the sale of the vehicle.
• So far only Aston Martin and Porsche have signed up to implement Apple CarPlay 2.0 which is ironic because neither of them was on the original list that Apple showed in June 2022.
• Both of these car makers rely less on digital for their brand value than the larger, mass-market OEMs and so arguably have less to lose should they end up ceding all of their digital real estate to Apple.
• However, even for these companies, I see this as a mistake as digital is only going to increase in terms of its relevance with time and once Apple is in the vehicle, it will be almost impossible to remove.
• This is evident as the presence or absence of CarPlay already impacts the vehicle buying decision of many consumers who own an iPhone.
• Furthermore, Apple will offer even less to OEMs than Google Automotive Services making it even more of a threat than Google.
• I suspect that many automakers and especially the high-volume makers will follow Mercedes Benz’s example.

• The scene is set for WWDC to be the launchpad for Apple’s ambitions in AI and given its history in this area, almost anything will represent a significant improvement.
• To be fair to Apple, its products already use AI but it’s the sort of AI that runs in the background which makes the user experience better, but no one is really aware that it is there.
• Good examples of this would be the excellent algorithm that optimises battery utilisation based on usage patterns and the AI that is used to improve its photography functionality.
• However, it is here where the confusion begins because, once again, everyone is getting mixed up when it comes to what actually is AI.
• In 2016 everyone thought that AI meant deep learning and in 2024 everyone thinks that AI means generative AI but the reality is very different.
• Artificial Intelligence is a broad church in that it encompasses everything from simple statistical analysis, software, deep learning and now generative AI.
• Apple has been using deep learning in its products for some time and in some specific areas, to great effect.
• However, where it has come up short is in AI-powered systems that interact directly with the user.
• These are agents like Siri, Alexa Google Assistant and now ChatGPT, Claude 3 and here Apple appears to be way behind.
• This is supported by the fact that Siri has been 3^rd rate for years and Apple has done very little to improve it since most people lost interest in digital personal assistants over 5 years ago.
• However, all that changed in 2022 when Open AI launched a chat system that could converse extremely well in natural language even if it does have a tendency to make things up.
• Since then, hype has gone to fever pitch and now all of the big ecosystems are under pressure to offer generative AI to their users or face having their users go elsewhere.
• Whether this is a real reflection of the true state of affairs has yet to be seen.
• This has put Apple in a difficult position as it clearly was unprepared for the rise of generative AI and its secrecy means that it never usually speaks about anything before it launches.
• I am not convinced that it has anything ready to go and so the keynote at WWDC may contain commentary aimed at placating those screaming for generative AI on iOS without actually launching a generative AI chatbot.
• I think that the most likely outcome will be a promise to upgrade to Siri such that it is powered by generative AI which is precisely what Amazon has done with Alexa.
• The only issue here is that Siri is currently implemented on the device whereas Alexa is completely in the cloud and given that generative AI at the edge is in its infancy, I suspect that Siri would have to return to the cloud.
• I suspect that Apple will also focus on generative AI in computational photography which is something that Google through Samsung has done quite successfully.
• This would mean adding functions like moving objects within a picture, making them bigger, filling in missing areas and so on.
• This would seem to be the most sensible approach and would involve talking about long-term Siri evolution and then adding some useful and cool features that users can actually get some utility from now.
• Generative AI is all the rage, but there is still a lot of uncertainty in terms of how a generative AI chatbot will make one’s digital life on a smartphone better.
• Consequently, I think Apple will talk a good game on generative AI at WWDC, but the features launched are likely to be focused on computational photography which has an immediate use case and which its competition is already featuring.
• I continue to think that Apple’s weakness in AI generally is not going to hurt demand for its products yet which gives it some time to get its offering in line.
• Should the AI bubble burst and interest flag, then this would be a net positive for Apple giving it more time to get its offering right and it would have to pay less for talent and equipment.
• Apple remains expensive for a company facing the multiple challenges of no growth, China and AI weaknesses and so I remain unexcited about taking a position.

• There is little doubt in my mind that over the years Apple has engaged in some questionable competitive practices, but conclusively proving that Apple has harmed consumers through its practices will be difficult to prove.
• The US Department of Justice has filed an antitrust lawsuit in federal court that accuses Apple of imposing contractual limitations on developers and making it more difficult for users to switch devices.
• A great example of the US complaint was the issue over parental control apps that occurred in 2019.
• Parental control apps typically used a technology called mobile device management (MDM).
• This was administrator-level software installed on the device that allowed a 3rd party to see what was happening on the device, where it was, read the data, control installs and updates and so on.
• Apple had tolerated this software on its devices for years but co-incidentally decided that MDM violated the policies of the App Store once it had launched its own version the same thing called Screen Time.
• At the time, Screen Time was not nearly as comprehensive as some of the 3rd party products and offered far fewer options than they did but this threat was dealt with by banishing most of them from the store (see here).
• Apple will put up a perfectly rational argument as to how it had to do this for security and privacy reasons, and it will be up to the court to decide whether these are genuine or just a smoke screen.
• Over the last 17 years, there have been several examples of this sort and now I suspect that a large number of companies will emerge from the woodwork to support the government’s case.
• Despite this and other examples, I find it difficult to conclude that consumers have been harmed or that Apple’s current market position has been obtained by anything other than competition on its merits.
• The facts of the matter are that Apple’s user experience, its consistency and the seamless integration of different device categories are better than anything else on the market.
• This is why it has obtained the position that it has, and the government’s lawyers had better all switch to Android before the case begins or face being wrongfooted in the courtroom.
• Despite the merits (or lack thereof) of the government’s case, this is yet another uncertainty that Apple does not need right now.
• Apple is losing market share in its 2^nd biggest market, China, and its failure to launch a generative AI product of some description is causing the market to remember just how bad it is at AI.
• This is not a new phenomenon as Siri has been 3^rd rate for years, but the market is beginning to remember just what a hole in its armour this is now that the AI hype cycle is back in full swing.
• This case is going to drag on for years and there will be appeals, counter-appeals and a lot more back and forth before it is finally decided which creates long-term uncertainty that the company does not need.
• This is especially the case with the shares trading at 26.0x 2024 PER and 23.9x 2025 meaning that there remain much better places to look for a better long-term return.
• I am more than happy to watch this latest legal fracas from the sidelines.

• Apple has finally admitted what has been obvious for many years and closed down its efforts to build a vehicle, refocusing the resources on generative AI.
• Project Titan has been in and out of the news for many years and, while the technology media has routinely jumped up and down with excitement, this project never made economic sense which I am certain is the reason why Apple has pulled the plug.
• The timing of the announcement makes it look like it is market conditions that are responsible for the closure, but I see this as a convenient way of not having to admit that it made a mistake.
• Apple has launched a Metaverse device into a very weak market leading me to think that for the vehicle, market conditions have nothing to do with the closure.
• Instead, it is all about economics and the reality remains as I have argued for over 8 years (see here) that making a vehicle makes no sense whatsoever and that infotainment is the only way by which Apple will make good margins from the automotive industry.
• Apple is a company that makes premium products, and it will openly admit that it does not do cheap very well.
• These premium products attract high gross margins which Apple investors expect to be maintained which is one reason why the shares continue to hold their premium valuation versus its peers.
• The problem with making vehicles is that even the best car makers earn 8-10% EBIT margins on premium vehicles in a normalised market.
• This is because these products are high ticket items and it is impossible to earn 40% gross margins on pressed steel, brake pads, wheels and so on as these pieces are commodities.
• Hence, unless users were willing to pay 2 or 3 times more for an Apple car than a competing vehicle at the performance and trim level, margins would be far lower than the habitual and expected 40%.
• Apple fans are an emotional and loyal bunch, but I think that this would stretch even their loyalty too far.
• Hence, while a vehicle would have a big impact on the top line, it would have a large and deleterious impact on profit margins which in turn, impact the valuation of the shares.
• This, combined with the reality that making cars is much more difficult than Mr Cook thought, are the real reasons why Project Titan has been closed down.
• Efforts will now turn to generative AI where I suspect Apple is busily trying to build a foundation model which I think it will also find more difficult than expected.
• As these large language models become more popular, more and more problems are emerging all of which stem from the problem of causality which I have discussed many times over many years (see here).
• AI in general has long been a weak spot for Apple and its traditional silence on the issue is starting to make some of its larger investors restless.
• AI is going to be important regardless of whether the AI bubble pops and Apple badly needs to address this issue as Siri looks more antiquated and obsolete with every passing quarter.
• Hence, I suspect that there may be some commentary on this topic when Apple releases its FQ2 results in April and potentially a soft launch of something at WWDC in June.
• The closure of Project Titan leaves infotainment as its only route into the vehicle and I continue to think that it is considering a creeping take-over of the infotainment unit.
• If it can force automakers to leave a hole in the dashboard for it to fill, then this is a product from which it can earn 40% gross margins.
• This also gives it the opportunity to control the distribution of apps and services in the vehicle just as it does in its smartphones leaving OEMs as nothing more than app developers for their own vehicles.
• I have thought that this is the best way for Apple to make money from the vehicle, but it will be many years before it has any noticeable financial impact.
• Hence, in the short-term, it remains all about the iPhone and to a lesser degree services which I continue to think are not exciting enough to justify the valuation.
• If I was to own anything in US big tech, it would be Google especially if the current bad press continues to erode its valuation.