Apple’s Services Growth Flywheel Continues To Strengthen

Posted on November 21, 2023August 29, 2026 by io-fund

This article was originally published on Forbes on Nov 16, 2023,05:19pm ESTForbes Forbes on Nov 16, 2023,05:19pm EST

Apple’s Services segment was one of the brightest spots in a relatively in-line earnings report at the beginning of November, topping an $85 billion run rate as growth jumped back to the high double-digits after a string of single-digit growth. Services demonstrated that its growth flywheel continues to strengthen with multiple outlets of opportunity in sight — from AI, to further growth in the installed base, to price hikes across different Services bundles.

Services Growth Outpaces iPhone, Apple

Since fiscal 2018, Services has become increasingly important to both the top and bottom lines for Apple. The segment has seen its share of revenue rise from under 15% five years ago to 22.2% at the end of September. Since then, Services has seen its annual run rate increase from ~$40 billion to over $85 billion, on track to surpass a $100 billion run rate potentially as early as the second half FY24.

FY21 was a breakout year for Services – the segment recorded greater than 24% YoY growth and generated more than $10 billion in gross profit each quarter, as its gross margin neared 70%. Gross margin has continued to stay above the 70% range, rising as high as 72.6% in Q2 FY22.

Source: I/O Fund

FY23 ending in September saw a full year growth rate of 7.1% YoY for $85.2 billion outpacing both iPhone and company-wide growth, with Q4 being the strongest quarter of the fiscal year with a growth rate of 16.3% YoY. The I/O Fund recently covered Apple’s earnings report more in-depth following fiscal Q4 here.

Since FY18, Apple has grown revenue at a 7.6% CAGR, meanwhile, Apple’s company-wide gross profit has grown at a 10.1% CAGR over the same period with profits partly impacted by Services’ rising contribution and expanding margin.

Compared to Apple, Services is seeing revenue and gross profit grow at much quicker rates – more than 9 percentage points higher for both metrics. Since FY18, Services revenue has grown at a 16.5% CAGR, outpacing Apple’s 7.6% growth rate as well as the iPhone’s 4.0% CAGR, due to the unevenness in revenue in between upgrade cycles – iPhone delivered YoY revenue declines in FY19, FY20, and FY23.

Services’ gross profit has expanded at a 20.1% CAGR, rising around 150% since FY18, from $24.2 billion to $60.3 billion as gross margin has expanded 10 percentage points, from 60.8% to 70.8%. This strong revenue and gross profit growth over the past five years has seen Services gain importance to Apple’s margins and its bottom line.

Source: Apple

In FY18, Services contributed 23.7% of Apple’s gross profit, whereas today, Services contributes 36% of gross profit.

The breakdown looks like this:

As Services’ share of revenue rose from 15% to 22.2%, it helped pull Apple’s gross margin ~580 bp higher in just five years. Product gross margin – iPhone, Mac, iPad, etc. – increased just 210 bp, meaning this expansion in gross margin is primarily coming from Services.

FY21 was a breakout year for Apple’s gross margin, expanding from 38% to more than 42% because of that growth in Services. Apple is guiding for gross margin to expand further in fiscal Q1 next year, to the 45% to 46% range – an expansion of 200 to 300 bp YoY, with Services’ growth rate forecast to be in the high-teens again.

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Services Seeing Multiple Growth Outlets

Services growth has been broad based, with new revenue records across a range of different offerings, and the segment has multiple growth outlets to lever in the future, from growth in paid subscribers, AI, and price hikes.

CEO Tim Cook explained on Apple’s Q4 earnings call that the Services segment “achieved all-time revenue records across App Store, advertising, AppleCare, iCloud, payment services, and video, as well as the September quarter revenue record in Apple Music.” CFO Luca Maestri added that Services “reached all-time revenue records in the Americas, Europe and rest of Asia-Pacific and a September quarter record in Greater China.”

What is driving these record levels across multiple Services offerings and in every geography worldwide is solid growth in active devices and strong growth in paid subscriptions. Paid subscriptions have risen at more than 27% annually over the past five years to 1 billion by the end of FY23.

Source: APPLE

Apple has surpassed 2 billion installed devices, and “continues to grow at a nice pace and establishes a solid foundation for the future expansion of the ecosystem.” Thus, the organic growth flywheel for Services remains soundly intact – growth in installed devices driving growth in paid and transacting accounts at a higher degree.

At the start of FY18, Apple reported that it had an installed active device base of 1.3 billion devices, meaning it had a ratio of about 0.18 paid subscriptions per 1 active device. Since then, installed devices have grown more than +50% to over 2 billion, while paid subscriptions have grown nearly +360% to almost 1.1 billion, or a ratio of about 0.5 paid subscriptions per active device.

Reaching new all-time highs in its installed device base signals further growth lies ahead for Services, especially as the ratio of paid subscriptions per active device continues to rise. Other outlets of growth arise from Apple’s recent price hikes and potential monetization opportunities from AI.

Additional Levers

Apple recently enacted some price hikes for News+, Arcade, and its One bundles, with the hikes ranging from $2/mo to $5/mo. As a whole, the price hikes could generate an additional ~$5 billion in annual revenue with just a 15% attach rate to Apple’s more than 1 billion paid subscriptions — however, the price hikes could incur a small amount of churn, among more price-sensitive consumers.

In terms of AI, Apple is not releasing any details about projects in development, though it is rumored that some of the AI products Apple is working on would improve Siri and Messages’ capabilities, or add features to Keynote, Pages, and Apple Music. Apple’s large language model ‘Apple GPT’ is reportedly under development, but a commercialization route is still undetermined. The next-generation of Apple’s software, iOS 18, macOS 15, and watchOS 11, are poised to bring AI features to Apple’s devices next year, as it works to catch up in the generative AI deployment race against OpenAI and Google.

For any of its AI products, there are three routes that could boost Services revenue – adding AI features for free in an aim to boost engagement across offerings, charging a subscription fee for AI features, or increasing prices of current bundles that incorporate AI. For example, if Apple charged for a stand-alone AI subscription at a $2.99/mo price point, it could rake in ~$10.8 billion in annual revenue at a 15% attach rate to its more than 2 billion active devices; boosting the prices of all of its subscription bundles by $0.99/mo could also add more than $10 billion annually.

In a previous Forbes article “AI Could Be Apple’s Next Chapter,” my firm pointed out that: “although Apple is tight-lipped about the progress of its AI projects, the so-called Apple GPT chatbot is rumored to be more powerful than Open AI’s GPT 3.5 model, according to The Verge. Apple is spending millions of dollars a day training the large language model Ajax on more than 200 billion parameters.”

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iPhone Demand Uncertain, China Risks Remain

Analysts have expressed concern over the holiday launch trajectory of Apple’s new iPhone 15, hinting that supply shortages, lower levels of consumer spending, and shorter wait times suggest weaker demand. The iPhone remains Apple's main source of revenue, and a conservative fiscal Q1 guide from the company along with heightened concerns over iPhone 15 demand add to risks that iPhone revenue growth in the near-term will remain depressed, after growing just +2.6% YoY in Q4.

Other concerns arise from Apple’s concentration in China, in regard to its iPhone supply base. Bank of America warned that Apple’s iPhone “supplier base remains largely in China,” which could “create many headwinds including around production, demand, [and] competition,” given that it is “hard to move all elements out of China.”

Services remains strong and a segment to watch, but we need the iPhone to participate and come in strong too, with a lingering risk to watch around China. Without the iPhone participating, Services is not enough to carry Apple’s stock alone, especially given its current valuation trading at levels hard to sustain.

Source: YCHARTS

Apple is currently trading at a 7.76x P/S ratio, above its 5-year median P/S ratio of 6.59x, with the 8.0x a level that Apple has struggled to hold on to since spiking to it in 2020. Apple is also trading at a nearly 28.8x forward P/E ratio, again another valuation level that it has struggled to hold on to – since late 2021, Apple has generally pulled back to below 24x forward P/E after trading above the 28 range.

Source: YCHARTS

However, another risk to watch is Alphabet’s antitrust trial, as it could have direct implications for Apple in the event of a negative ruling. Alphabet’s multi-billion dollar payments to Apple for Google to be the primary search engine on Safari across Apple’s devices is at the center of the trial, and that payment is rumored to be ~$19 billion this year – a key witness mentioned during the trial that Google is paying Apple 36% of search advertising revenue it generates via Safari. Should the scale of those payments constitute monopolization of the search market, Apple could be set to lose on a lucrative Services revenue stream.

Conclusion

Services is rapidly becoming one of Apple’s most important top-line segments, and arguably is the most important for Apple’s bottom-line, given its outsized role in boosting Apple’s gross margin. Organic growth has been a strong driver of Services’ +16.5% 5-year revenue CAGR and its +20.1% 5-year gross profit CAGR, both of which outpace Apple’s growth rates by more than 9 percentage points.

Should Services continue to grow in the teens for the next five years, such as at a 14% 5-year CAGR through FY28, it would be generating approximately $164 billion in revenue, or slightly more than 30% of Apple’s projected $538.6 billion in revenue. Price hikes, introduction of AI features, or finding ways to increase engagement and boost the ratio of paid subscriptions per active device all support this long-term revenue growth outlook for the segment.

Damien Robbins, Equity Analyst at the I/O Fund, contributed to this article.

The I/O Fund was early to AI with a 45% allocation in 2023. For more in-depth research from Beth, including 15-page+ deep dives on the 10 stock positions the I/O Fund owns, subscribe here.

Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.

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2024 Trend: Memory and PC Rebound

Posted on November 17, 2023June 30, 2026 by io-fund

The focus of our recent AMD deep dive in July helped emphasize how memory has become a point of fierce competition among AI accelerators.

“The MI300X requires more power than its predecessor MI250X at 750 watts, and this is higher than Nvidia’s H100 at 700 watts. However, it’s not an apples-to-apples because what the MI300X promises to deliver is running compute-intensive large language models with fewer GPUs than is required with the H100s due to offering roughly double the memory.”due to offering roughly double the memory.”

We discussed this further in the Lam Research: Wafer Fab Equipment Leader & HBM/DRAM Memory deep dive when it was stated:

“The impetus is AI acceleration, which is in a stage where it’s fiercely competing on memory […] In fact, according to Lam, AI servers use 8X DRAM and 3X NAND compared to an enterprise class server […]according to Lam, AI servers use 8X DRAM and 3X NAND compared to an enterprise class server […]

Point being, memory is becoming an important component in the AI arms race, and Lam is a major equipment supplier and beneficiary of capital intensity that follows each new generation of HBM.memory is becoming an important component in the AI arms race, and Lam is a major equipment supplier and beneficiary of capital intensity that follows each new generation of HBM.

In the analysis, we touched on the GH200 super chip from Nvidia, which “combines the H100 GPU with Grace 72-core Arm CPUs for an increase of memory capacity by 3.5X and memory bandwidth by 3X. Per the press release: HBM3e memory, which is 50% faster than current HBM3, delivers a total of 10TB/sec of combined bandwidth, allowing the new platform to run models 3.5x larger than the previous version, while improving performance with 3x faster memory bandwidth.”

Since then, more information has been revealed about Nvidia’s H200 GPUs, which will have 141GB total of HBM3e memory with 4.8 TB/s of bandwidth across six HBM3e stacks. This compares to the H100 with 80GB of HBM3 and 3.35 TB/s of bandwidth. To see how this compares to the MI300X from AMD, you can read more here.

If 2023 was the year AI accelerators made their importance known, then 2024 will be the year that memory and HBM3/HBM3E makes its importance known as the competition is going head-to-head at memory capacity and bandwidth per GPU rather than compute performance. This further translates to mean the AI race is more focused on inference for the next generation of GPUs as the neural network can be run entirely in memory without the need to move data back-and-forth with the external memory.

In fact, to drive the point further as to how important memory will be in the next generation of GPUs, the compute performance from the H100 to the H200 is not changing much. According to what the industry has seen so far from Nvidia’s GPU HGX 200 systems, there will be “32 PLOPS FP8” performance, which would be achieved through eight H100s with 3,958 teraflops of FP8 each. The translation is that Nvidia’s H200 upgrade is strategically focused on memory, which also translates to AMD having a strong sense of direction on design as it forced Nvidia to answer to the MI300X’s memory capacity and bandwidth. It’s also quite strategic for AMD to go directly toward competing on LLM inferencing performance as these are the workloads that will be most in demand.

Memory is Tough

As we review the memory market, and also segue to the PC market in this analysis, it bears mentioning that the memory is a tough market. It can often be a race to the bottom on pricing, there are rollercoaster-like cyclical patterns, it’s heavily exposed to consumer devices, and it has many global leaders not trading on the Nasdaq. Memory leaders are concentrated in APAC and so any United States stock needs to be measured against overseas competitors.

With that said, over the past year, the memory, smartphone, and PC markets have been going through inventory corrections, but these markets are close to bottoming based on recent earnings commentary from several semiconductor companies such as Samsung, Microsoft, AMD, Intel and others. Sometime in the medium term, PCs will go through a super cycle driven by AI. We want to look more closely at the timing of this and who the major players might be.

In the Lam Research analysis, it was stated that the pummeled consumer market is deceiving as eventually hybrid AI will bring AI processing capabilities to the edge, including consumer devices. Memory is a key component in the competitive AI race both inside and outside the data center. Although the introduction to this analysis emphasized data center AI accelerators, we want to start to turn our focus toward the edge.

It's also important to point out that what matters most for determining a good stock is dollar content per chip. For example, HBM3e is priced five to six times higher than typical DRAM. This means that if the shipment volume is 2% of total DRAM, then its sales ratio reaches 12%. Our goal is to find the semiconductors that can charge more for their chips in the AI super cycle for PCs rather than simply PC players.

Memory Rebound

HBM3 sales are expected to explode. According to Trend Force, HBM3 could grow to $8.9 billion in 2024 for a 127% YoY increase.

SK Hynix is projecting 100% growth in HBM demand this year and next, revised up from 50% growth. According to SK Hynix, the AI chip boom will drive an 82% CAGR for HBM3 by 2027. SK Hynix has reclaimed its spot as the number two memory company globally due to HBM sales, and was the preferred supplier of HBM3 for Nvidia’s H100 GPUs.

Samsung, the world’s largest manufacturer of DRAM and NAND by revenue, has shown a trend of QoQ improvements in revenue and operating profits since 4Q22. As long as this trend continues, then it’s likely the memory market has bottomed. According to the Korea Economic Daily, Samsung executives stated at a conference: “Our customers’ current (HBM) orders have more than doubled from last year.”

Micron shows something similar to where the company was reporting deeply negative growth and is rebounding significantly on revenue. This is easily seen on a QoQ basis pictured below.

As a percentage of revenue, Micron’s QoQ Profit Improvement is also quite clear with a recovery by the second half of 2024.

Although HBM3 will participate, the major memory suppliers are primarily rebounding from lapping a trough in a consumer cycle that had peaked following Covid. Typically, memory stocks would be on a deep discount given the steep cycle, yet SMH returns are > QQQ returns. This has lifted the tide of all boats, and memory stocks such as Micron and Lam are not trading where they’d typically trade, which makes a near-term buy less likely for the I/O Fund until we see a pullback. This is where the I/O Fund is unique, not only do we strive to be early in our research, such as to the importance of memory in the next release of AI accelerators, but we are also careful with our timing.

PC Rebound

Similar to the memory and smartphone markets, the PC market is in the process of normalizing inventory. Silicon Motion, one of the largest manufacturers of NAND flash controllers, which go into PCs and smartphones, commented in its recent earnings call that inventory for the PC and smartphone markets is normalizing and these markets are poised to return to growth in CY24.

“We saw inventory level begin to normalize across the majority of end markets and OEM order activity pick up in the third quarter leading to a strong revenue growth in the quarter. We expect this trend to continue and are confident they will lead to strong sequential growth in the fourth quarter. While the first half of 2023 was challenging due to the global macro economy weakness and excess inventory in the channels the inventory level across our end market is normalizing and OEM demand continue to improve.” -Silicon Motion, Q3 Earnings Call Nov 2023

“By end market standpoint, excess inventory in the PC and smartphone markets have plagued the industry since late 2022, when the global economy weakened and demand slowed. It has taken nearly a year where we believe the inventory level in both the PC and smartphone markets are normalizing. We are seeing more consistent order pattern from our customers and better visibility that are more closely aligned with end market demand. We are optimistic that this trend will continue and that the industry is well positioned to return to growth in 2024.” -Silicon Motion, Q3 Earnings Call Nov 2023

This commentary by Silicon Motion was also supported by AMD in its recent earnings call, in which management commented that it expects growth for the PC market in CY24, and the PC market will return to normal seasonality levels in demand.

“Year-over-year, we expect revenue for the Data Center and the Client segments to be up by strong double-digit percentage, the Gaming segment to decline, given where we are in the console cycle, and the Embedded segment to decline due to additional softening of demand in the embedded market.

Sequentially, we expect Data Center segment to grow by strong double-digit percentage, Client segment revenue to increase and the Gaming and Embedded segment to decline by double-digit percentage […]

Sales of our Ryzen 7000 processors featuring our industry-leading Ryzen AI on-chip accelerator, grew significantly in the quarter as inventory levels in the PC market normalized and demand began returning to seasonal patterns.” –AMD Q3 2023 Earnings Call

For the PC market, HP believes AI can help double the PC market’s growth over the next 3 years.

“The biggest opportunity we see is with in Personal Systems. The ability to run generative AI applications on a PC will enable personalized experiences, improved latency, provide better security and privacy protections, and reduce costs. And as we begin commercializing AI-enabled devices, we believe the overall PC category growth rate can double over the next three years.” -HPQ Analyst Day

Intel has ambitious plans to take advantage of the AI opportunity in PCs. Through its AI PC Acceleration Program, Intel is focused on having AI on more than 100M PCs by 2025. Intel is working with over 100 independent software vendors on more than 300 accelerated AI features, including well-known companies such as Adobe, Webex, and Zoom.

On December 14th, Intel will launch the Core Ultra Processors. The new processors are a 7nm chiplet design which makes updates easier, and allows for the most efficient use of the chip tiles. Especially for AI purposes, chiplets are replacing monolithic circuits, where the overall system is divided into smaller parts so that 3nm or 5nm nodes can be replaced when needed. This avoids having to replace all of the components as nodes shrink and design companies otherwise battle Moore’s Law. With chiplets, AI platforms can scale by adding computing power and reduce total cost of ownership.

The Meteor Lake architecture will come with a neural processing unit (NPU) to execute AI workloads. The goal of AI edge devices (PCs, mobile devices, and edge servers) is to diversify AI execution for both speed and power efficiency. By running the workloads across NPUs, GPUs and CPUs, the Core Ultra will drive better efficiency.

Per Intel’s management in the most recent earnings call:

“Built on Intel 4, the Intel Core Ultra has been shipping to customers for several weeks and will officially launch on December 14 alongside our 5th Gen Xeon. The Ultra represents the first client chiplet design enabled by Foveros Advanced 3D packaging technology, delivering improved power efficiency and graphics performance.

It is also the first Intel client processor to feature our integrated neural processing unit, or NPU, that enables dedicated low-power compute for AI workloads. Next year, we will deliver Arrow Lake as well as Lunar Lake, which offers our next-gen NPU, ultra-low power mobility and breakthrough performance per watt.”

Intel and also Qualcomm are set to release WiFi 7 in Q4. WiFi 7 will be two to four times faster than WiFi 6 and will have twice as many data streams. Although AI applications are not mainstream yet, WiFi 7 makes it possible to develop and distribute AI applications due to the high capacity, low latency, and extended range. The high bandwidth consumption that AI applications require, along with moving AI workloads to AI devices means WiFi 7 will be instrumental for AI-powered PCs.

Note: We will discuss Qualcomm again when we look more closely at the mobile rebound.

2024 Refresh: Windows 12

“We actually think 2024 is going to be a pretty good year for client, in particular because of the Windows refresh. We still think that the install base is pretty old, and does require a refresh. We think next year may be the start of that given the Windows catalyst.” -Intel, Citi Analyst Conference, Sept 6th

In September, a CoPilot update was rolled-out for Windows 11 with over 150 features such as CoPilot in Windows, which is a toolbar that allows generative AI to be used across any task across the Windows operating system. The new update also added AI-powered Bing search to the taskbar.

Windows 11 was an exciting update, yet the next Windows release is expected to make a much bigger impact. The Intel statement was the first to hint at the Windows refresh, which is generally understood to be Windows 12, due to come out in 2024.

We had noted that AMD also referenced a Windows refresh in the last earnings call. Per management’s opening remarks noted in our Post-ER writeup: “Looking forward, we are executing on a multiyear Ryzen AI road map to deliver leadership compute capabilities built on top of Microsoft's Windows software ecosystem to enable the new generation of AI PCs that will fundamentally redefine the computing experience over the coming years.”

It's likely that Intel and AMD are leaking the next Windows refresh because Microsoft is working closely with hardware partners to optimize chips to handle the AI workloads. The Ryzen 7000 mobile processors are the first x86 chips to contain a dedicated AI engine to support Microsoft’s Windows Studio Effects. Typically, this requires Arm-based hardware with a dedicated neural processing unit (NPU).

AI-powered PCs will ultimately change the trajectory for AI, to where more people can access AI-powered applications, which in turn, will help AI developers be able to build a bigger ecosystem. There is a major bottleneck right now for AI applications to where client devices are not powerful enough or energy efficient enough to leverage AI capabilities.

Look for Windows 12 to be a major release for 2024, and to be the official moment AI-powered PCs kickoff.

What Industry Analysts are Saying:

Gartner:

Per Gartner, “The global PC market is expected to rebound in the fourth quarter of 2023 as the beleaguered industry begins a return to growth. Worldwide PC shipments totaled 64.3 million in the third quarter of 2023, according to analysis from Gartner, marking a 9% decrease compared to the same period last year and the eighth consecutive quarterly decline.”

Additional Management Commentary:

AMD:

“Sales of our Ryzen 7000 processors, featuring our industry-leading Ryzen AI on-chip accelerator, grew significantly in the quarter as inventory levels in the PC market normalized and demand began returning to seasonal patterns.” -AMD, Q3 Earnings

“Question – Blayne Curtis: Thanks. And then I just wanted to ask on the PC market, I think you and Intel have seen you were under-shipping in the first half. Maybe you're kind of over-shipping a little bit now, restocking. I'm just kind of curious your perspective of what that normalized run rate is in terms of the size of the PC market and kind of any perspective, if inventory levels are starting to move back up.

Answer – Lisa T. Su: Yeah, I would say again, Blayne, when we look at sort of the third quarter and sort of the environment that we're on now, I think inventory levels are relatively normalized, and so the sell-in and consumption are fairly close. We were building up for holiday season that is a strong season for us overall. When I think about the size of the market, I think from a consumption standpoint, this year is probably somewhere like 250 to 255 million units or so.”

“Jean Hu

Yeah. Hi, Stacy. I'll say the first thing is, if you look at 2023, it's a very unusual year for the industry, right, especially the PC market. It's one of the worst down cycles during the last 3 decades. So during that kind of a down cycle, definitely, we had headwinds on gross margin side, on our Client business, which we have made significant progress in Q3 and Q4 in second half.”

Microsoft:

“In our consumer business, PC market unit volumes are returning to pre-pandemic levels.”

“Windows OEM revenue increased 4% year-over-year, significantly ahead of expectations driven by stronger-than-expected consumer channel inventory builds and the stabilizing PC market demand noted earlier, particularly in commercial.”

Previous Cyclical Behavior

According to Deutsche Bank, past semiconductor cycles have lasted on average of ~28 months (2 years, 4 months).

If we look at the beginning of 2018 to the end of Feb 2020, the last down cycle, the SOXX was down 14% off of its high due to the US and China trade war, which included bans on Huawei and ZTE. Semiconductor companies were negatively impacted by these bans. By the end of February 2020, semiconductor stocks were down the following from their highs:

QRVO: down 15%
HP: down 21%
SWKS: down 22%
QCOM: down 18%
DELL: down 42%

Conclusion:

As we look toward 2024, memory and PCs are shaping up to be a predominant theme. This broad analysis looks at management commentary across a range of companies that all seem to point toward the bottom being in for PCs and memory. In the coming weeks, we will look closer at specific companies that will participate as we narrow our focus for 2024.

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Big Tech companies continue to invest in AI

Posted on November 15, 2023June 30, 2026 by io-fund

Big Tech capex is a leading indicator for AI semiconductor companies and has been a secular tailwind for our holdings, such as Nvidia and AMD. The combined capex of Big Tech companies has increased from $41.4 billion in 2017 to $150.6 billion in 2022, growing at a CAGR of 29.5%. In the recent earnings calls, management teams from big tech companies are indicating they will continue to invest in AI.

On a side note, increased capex related to AI does not mean AI stocks will move in a linear fashion, rather we track data like this to help us determine what to buy during selloffs, and at the bottom of selloffs.

Semiconductor Market Update

According to the Semiconductor Industry Association (SIA), global semiconductor sales were up 1.9% MoM and down (-4.5%) YoY in September to $44.9 billion. Q3 global semiconductor sales were up 6.3% QoQ and down (-4.5%) YoY to $134.7 billion.

John Neuffer, SIA President and CEO said, “Global semiconductor sales increased on a month-to-month basis for the seventh consecutive time in September, reinforcing the positive momentum the chip market has experienced during the middle part of this year,”increased on a month-to-month basis for the seventh consecutive time in September, reinforcing the positive momentum the chip market has experienced during the middle part of this year,” he further said, “The long-term outlook for semiconductor demand remains strong, with chips enabling countless products the world depends on and giving rise to new, transformative technologies of the future.”

Meanwhile, South Korean exports rose in October as semiconductor exports reported the smallest drop since August 2022 of (-3.1%) YoY in October. Chip sales helped the rise in the country’s exports for the first time in about a year.

Management Commentary on Big Tech Capex

Microsoft

Microsoft spent $28.40 billion in capex in 2022, up 3.3% YoY. YTD September 2023, the company has already spent $29.7 billion and therefore will see a significant jump in capex for the year 2023, helped by investments in cloud and AI.

Amy Hood, CFO of Microsoft, said in the recent earnings call. “Capital expenditures, including finance leases were $11.2 billion to support cloud demand, including investments to scale our AI infrastructure. Cash paid for PP&E was $9.9 billion.” including investments to scale our AI infrastructure. Cash paid for PP&E was $9.9 billion.” She further added, “We expect capital expenditures to increase sequentially on a dollar basis, driven by investments in our cloud and AI infrastructure. As a reminder, there can be normal quarterly spend variability in the timing of our cloud infrastructure buildout.”driven by investments in our cloud and AI infrastructure. As a reminder, there can be normal quarterly spend variability in the timing of our cloud infrastructure buildout.”

Nvidia had announced last year that they have a multi-year collaboration with Microsoft to build a giant AI supercomputer using thousands of Nvidia GPUs, Nvidia Quantum-2 InfiniBand, and full stack of Nvidia AI software to cater to the growing demand for AI.

Alphabet

The company spent $31.49 billion in capex in 2022, up 27.8% YoY. In the recent quarter, the company’s capex grew by 10.7% YoY to $8.06 billion. YTD September 2023, the capex was $21.3 billion down (-11.1%) YoY. However, the company will see an increase in Q4 and continue to grow in 2024.

Ruth Porat, CFO of Alphabet, said in the recent earnings call. “Finally, our reported CapEx in Q3 was $8 billion, driven overwhelmingly by investment in our technical infrastructure with the largest component for servers, followed by data centers, reflecting a meaningful increase in our investments in AI compute.reflecting a meaningful increase in our investments in AI compute.

The growth in reported cash CapEx in Q3 is somewhat muted due to the timing of supplier payments, which can cause variability from quarter-to-quarter. We continue to invest meaningfully in the technical infrastructure needed to support the opportunities we see in AI across Alphabet and expect elevated levels of investment, increasing in the fourth quarter of 2023 and continuing to grow in 2024.” We continue to invest meaningfully in the technical infrastructure needed to support the opportunities we see in AI across Alphabet and expect elevated levels of investment, increasing in the fourth quarter of 2023 and continuing to grow in 2024.”

She further clarified to an analyst that “2024 aggregate CapEx will be above the full year 2023.” “2024 aggregate CapEx will be above the full year 2023.”

The main takeaway is that the investment in technical infrastructure is growing and will continue to grow in 2024. There is an increasing shift in investment in technical infrastructure (i.e., AI and cloud) compared to other capex like office facilities, which is of prime importance for our portfolio. Ruth had clarified the change in shift in the Q4 2022 earnings call, “We're increasing our investments in technical infrastructure. And that's not just for AI. That's to support investments across Alphabet, in particular in Cloud as well. And at the same time, we're meaningfully decreasing our CapEx for office facilities.”we're meaningfully decreasing our CapEx for office facilities.”

Amazon

The company spent $58.62 billion in capex in 2022, down (-2%) YoY. The key takeaway is the company’s technological infrastructure spend is increasing. To understand the breakup of Amazon’s capex, we looked at some of the other previous earnings calls and understand technology infrastructure spend to be over 50% of the total capex. Brian Olsavsky, CFO of the company said in the Q2 2022 earnings call, “In 2021, we incurred approximately $60 billion in capital investments. About 40% of that is comprised of technology infrastructure, primarily supporting AWS as well as our worldwide stores business. Another 30% of the $60 billion was fulfillment capacity and a little less than 25% was for transportation, remaining 5% was comprised of things like corporate space and physical storesAbout 40% of that is comprised of technology infrastructure, primarily supporting AWS as well as our worldwide stores business. Another 30% of the $60 billion was fulfillment capacity and a little less than 25% was for transportation, remaining 5% was comprised of things like corporate space and physical stores.” He further said, “We expect infrastructure to represent a bit more than half of our total capital investments in 2022.”“We expect infrastructure to represent a bit more than half of our total capital investments in 2022.”

The guidance for 2023 capex is $50 billion, down (14.7%) YoY. However, technology infrastructure continues to grow. Brian said in the recent earnings call. “Now, let's turn to our capital investments. We define our capital investments as a combination of CapEx plus equipment finance leases. These investments were $50 billion for the trailing 12-month period ended September 30, down from $60 billion in the comparable prior year period. For the full year 2023, we expect capital investments to be approximately $50 billion compared to $59 billion in 2022. We expect fulfillment and transportation CapEx to be down year-over-year, partially offset by increased infrastructure CapEx to support growth of our AWS business, including additional investments related to generative AI and large language model efforts.”We expect fulfillment and transportation CapEx to be down year-over-year, partially offset by increased infrastructure CapEx to support growth of our AWS business, including additional investments related to generative AI and large language model efforts.”

We will be listening closely for 2024 capex discussions next quarter.

Conclusion

We continue to monitor Big Tech capex commentary and are encouraged by Meta’s recent guide for FY2024. Meta is the only company that has provided this level of visibility. In addition to a potential increase in capex from Big Tech, we are hearing across the board that a higher allocation of capex is going toward AI infrastructure.

With that said, it’s normal for cloud IaaS to go through periods of optimization. Given Meta’s guide, we are hopeful a period of optimization will not happen in 2024. Meanwhile, we will continue to closely monitor Big Tech capex comments closely as an important proxy for AI accelerators.

Advanced Signals Members receive real-time trade alerts for our entries and in-depth technical analysis from the Portfolio Manager, Knox Ridley. Learn more here.here.

Royston Roche, Equity Analyst at the I/O Fund, contributed to this analysis.

Recommended Reading:

Tesla Sells 33% Of Vehicles Below Average Cost, BYD Pulls Ahead

Posted on November 14, 2023August 29, 2026 by io-fund

This article was originally published on Forbes on Nov 9, 2023,09:23pm ESTForbes Forbes on Nov 9, 2023,09:23pm EST

BYD more than doubled Tesla’s China sales in October as Tesla’s sales slipped on a month-over-month basis, while NEV startups showed strong sales numbers across the board. China’s new energy vehicle (NEV) industry continues to exhibit solid momentum, with September seeing NEV sales rise about +22% YoY and October estimated to see around +34% YoY growth. As a whole, China is expected to once again be the primary driver of global EV sales this year, with volumes forecast to reach or exceed 8.5 million units, or more than 60% of the projected 14 million global volume.

Tesla has been in the spotlight recently — its margins have contracted significantly over the past few quarterscontracted significantly over the past few quarters as it prioritizes price cuts. China is Tesla’s most important market as it currently represents the highest remaining total addressable market (TAM), therefore the recent weakness is not something to ignore, especially as domestic rivals pick up their pace of growth.

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BYD Trumps Tesla in China as Sales Stagnate

BYD’s delivery numbers have shown tremendous growth in Q3 and the start of Q4, as opposed to Tesla’s stagnation as consumer demand looks to be shifting in favor of local OEMs. XPeng and Li Auto both posted record October numbers with ~300% YoY growth, while NIO saw +60% YoY growth. BYD’s increased dominance in China is more visible with sales data by model: 5 of the top 6 highest selling models in October were BYD, combining for nearly 214,000-unit volume, compared to the Model Y’s 53,249 volume for the month.

Source: I/O Fund

BYD has seen steady growth in NEV and purely BEV sales since May, and since June, BYD has posted five straight record months for NEV deliveries, rising from 253,046 in June to close out Q2 to more than301,000 in October June to close out Q2 to more than301,000 in October to kick off Q4. Deliveries grew +39% YoY in October, the slowest growth rate so far this year, where monthly sales have averaged +77% YoY growth. In terms of BEV sales, for a more apples-to-apples comparison to Tesla, BYD recorded +60% YoY growth to 165,505 deliveries and exports of China-made vehicles in October – more than double Tesla’s total . At that rate, BYD is set to overtake Tesla in terms of quarterly BEV deliveries, being on track to surpass 500,000 BEVs in Q4, whereas Tesla is forecasting a volume of at least 449,000 vehicles in Q4 to reach its1.8 million target for 2023.

Source: I/O Fund

On the other hand, Tesla’s China sales peaked in June at 93,680 vehicles, with September seeing a nearly (12%) MoM and (11%) YoY decline to 74,073 vehicles, including exportspeaked in June at 93,680 vehicles, with September seeing a nearly (12%) MoM and (11%) YoY decline to 74,073 vehicles, including exports. October saw a fractional YoY increase of just +0.6% while registering a consecutive MoM decline of (2.6%), as the OEM continues to lag the growth of the broader NEV industry.

The Profitability Picture

NIO and XPeng are struggling to find a shift to profitability with elevated levels of R&D and losses piling up, whereas Tesla is facing margin troubles, exacerbated by its reliance on China. The reason here is simple: Tesla continues to sell vehicles in China below its average cost, from Q4 2022 through Q3 2023. Currently, the base Model Y is priced around $36,200, and the revamped Model 3 saw a 12% increase in its base price to $35,800 – both still below Tesla’s average cost of ~$37,487 per vehicle in Q3.

The recently announced Model Y price hikes may help alleviate the issue, given the Model Y is accounting for just over 70% of monthly sales in China, but the past four quarters have seen China’s ASP trail average cost per vehicle by (3%) or more.

Source: I/O Fund

Q1 saw Tesla deliver 137,429 vehicles in China (excluding exports) for an average ASP of $35,589.
Q2 saw China’s ASP rise ~$1,000 to $36,578 on a +14% QoQ rise in deliveries to 156,676 vehicles. ASP was aided by a price increase in May and a higher mix of Model Y sales.
Q3 saw ASP decline once more to $35,953, as deliveries slipped (12.2%) QoQ to 139,624

Although Tesla has made progress in bringing its cost per vehicle lower over the past four quarters, ASP has declined at a quicker rate due to extensive price cuts. However, the sheer volume that China contributes – just under 33% of YTD deliveries at 433,729 vehicles – combined with ASP trailing average COGS means that Tesla’s margins will likely not recover above 20% until China’s ASP shifts back above average COGS. It is important for cost of goods sold (COGS) to be below average selling price (ASP), as the difference between the two is the gross profit. In Tesla’s case, China’s ASPs being below average COGS are weighing negatively on gross profit.

We previously discussed how Tesla will likely continue to lower prices to increase its leading EV market share to stave off competition which will intensify over the next few years. In a competitive analysis framework, we projected Tesla’s Q3 operating margins to decline to a level between Honda and VW, or to 7.8% compared to most recent 9.6%. Operating margin for Q3 was 7.6%, just below our base case and above our bearish case model. For a deeper dive into Tesla’s margin story is evolving, read more here and here.to 7.8% compared to most recent 9.6%. Operating margin for Q3 was 7.6%, just below our base case and above our bearish case model. For a deeper dive into Tesla’s margin story is evolving, read more here and herehere and here.

Source: I/O Fund

This is increasingly evident when looking at Tesla’s automotive gross margins. Automotive margin saw a pinch in Q2 2022 as COGS rose, before falling below 20% in Q4 2022 as China ASPs shifted below the COGS curve. Margins have fallen each quarter this year as China ASPs remains below the curve, dragging on global ASP which continues to slide as a result of price cuts.

However, BYD is showing strength in margins this year – BYD’s automotive gross margins surpassed 25% in Q3, rising from 20.7% in Q1 and from 22.8% in the year ago quarter. Automotive gross margin has also markedly improved from 15.6% in Q1 2022, an expansion of 1010 bp, while Tesla’s margins have contracted 1390 bp since peaking that same quarter at 29.65%. BYD has cut prices of some of its popular models, but not to the degree that it has become detrimental to margins.

China’s Importance to Tesla

Tesla’s weaker sales numbers in China in September and October do raise some demand concerns, as these two months typically are the start of seasonal strength lasting through December. It also raises broader concerns within its margins and revenue growth, due to the outsized influence China has on Tesla’s production and deliveries.

Gigafactory Shanghai accounts for slightly more than half of Tesla’s current installed production capacity of ~1.85 million vehicles, with the plant capable of operating at a ~0.95 million annual run rate. Tesla noted in Q3 that the “Shanghai factory has been successfully running near full capacity for several quarters, and we do not expect a meaningful increase in weekly production run rate.” In Q3, Tesla sold 222,517 China-made vehicles, with 82,893 exported. On a YTD basis, Tesla sold 699,056 China-made vehicles, with 265,327 exported. That means China accounted for ~51.1% of Q3’s total deliveries and ~52.1% of the 1.32 million total deliveries YTD.

Shanghai is essentially maxed out in terms of the volume of vehicles that it can churn out, so October’s stagnation raises more questions about how Tesla will regain market share in China. With BYD’s strong growth in Q3 and Tesla’s slide in September, the American EV maker saw its market share fall more than 300 bp QoQ from 12.98% in Q2 to 9.89% in Q3.

While September’s MoM weakness could be chalked up to a production line upgrade in anticipation of the revamped Model 3, October’s MoM stagnation either points to a slowdown in production off full capacity at Giga Shanghai (annualized rate of ~0.86M vs ~0.95M max), or a build-up in China-made inventory. Neither scenario would be much of a positive for Tesla heading into China’s seasonally strong Q4, as both could suggest more demand weakness through the end of the year.

Conclusion

The main story for Tesla investors at the moment is when margins will bottom, as automotive and gross margin continues to deteriorate. China offers a major clue for when and where margins will bottom, given that Tesla relies on the country for about one-third of its deliveries and just over 20% of its revenues.

BYD is excelling at executing during this price-competitive time, with deliveries reaching a new monthly record while margins expand. On the other hand, Tesla has seen monthly sales in China stagnate, with ASP in the country sliding again in Q3. With China’s ASP currently going on five quarters below Tesla’s average COGS, the bottom for margins is still not in sight.

I/O Fund Equity Analyst Damien Robbins contributed to this report.

November Positions Report

Posted on November 10, 2023June 30, 2026 by io-fund

Regarding the horizontal lines, black lines represent strong support/resistance, while dark red lines mark very strong support/resistance.

Elliott Wave counts are meant to provide context. Each colored count represents the most probable paths given the current price data. There is a pattern unfolding in real-time, one of which will play out. By monitoring price levels that are held/broken, it will help us figure out which one is in play, so that we can better manage risk.

Broad Market Analysis

The Larger Trend (S&P 500)

Holding the 4163 SPX level would be the deciding line between how we approach risk for the rest of the year. My primary view was that the S&P 500 (SPX) would see one more swing higher into early 2024 as long as we held this region. We have broken this level since and found a low, so far, at the 4103 SPX level. This move has altered how I view this market, and also how we plan to manage our portfolio.

Because of this, I am maintaining the two general counts; however, I am shifting my primary count to the Red count, and having the Green count as an alternative.

Red – The bear market that started in January of 2022 is still playing out. In Elliott Wave speak, 2022 was the A wave, 2023 was the B wave, and we are starting the final leg of this secular bear market, called the C wave. In other words, 2023 was a cyclical bull market within a secular bear market.

C waves are relatively easy to track because they are always 5 wave patterns. Unlike a 3 wave pattern, they tend to follow set parameters, have little room for alternative interpretations and allow for precise targets. This is the good news. The bad news is that the C wave is the most dramatic and emotional part of a correction.

If this is playing out, then we are completing the 1st wave that makes up the larger C wave. What follows the 1st wave is the 2nd wave bounce, which I believe we are in. The 3rd wave drop is where the bulk of the destruction will happen. The fact that the drop off the July top is a 5 wave pattern, this potential is present and risk remains elevated.

I do not see a recession developing in Q3, and still do not today, based on the data. So, any top would mean an “event” would likely pull forward a recession, and therefore a market top. Since then, we have had another international event occur, which the market has used to push below our 4163 critical support, forcing us to alter our primary count.

Green – This is now my alternative scenario. It is still possible, especially after so many FAANGs reported favorable earnings. However, the only difference between the Red and Green count is how high this final bounce will go – the Green targets are anywhere between 300 – 600 SPX points above the Red targets.

While I do think the odds of SPX reaching a new high has diminished due to the depth of this correction, I do believe the NASDAQ-100 and a handful of FAANGs will still see higher highs, while most stocks and indexes see lower highs.

2023 Uptrend and Top

If we zoom in on the structure of the 2023 cyclical bull market, there are a few visuals worth noting. For one, the depth of this drop has clearly broken through the trend channel that has held this move in place.

Fourth waves can, and sometimes do, break through the trend channel, but they need to reverse back into the channel quickly, which we have just seen. If this is a 4th wave, and it did temporarily break the trend channel, expect the 5th wave to be fast and nearly vertical. The next pullback will tell us more.

Secondly, note the structure of the drop from the July high. It is clearly 5 waves, which has decreased the probabilities in the Green count and increased the probabilities of the Red count. The reason for this is because it builds the case for the C-wave. These patterns are fractal, so a smaller 5 wave pattern builds into the larger. We now have what can be counted as a smaller 5 wave pattern in place, which is concerning.

The Last Bounce

The above image sums up where I think the next move will take us. My primary count is Red, which means we will see another drop then push higher into the 4400 SPX region. If this count is in play, the next drop should hold the below red trend line, or even a little lower towards 4238 SPX, at most. This would be the retest of the trend channel breakout.

If we instead break below it, the odds will increase that the correction that started in July is not over. This is marked in Blue and has us making one more drop towards the 4000 SPX region before completing the larger 1st wave pointing down. If this plays out, the Green count will get removed from the board.

If we are in the Green count, we will not know until we break above 4490 SPX.

In conclusion, I only see one more bounce in the S&P 500. Whether that bounce takes us to the 4400 SPX region or towards the 4700 – 5000 SPX region, will not change the likely outcome – any bounce we see will likely get retraced plus all of the 2023 cyclical bull market in 2024. Each investor will need to determine their own risk tolerance, time horizon, and ability to be nimble if they want to play this developing bounce.

Positions Report of Nvidia, Microsoft, and Netflix

Nvidia (NVDA)

NVDA appears to be one of the stronger FAANGs, like AMZN, META, MSFT above – it appears to be working through an incomplete uptrend, suggesting a 5th wave higher is needed. What is concerning is that the red count provides that 5th wave higher, which suggests a bigger top is already in. This would support some of the institutional activity in the $440 region, which suggests selling.

As usual, the upcoming earnings report will be paramount to deterring what count is in place for NVDA, and the larger market. As long any further weakness holds $380, the green count is still active. Any move below $340 will fully confirm the top is in.

Microsoft (MSFT)

MSFT is very close to the upper targets we laid out weeks ago. At $378 and we should see a pullback. If that pullback is a 5-wave drop, it will signal a larger top is developing. However, it still needs a higher high to complete that 5th wave. Until we get that, this could play out in many ways. Any imminent drop below $324 will be concerning. Below $307 and the top is in.

Netflix (NFLX)

I’m still considering the July high as a bigger top. This doesn’t mean we can retest that level and even push slightly higher in the coming weeks/months. This would be my Green count below. Note how the drop from the July peak was a 3 wave pattern, followed by what looks like another 3 wave bounce. This lines up with the big picture that we are tracking, which is that NFLX is in a large degree 2nd wave retrace. If the next drop is a 5 wave move, it will line up with this thesis. If instead we get a 3 wave retrace, it will support the Green count. So, the next decline in NFLX will be very telling.

Advanced Signals Members receive real-time trade alerts for our entries and in-depth technical analysis from the Portfolio Manager, Knox Ridley. Learn more here.here.

Big Tech companies continue to invest in AI

Posted on November 10, 2023June 30, 2026 by io-fund

Semiconductor Market Update

Management Commentary on Big Tech Capex

Microsoft

Alphabet

She further clarified to an analyst that “2024 aggregate CapEx will be above the full year 2023.” “2024 aggregate CapEx will be above the full year 2023.”

Amazon

The company spent $58.62 billion in capex in 2022, down (-2%) YoY. The key takeaway is the company’s technological infrastructure spend is increasing. To understand the breakup of Amazon’s capex, we looked at some of the other previous earnings calls and understand technology infrastructure spend to be over 50% of the total capex. Brian Olsavsky, CFO of the company said in the Q2 2022 earnings call, “In 2021, we incurred approximately $60 billion in capital investments. , “In 2021, we incurred approximately $60 billion in capital investments. About 40% of that is comprised of technology infrastructure, primarily supporting AWS as well as our worldwide stores business. Another 30% of the $60 billion was fulfillment capacity and a little less than 25% was for transportation, remaining 5% was comprised of things like corporate space and physical stores, “In 2021, we incurred approximately $60 billion in capital investments. About 40% of that is comprised of technology infrastructure, primarily supporting AWS as well as our worldwide stores business. Another 30% of the $60 billion was fulfillment capacity and a little less than 25% was for transportation, remaining 5% was comprised of things like corporate space and physical stores.” He further said, “We expect infrastructure to represent a bit more than half of our total capital investments in 2022.”“We expect infrastructure to represent a bit more than half of our total capital investments in 2022.”

We will be listening closely for 2024 capex discussions next quarter.

Conclusion

Royston Roche, Equity Analyst at the I/O Fund, contributed to this analysis.

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Apple Q4: iPhone Revenue Accelerates while Services Shine

Cloudflare 3Q23 Earnings Summary

Supermicro Fiscal Q1: “Conservative” Guide

AMD Q3 Earnings: $2B in GPU Revenue for 2024

Positions Report – November 2023

Posted on November 9, 2023June 30, 2026 by io-fund

For reference to terminology used, please look at technical analysis under our resources section here. Regarding the horizontal lines, black lines represent strong support/resistance, while dark red lines mark very strong support/resistance.here. Regarding the horizontal lines, black lines represent strong support/resistance, while dark red lines mark very strong support/resistance.

Broad Market Analysis

The Larger Trend (S&P 500)

In last month’s report, I discussed the importance of holding the 4163 SPX level. This level would be the deciding line between how we approach risk for the rest of the year. My primary view was that the S&P 500 (SPX) would see one more swing higher into early 2024 as long as we held this region. We have broken this level since and found a low, so far, at the 4103 SPX level. This move has altered how I view this market, and also how we plan to manage our portfolio.

Because of this, I am maintaining the two general counts; however, I am shifting my primary count to the Red count, and having the Green count as an alternative.

Red

The bear market that started in January of 2022 is still playing out. In Elliott Wave speak, 2022 was the A wave, 2023 was the B wave, and we are starting the final leg of this secular bear market, called the C wave. In other words, 2023 was a cyclical bull market within a secular bear market.

As stated last month, I do not see a recession developing in Q3, and still do not today, based on the data. So, any top would mean an “event” would likely pull forward a recession, and therefore a market top. Since then, we have had another international event occur, which the market has used to push below our 4163 critical support, forcing us to alter our primary count.

Green

This is now my alternative scenario. It is still possible, especially after so many FAANGs reported favorable earnings. However, the only difference between the Red and Green count is how high this final bounce will go – the Green targets are anywhere between 300 – 600 SPX points above the Red targets.

2023 Uptrend and Top

The Last Bounce

The below image sums up where I think the next move will take us. My primary count is Red, which means we will see another drop then push higher into the 4400 SPX region. If this count is in play, the next drop should hold the below red trend line, or even a little lower towards 4238 SPX, at most. This would be the retest of the trend channel breakout.

If we are in the Green count, we will not know until we break above 4490 SPX.

Strong Supporting Markets

NASDAQ-100 (NDX)

While it is questionable whether the S&P 500 will push to new highs in the Green count, I think the odds are quite high that the NASDAQ-100 does. Note how NDX did not break below the trend channel. This was a prolonged and complex 4th wave, but it did not go deep enough to invalidate the larger count, which is pointing towards a 5th wave higher to complete large trend.

Amazon (AMZN)

Unlike many FAANGs, Amazon has, what appears to be, an incomplete pattern. It needs a 5th wave higher to complete the move off the January low. My primary target for this move is $155 – $160. Once Amazon gives us this 5th wave higher, it will be a big warning to the bulls, because it will have a complete pattern. If accurate, this should be followed by a larger drop.

Meta (META)

Meta is another FAANG that appears to have an incomplete uptrend. Note how the correction, so far, appears to be a 3 wave move that overlaps. This is characteristic of a corrective move, and also implies that we should see a 5th wave higher. Meta appears to have the most upside of all the remaining FAANGs.

Microsoft (MSFT)

MSFT is another FAANG that appears to have an incomplete uptrend. I’m showing the monthly chart here so you can see the larger trend in place. Many stocks within other sectors of the market have completed their very large 5 wave pattern off the 2009 low. A few, like MSFT, are behind, and still have one more high before completing this large pattern. My target for MSFT will around $378. Once this final leg is complete, I expect a deep retrace to begin.

The above charts in Big Tech are the clearest that I track. They have higher odds of making that final 5th wave move to new highs. Why this is important is because they can be our guides in better managing risk. Once these charts complete that 5th wave to new highs, the risk will be elevated for the bulls. On the other hand, if they instead fail, we will be able to pivot relatively quickly.

Weak Supporting Markets

Just as the above patterns can be a guide to help determine heightened risk, so can some of the weaker markets. The below markets have the same pattern is place – a large top (B wave), followed by a 5 wave decline from the recent high (early start of the C wave). So, these markets are farther along in their drawdown than the healthier ones above.

Equal Weight S&P 500 (RSP)

RSP proves that the weighting of the same stocks matters a lot. While SPX is a contender for one more high in 2023, RSP failed to break above the February highs. What’s notable is that we have broken through the lower trend line in a 5 wave move. The next bounce, which we are currently in, should be a 3 wave move that hits the above targets on the chart.

Transportation (IYT)

This index has also broken the major trend line in a deep 5 wave move. We should see one minor drop followed by a final push higher. This index, along with many of its constituents, looks quite unhealthy and tends to lead the market.

Regional Banks (KRE)

This index is the cleanest. We have a clear 5 wave drop, followed what looks like the start of the 2nd wave bounce. We will likely see a little more downside before getting that final push higher into our wave 2 targets.

Ark Innovation (ARKK)

Though ARKK has the same 5 wave pattern from the recent high, it isn’t as clean as the above charts. There is the potential for a bigger move higher, which would line up with the SPX Green count. This ETF will help determine where the broader market goes, and the next pullback will tell us a lot. However, even if we do see a bigger move higher, this ETF has topped and it will be years before it sees new highs.

In conclusion, the bifurcation in this market is only growing. While some stocks have incomplete uptrends, suggesting one more high, others have topped and are looking to make another lower low soon. All provide key clues on when this already risky market will approach maximum risk. As stated before, we are already quite defensive and ready to hedge 100% of our portfolio when our signal flips, but we will use the above patterns to help us de-risk even more in the coming weeks.

Macro

We have warned our members all year that the fight against inflation is far from over. The disinflation that we saw was not only historic, but it was driven predominantly by a deep deceleration in energy prices, as noted by the 3-month annualized readings below.

Note how Core Inflation stayed within the 4%-5% range through most of 2022 and 2023. Instead, we saw food and energy decelerate, causing the disinflation that rallied equities into 2023.

As we warned since June, energy was putting in a big bottom, and it should put pressure on inflation numbers. This is exactly what has happened. We have seen the headline CPI numbers bottom well above the FED’s 2% target, followed by 3 months of reacceleration.

What’s concerning is that not only has energy prices reaccelerated, but so have core prices. Even though we believe the FED has paused their rate hike campaign, like in all instances throughout all of modern market history, a recession is needed to truly tame inflationary pressures. I do not believe this time is different.

However, the economy is not in agreement. While we are seeing some soft spots, employment remains relatively strong to claim an imminent recession is underway.

For one, continuing claims for unemployment are staying stable. Once we see a sharp jump here, it is a warning sign. Also, some other key employment metrics that I tracks – Private Sector Quits Index, Employment Cost Index, and Job Openings/Total Unemployment – are all well above the pre-COVID highs. Though they are weakening, they are still quite strong relative to the pre-COVID levels, suggesting that they are not recessionary, yet.

Heightened unemployment is necessary in recessions. Though we are seeing a resilient employment market, it’s worth noting that some of the leading indicators for employment are flashing warnings.

For one, Total hours Worked is trending down and now noticeably bellow the pre-COVID highs. Also, one of the first metrics to drop for employment is temp hours worked. This metric is seeing its fourth month of deceleration to the downside.

So, while the overall employment market is showing resilience, under the hood, we are starting to see cracks form. This further confirms that we are on the clock for a coming recession.

Another point worth mentioning is the relationship between Japan, Oil, and the NASDAQ-100. Next to the NASDAQ-100, the Japanese Nikkei is one of the strongest markets in the world. Interestingly, the Nikkei has been leading the NASDAQ-100 for some time. The below chart shows this phenomenon – the Nikkei is in red while the NASDAQ-100 is in blue. Note how the Nikkei tends to bottom and top before the NASDAQ-100.

The reason for this is academic. What really matters is that the correlation is still intact, as the Nikkei is also working on an incomplete uptrend pattern.

The drop in the Nikkei is quite a mess. Note the overlapping waves with no clear direction. This is typical of 4th waves, and supports that the Nikkei is setting up for that final swing higher.

Japan also imports all of their oil, which also supports this thesis. If oil prices continue higher, this will compress Japanese margins, and likely cause their stocks to go lower. The current state of oil appears to be in the sharpest part of its current correction. My targets for this drop are around $76 – $70.

If the current drop in oil holds $70, and then starts turning back up, it will also signal that we are close to the end of this push higher in equities. Note how the larger pattern is a 5 wave move off the low, now followed by a 3 wave retrace. This is threatening the return of a large uptrend in oil, as well as many other commodities, which will increase inflationary pressures.

So, how oil reacts around the $70 region will be very important. Though most investors are starting to accept the sticky inflation theme we have been warning about, few are aware that oil is setting up for a potential move to new all-time highs. This needs to be monitored daily for risk management purposes. If oil can push below $70, then this thesis will be negated. This will be very bullish for equities, and potentially be the catalyst for the Green count in SPX

In conclusion, while the market is starting to accept that inflation is stickier than previously thought, few are talking about some of the setups in key commodities, like oil, that have the potential to push to new highs. If this happens, it will catch the market off guard, as most expect a softening economy to lead into a recession, which will pull down commodity prices, and therefore inflation. The implication, if accurate, is a true stagflation environment, which would be the catalyst for the larger C-wave drop to fresh lows. A lot is riding on how oil trades over the coming weeks.

I/O Fund Portfolio

We are currently sitting on about 25% cash. This is very defensive, and if we continue to see the above markets and stocks hit their targets, we will continue to raise cash. The below pie chart is how we are allocating the other 75% of our funds. This represents all funds invested.

Advanced Micro Devices (AMD)

AMD has broken out above the downtrend channel. This further supports the Green count that has the $130 region as a final target before putting in a larger top. AMD is due for a pullback – note how the detrend oscillator is at the same amplitude that saw the 2018 and 2020 tops. Prior tops tend to mark current tops with this oscillator. As long as the pullback holds $93, I expect the $130 target to be met in the coming weeks. Below $93 and this thesis will be threatened in favor of the Red count below.

Nvidia (NVDA)

Microsoft (MSFT)

Bitcoin (BTCUSD)

Bitcoin’s correlation to tech stocks has completely detached. It is on its own path, which seems to have more of a correlation to global liquidity as well as banking concerns. I’m not sure what the catalyst for this bullish count will be, but so far, it is still valid and playing out. We need to see a fresh vertical move up from here to further confirm this count. If Bitcoin instead gets below $30,000, it will get concerning, and put the below bull path in jeopardy.

CrowdStrike (CRWD)

So far, CRWD is following the bullish count we laid out months ago. It appears to be tracing a leading diagonal pattern for its 1st wave. If true, we still need a 4th wave drop and 5th wave push higher to confirm it. I’m looking for a top soon, followed by a 4th wave pullback to $166 – $150. As long as this pullback hold $147, I’m leaning into the bullish path, which has us targeting $215 before the bigger pullback takes hold.

Netflix (NFLX)

Aehr Test Systems (AEHR)

The one thing this drop does have going for it is that we only have a 3-wave drop from the high. If we see a bounce back into the $26-$28 level (4th wave), followed by another drop lower (5th wave), then we have reason to be concerned. If this happens, it would be the larger 1st wave pointing lower, which should be followed by a 2nd wave bounce. This would be used to de-risk. If the Green count has any chance, AEHR needs to get back above $35 and not make another low.

Ethereum (ETHUSD)

The bullish structure in ETHUSD continues to build. I wouldn’t be concerned about Ethereum not breaking out with Bitcoin, yet. It’s due for a slight pullback, which should hold $1635. Below here is concerning. If we do hold this support zone, the next move will need to be a vertical breakout.

Super Micro (SMCI)

SMCI continues to frustrate and confuse. The patterns are messy, and just when I think a have a handle on it, it gets more confusing. What I do know for certain is that the move down from the October high is a clear 5 waves. Either this is all of the C wave of the 4th wave correction (Green), and we are setting up for new highs, or this is the 1st wave of a larger C wave pointing down (Red). The bounce, so far, appears to be corrective, which elevates the risk here. A break below $230 – $222 will confirm the red count. We need to get above $275 to confirm the Green count.

Marvell (MRVL)

Once MRVL broke below the $52 level, the risk became elevated. What’s frustrating about the chart is that we have overlapping waves up and down. The current drop cannot be counted as the start of a larger drop, yet. If we get one more drop towards $46-$44, then we have this confirmation, and the top will likely be in for MRVL. If this happens, the next bounce is where you de-risk. If the Green count has any chance, this has to be a low, and we need to turn back up from here.

CloudFlare (NET)

This Gann chart tells the current story with NET. It’s in a very large resistance zone. The 1×1 line (45 degrees) from the top is around $64-$66. Also, two difference techniques that I use to find support and resistance confirm the same level, and all three of my moving averages are also in this zone. If NET can break above this zone at $66, retest it as support and hold it, I’d consider that quite bullish and would look to add. Instead, if we see a strong reversal here that takes us below the $54, I’d start getting concerned.

Chainlink (LINKUSD)

This is my general roadmap for LINKUSD. We should see some type of top around $14-$18. If the following pullback is a 3 wave move, then that will confirm the blue count presented. We would use that drop to add more to our position. If instead, we see a 5 wave drop from that high, it would be concerning, and we may use that to reduce our exposure. As of now, I see no reason to be pessimistic, as the next drop will tell us everything.

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Solar Stocks Still Searching For A Bottom

Posted on November 7, 2023August 29, 2026 by io-fund

This article was originally published on Forbes on Nov 3, 2023,01:00am EDTForbes Forbes on Nov 3, 2023,01:00am EDT

Solar is arguably one of the market’s most sold-off industries at the moment, with the Invesco Solar ETF falling more than 42% YTD as the industry struggles to find growth in a high-rate environment. With implied Fed funds futures suggesting interest rates will remain above 5% through Q2 2024 before slowly dropping to the 3.75% range by year-end 2025, the industry is still facing a high-rate environment with more possible adverse demand effects for multiple quarters ahead.

SolarEdge and Enphase are among the S&P 500’s worst performers this year, falling more than 70% each; a significant weakening in US demand starting in Q2 worsened with weakening European demand in Q3, causing revenues to nosedive. Residential solar companies SunPower, Sunrun, and Maxeon have all declined more than 55% to 70%, as well.

SolarEdge Says Weak EU Demand Caused Q3 Revenue Slump

SolarEdge sent the solar sector for a tumble on October 20th as it pointed to significant weakening in EU demand for a major Q3 shortfall and lower Q4 revenues. Shares fell over -27% as the company cut its revenue guide nearly (20%) from $880M-$920M to $720M-$730M, its gross margin forecast from 28%-31% to 20.1%-21.1%, and its operating margin forecast from $115M-$135M to $12M-$31M. CEO Zvi Lando said the company “experienced substantial unexpected cancellations and pushouts of existing backlog from our European distributors” in the second half of Q3, while installation rates “were much slower at the end of the summer and in September.”

Q3 results reported on Wednesday showed a marginal beat in revenues to $725M, an 1190 bp contraction in gross margin, and a shift to negative EPS, but the focal point of the report was a brutal Q4 guide. Consensus estimates for Q4 heading into the report were floating between $660M to $675M – the actual guide was far lower, with SolarEdge pointing to $300M to $350M in total revenues, with $270M to $325M in solar revenues.

That correlates to a (55%) QoQ decline from Q3’s $725M, and (67%) lower than the nearly $1B in quarterly revenues SolarEdge generated in Q2. Non-GAAP gross margins are expected to decline another 1280 to 1580 bp from Q3’s 20.8% to just 5% to 8% in Q4, including a 130 bp benefit from IRA credits. Given the operating expense outlook and major gross margin contraction, SolarEdge could see Q4 non-GAAP EPS fall further from the ($0.55) reported in Q3 to ($2.40) or lower in Q3 — not even in the same universe at the $0.63 consensus estimate.

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Enphase Earnings Echo Demand Woes

Enphase echoed SolarEdge’s commentary about weakening EU demand, as European revenues fell (34%) sequentially in Q3, after recording +25% QoQ growth in Q2. That’s a pretty swift QoQ decline in European revenues, which Enphase attributed to “high inventory at our distribution partners along with a softening in demand in our key markets – the Netherlands, France, and Germany.”

US revenues fell (16%) sequentially in Q3, continuing a (12%) sequential decline in Q2 as high rates and the shift to NEM 3.0 continued to impact US demand. Management said that in California, the “sell-through of our microinverters was 25% lesser in Q3 compared to Q2 due to the NEM 3.0 transition. It will take a few more quarters for our installers to fully transition to NEM 3.0 and normalize sales to NEM 2.0 levels.”

For Enphase, US revenues have been declining, and Europe’s stronger growth is not enough to absorb the losses in the US; now, that picture is even clearer: California is set to drag on US growth until NEM 3.0’s normalization completes sometime in 2024, while European demand has weakened substantially. Combined, this is causing a snowballing decline in revenues that may not bottom until Q1 or even Q2 2024, one to two quarters later than previously expected.

Enphase guided a nearly (40%) QoQ revenue decline for Q4: $300M to $350M, compared to $551M in Q3 and $711M in Q2. Management provided some clarity on the very low Q4 guide, saying it “reflects approximately $150M of channel inventory correction in the U.S. and Europe. In other words, we are under shipping to the end market demand for our products by approximately $150M. We anticipate under shipment will continue in Q1 and expect our channel inventory to normalize in Q2.”

That raises some doubts about when microinverter shipments will bottom, as shipments are plummeting, falling (24.9%) sequentially from more than 5.1M in Q2 to just over 3.9M in Q3. Q4’s revenue guide suggests microinverter shipments could fall by ~1.5M QoQ to ~2.4M, or the lowest level since Q2 2021.

Source: I/O FUND

A quick V-shaped recovery in early 2024 for microinverter shipments and revenues looks to be out of the picture, based on management’s commentary around inventories and California’s normalization trend. In addition, US residential installations are projected to decline next year, while demand in the Netherlands may have peaked last year and fall through 2025 to 2026.

US Residential Growth Forecast to Decline In 2024

The near-term outlook for solar has definitely taken a hit from high rates impacting demand – a forecast from Wood Mackenzie/SEIA is pointing to a YoY decline in US residential solar installations in 2024, weighed down by a sharp contraction in California. Overall, the group expects installations to drop (4%) in 2024, dragged down by a (38%) contraction in California primarily due to the shift to NEM 3.0.

Q2 recorded growth of +6% QoQ and +30% YoY to 1.77 GW installed, reaching a new record. However, SEIA noted that “growth has not been as strong in traditionally larger markets with lower retail rates like Arizona and Texas, where high interest rates are creating headwinds.” That interest rate headwind has persisted through Q3, into Q4, and most likely will cause demand softening through much of 2024. Combined with a “lower urgency to go solar due to the ITC extension” and heightened recession fears, the broader macro backdrop for solar remains muddled, reflected by Enphase’s and SolarEdge’s troublesome revenue guides.

Source: SEIA / WOOD MACKENZIE SOLAR MARKETING INSIGHT REPORT Q3 2023

The long-term outlook for residential is more positive, as growth is expected to pick back up to about +8% on average from 2025 through 2028, boosted by IRA benefits and more projects qualifying for ITC adders. However, that inflection back to growth in 2025 is not set in stone and may not occur as quickly as anticipated, should rates remain at or above 4% heading into the first half of the year.

EU Key Market Demand at Risk in the Near-Term

SolarEdge cited weakening demand across the EU, while Enphase pointed out softened demand in three key markets: the Netherlands, France, and Germany. These three markets are expected to account for a lion’s share of annual capacity in Western Europe over the next decade, so softening demand in the three nations is not something to be taken lightly.

Source: WOOD MACKENZIE

In the Netherlands, annual installed capacity is forecast to have peaked in 2022 to about 1.8 GW. A further decline from the peak is projected to occur in 2024 before stabilizing around 1.4 GW per year, nearly (22%) lower than 2022’s levels. This decline to stagnation in capacity installed would be a stark contrast to the strong growth seen from 2018 through 2022.

Source: HOLLAND SOLAR

Germany is also seeing some near-term effects to solar demand, although its medium-term and long-term view remains brighter than that of the Netherlands. Germany saw 3.4 GW of solar capacity installed in Q3, a (5.5%) sequential decline from 3.6 GW in Q2 as rooftop solar installations pulled back. September’s installed capacity was just 0.92 GW, a (32%) decline from July’s 1.35 GW additions and the lowest monthly level since February. While this slump in installations is likely to continue through Q4 and possibly extend into 2024, residential’s outlook over the decade is strong: Wood Mackenzie sees Germany’s “residential segment will experience the most growth, with cumulative installed capacity expected to grow fivefold” through 2032.

France witnessed 12% growth in installed capacity in the first half of 2023, with total installed capacity of 1.37 GW. Nearly 42% of the installed capacity in 1H came from fully or partially self-consumed systems, while 94% of installations in Q2 were systems smaller than 9 kW, suggesting the residential market had been relatively robust heading into 2H. Over the long-run, France is expected to see residential solar installations climb, with projections for “cumulative totals for home solar in France to quadruple by 2032.”

Valuations at Multi-Year Lows

Residential solar stocks have seen valuations drop to multi-year lows. Enphase currently trades at 3.77x EV/revenue and 4.4x forward EV/revenue, far below its 5-year median 12.11x multiple and far below the high double-digit multiples it commanded in 2021 and late 2022. SolarEdge’s 1.04x EV/revenue and 1.15x forward EV/revenue also sit far below its 5-year median multiple of 5.17x. Forward P/E ratios for the two have dropped to the teens, nearly 70% lower than their 5-year averages, respectively.

Source: I/O FUND

However, forward revenue projections have pulled back substantially – revenue targets have essentially shifted back by one to two fiscal years.

Source: YCHARTS

As of June 30, Enphase was projected to generate revenues of $3.04B in FY23, before growing to $3.80B in FY24 and $4.72B in FY25. As of October 30, just 4 months later, Enphase’s forward revenue forecast has plunged around (40%): FY24’s forecast has declined by more than $1.6B to just $2.15B, below FY23’s projected $2.3B, while FY25’s forecast has pulled back $1.8B to below $3B– a figure that Enphase was previously expected to hit this year.

SolarEdge was projected to see similar growth, with revenues rising from $4.13B in FY23 to $5.05B in FY24 and $5.89B in FY25. Again, forward projections have pulled back significantly, with FY24’s estimate now just $3.74B, around (26%) lower than it had been on June 30.

Near-term demand weakness in multiple major end markets is the main theme for solar stocks heading into 2024. Forward revenue projections have plummeted as a result, while valuations have reached multi-year lows – Enphase and SolarEdge are trading at deep discounts in anticipation of a bottom in revenues occurring over the next two to three quarters.

By respecting our risk management, the I/O Fund closed Enphase twice with minimal losses. When the fundamental picture changed, we stepped aside. If there is any lesson 2022 has taught tech investors, it’s that long-term buy and hold can create unnecessary losses. In April, we closed Enphase for a (-15%) loss following an earnings analysis for our premium members, avoiding a (-64%) loss from the original cost basis. When we attempted again in September, we closed the position when the setup failed, avoiding the losses from the solar sector selloff and Enphase’s most recent report. We share our trades in real time with our research members.

I/O Fund Equity Analyst Damien Robbins contributed to this report.

Cloudflare 3Q23 Earnings Summary

Posted on November 3, 2023June 30, 2026 by io-fund

Cloudflare reported revenue and EPS above consensus. However, 4Q23 revenue guidance missed consensus by ~1% due to geopolitical uncertainty and macro headwinds. The other positive thing to note was that Dollar-Based Net Retention Rate (DBNR) improved to 116% for 3Q23. Management believes DBNR will stabilize near these levels and it will take some time for its efforts to improve Go-to-Market execution to be shown in DBNR, which we see as a positive.

Despite the same macro headwinds that Cloudflare is facing along with other software companies, we believe there is strong demand and need for Cloudflare’s products such as Area 1 and its developer platform, Cloudflare Workers. Longer term, we believe NET will significantly benefit from the AI inference opportunity, which we previously highlighted in our Cloudflare: Bringing AI Inference to the Edge note. Currently NET has inference optimized GPUs in 75 cities globally as of the end of October 2023 and is on track to be in 100 cities by end of CY23.

Revenue and EPS

Revenue: $335.6 (up 32% Y/Y) above consensus of $330.6M (+30% Y/Y).
Non-GAAP EPS: $0.16 above consensus of $0.10
NET gave 4Q23 revenue guidance of $352.5M, at the midpoint below consensus of $356.3M (+30% Y/Y)
· Commentary from call: “Moving onto the guidance for the fourth quarter and the full year, with broadening geopolitical uncertainty and increasingly mixed macroeconomic data points across geographies. The business environment in which we operate remain challenging to predict, and as a result, we continue to remain prudent and cautious in our outlook for the fourth quarter”.
Non-GAAP EPS guide: $0.12 above consensus of $0.10.

Margins

Non-GAAP Gross Margin: 78.7% vs. 78.1% in 3Q22
· From 2Q23 to 3Q23, Non-GAAP Gross Margins expanded from 77.7% to 78.7%
Non-GAAP Operating Margin: 12.7% vs. 5.8% in 3Q22
· From 2Q23 to 3Q23, Non-GAAP Operating Margin expanded from 6.6% to 12.7% due to OpEx as a % of revenue going down 5% Q/Q and going down 6% Y/Y to 66% of revenue.

Cash Flow

$34.9M (10% FCF Margin) vs. ($4.6M) (-2% FCF Margin) in 3Q22
· From 2Q23 to 3Q23, FCF Margins expanded from 6% to 10%
· Commentary from call “This is a business that can generate significant cash, and in 2023, we expect we will generate more than $100 million in free cash flow, well ahead of our original goal when we started the year, and the direct result of improved execution across our entire business.”
· Network CapEx: 8% of revenue.
· FY23: expects network CapEx to be 8-10% of revenue vs. 10-12% previously. However, they expect network CapEx to return to normalized levels over a period. We had highlighted earlier in our analysis that network CapEx is the primary reason why FCF can be minimal at times.

Key Business Metrics

Paying customers: 182,027 (+17% Y/Y)
· Commentary from call: “We added a record number of net new customers year-over-year, spending more than $500,000 and $1 million on an annualized basis with Cloudflare”.
Paying customers with more than $100K ARR: 2,558 (+34% Y/Y)

Dollar-Based Net Retention (DBNR): 116%
· Commentary from call: “We continue to believe the recent decelerating trend in DNR stabilizing near these levels”.

DBNR expanded from 115% in 2Q23 to 116% in 3Q23.

Go-To-Market (GTM)

NET’s pipeline close rates held firm.
· Commentary from call: “During the quarter, the pipeline generated by this new cohort was 1.6 times higher than those brought on at the same time a year earlier. These new account executives achieved more than 130% of their activity goals for the quarter”.
NET’s salesforce productivity remained stable and linearity in terms of when deals were closed was similar to Q2.
· Commentary from call: “I think that we have been able to hold things steady while making significant organizational changes and improvements across our sales and marketing organization is very encouraging. Beyond that, we’re beginning to see positive early signs from the sales team members we’ve brought on over the six months to replace underperformers.”

Conclusion

Cloudflare may require more than one entry. Cloud has been volatile, and NET can produce choppy reports. We plan to use technical analysis to its fullest.

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Apple Q4: iPhone Revenue Accelerates while Services Shine

Posted on November 3, 2023June 30, 2026 by io-fund

Apple posted Q4 results that were roughly in line with expectations: revenues of $89.49 billion met consensus estimates, while EPS of $1.46 beat estimates by about 5.0%. iPhone revenues accelerated sequentially to reach a September quarter record, while Services revenue also rose to a new record, reaccelerating to the high-teens after four quarters of single-digit YoY growth.

Installed devices reached a new all-time high across all geographies and products. CEO Tim Cook said Apple has its “strongest lineup of products ever heading into the holiday season, including the iPhone 15 lineup and our first carbon neutral Apple Watch models.” Supply constraints and reports of weak demand for the iPhone 15 may overshadow the strength of that lineup, but Apple is expecting iPhone sales to rise in the December quarter, while other product revenue will weigh on revenue that is forecast to be similar to last year’s numbers.

Q4 Revenue and EPS:

Q4 revenue of $89.49 billion marginally beat expectations of $89.28 billion, representing a YoY decline of (0.7%).
iPhone revenue of $43.81 billion met expectations, growing by +2.8% YoY and +10.4% QoQ.
Services revenue of $22.31 billion grew by +16.3% YoY.
GAAP EPS of $1.46, up 13.2% YoY, driven by an improvement in net margin and a (2.8%) reduction in share count.

Margins:

Gross margin was 45.2%, 20 bp above management’s guidance of 44% to 45%. Gross margin improved 65 bp QoQ.
Operating margin was 30.1%, an improvement of ~200 bp QoQ and ~250 bp YoY. The improvement was aided by growth in gross margin and operating expenses of $13.46 billion coming in slightly below guidance of $13.5 billion to $13.7 billion.
Net margin was 25.6%, an improvement of ~135 bp QoQ and ~265 bp YoY. Net margin improved to the highest level since fiscal Q2 2022.

FY23 Key Metrics:

Revenue declined (2.8%) YoY to $383.3 billion.
EPS of $6.13 improved +0.3% YoY.
Gross margin of 44.1% improved ~80 bp YoY from 43.3%.
Operating margin of 29.8% declined ~50 bp YoY from 30.3%.
iPhone revenue of $200.6 billion, representing a (2.4%) YoY decline from $205.5 billion.
Services revenue of $85.2 billion, representing a +9.1% increase from $78.1 billion.

Cash and Debt:

Apple had $162.1 billion in cash, equivalents and marketable securities at the end of the fiscal year, with total debt of $105.1 billion. Net cash on hand was $57.0 billion.

Operating cash flow for the full year was $110.5 billion, a YoY decline of (9.5%) from $122.2 billion.

Other Key Metrics:

Q4 saw Apple record a record September quarter for iPhone sales, while iPad and Mac sales declined as Apple lapped a tough comp where it fulfilled significant pent-up demand in the year-ago quarter following factory shutdowns. Mac sales missed estimates by nearly $1 billion, declining (33.8%) YoY to $7.61 billion. Cook said the Mac should have a “significantly better quarter” in the upcoming December quarter, helped by holiday sales and the newly released M3-powered Macs.

However, both Mac and iPad revenues increased about +11.3% sequentially: Mac revenues rose from $6.84 billion to that $7.61 billion figure, while iPad revenues rose from $5.79 billion to $6.44 billion. Wearables, Home & Accessories revenues increased more than $1 billion sequentially to $9.32 billion.

For FY23, product revenue declined (5.7%) YoY to $298.1 billion from $316.2 billion in the previous fiscal year, dragged lower by a ~($10.8) billion decline in Mac revenues, with some softness in iPhone and Wearables, Home & Accessories.

Services Shine Once More

Services stole the show in Q4 after posting four consecutive quarters with YoY growth rates between 5% to 9%, with revenues rising +16.3% YoY and +5.2% QoQ to $22.31 billion. This came in nearly 4.5% above analysts' expectations for $21.35 billion.

Reaching a new all-time high in its installed device base signals further growth lies ahead for Services, especially with the recent price hikes that Apple put into effect for News+, Arcade, and its One bundles. Combined, the price hikes could entail an additional ~$5 billion in annual revenue with just a 15% attach rate to Apple’s more than 1 billion paid subscriptions.

It’s well known that Apple has one of the most loyal customer bases in the world for its products; however, it’s also fair to say that Apple also holds one of the most loyal paying subscriber bases in the world. Paid subscribers have risen at more than 27% annually from 240 million at the start of FY18 to more than 1 billion at the end of FY23. As installed devices continue to grow, paying subscribers should continue to grow hand in hand, providing a strong growth lever for Services.

Services is also seeing its contribution to Apple’s bottom line surge because of that strong growth in paying subscribers. Services contributed $0.39 to each $1 of gross profit Apple generated in Q4; in FY23, Services contributed nearly $0.36 per $1, up +8.8% from the $0.33 per $1 it added in FY22.

Another way to put that: Services contributed almost 40% of gross profit in Q4 and nearly 36% in the full year, despite only contributing ~25% of revenue in Q4 and 22.2% in the full year. That outsized influence down the line is already evident – gross margins continue to expand, rising above 45% in Q4, helping drive +8.3% YoY growth in operating income. As Services begins to approach and surpass 30% of total revenue, that contribution should continue to rise, potentially towards the 50% range.

However, one risk to watch is Alphabet’s antitrust trial, as it could have direct implications for Apple in the event of a negative ruling. Alphabet’s multi-billion dollar payments to Apple for Google to be the primary search engine on Safari across Apple’s devices is at the center of the trial, and that payment is rumored to be ~$19 billion this year. Should the scale of those payments constitute monopolization of the search market, Apple could be set to lose on a lucrative Services revenue stream.

iPhone 15 Demand Under the Microscope

Apple’s new iPhone will be under the microscope, following Apple’s weaker December quarter revenue guide, uncertainties about supply, and lingering questions about China risks.

Speaking with CNBC prior to earnings, Cook said the iPhone 15’s Pro and Pro Max models were still constrained due to elevated demand — the iPhone 15 was estimated to have received 10% to 12% more pre-orders than the iPhone 14.

However, analysts remain cautious about the supply and demand environment: BofA said in mid-October that iPhone 15 availability was improving, UBS said that contracting wait times suggested demand for the new phone looked weak, while Morgan Stanley echoed UBS’ fears, pointing to moderating delivery lead times in late October as another sign of demand weakness.

Counterpoint Research data painted a split picture for early iPhone 15 demand: the research firm said that China sales were down (4.5%) YoY relative to the iPhone 14, while US sales were showing double-digit increases.

Estimates for the December quarter were projecting +4.9% YoY growth to $122.90 billion in revenue, but Apple signaled that the one-week-shorter quarter would see similar revenues, at the $117 billion range. Apple signaled that the extra week last year “added approximately 7 percentage points to the quarter's total revenue,” so it is understandable why Apple would forecast flatter sales YoY in a 13-week quarter this year compared to the 14-week quarter last year. Management did signal that they “expect iPhone revenue to grow year-over-year on an absolute basis.”

Normalization of supply constraints to meet demand and see iPhone sales grow to more than $66 billion would be a positive, although risks remain in China, primarily from high demand for Huawei’s new Mate 60 Pro. China’s sales will be scrutinized, given that the Mate 60 Pro was estimated to have sold 1.6 million units in its first six weeks, and 400,000 units in the two weeks following the iPhone 15 launch in the country.

Revenues had declined (2.5%) YoY and (4.3%) QoQ in the Greater China region in Q4, while December quarter sales last fiscal year also failed to impress, showing a (7.3%) YoY decline. As Apple’s third largest market, generating annual revenues around $70 billion or more, another weak holiday quarter would raise concerns that Huawei could overtake Apple in terms of market share, as it is quickly encroaching on Apple based on recent data from Canalys and Counterpoint Research.

Earnings Call:

Apple’s earnings call reflected the strength of Services, while talking up the growth opportunities in emerging markets and signaling more gross margin expansion.

Apple “achieved all-time revenue records across App Store, advertising, AppleCare, iCloud, payment services, and video, as well as the September quarter revenue record in Apple Music.” CFO Luca Maestri said Apple saw “growth coming from all categories and every geographic segment,” while its “installed base of over 2 billion active devices continues to grow at a nice pace and establishes a solid foundation for the future expansion of the ecosystem.”

In addition, “transacting accounts and paid accounts grew double-digits year-over-year, each reaching a new all-time high. Also our paid subscriptions showed strong growth. We have well over 1 billion paid subscriptions across the services on our platform, nearly double the number we had only three years ago.” That suggests Apple has more than 1.1 billion paid subscriptions, or a ratio of about 1 paid subscription per every 2 active devices.

The main takeaway from management’s commentary is that Services has many levers to drive growth, from the recent price hikes to constant increases in paid subscriptions driving record revenue across multiple offerings. At just over $85 billion in TTM revenue, the segment is poised to capture that $100 billion run rate sooner, potentially as soon as two to four quarters.

Apple guided gross margins to be “between 45% and 46%” from the coming quarter, versus the 45.2% just reported and a ~200 to 300 bp improvement YoY. Services will have a marginal impact on that expansion, but management pointed to “improved costs and improved mix” on the product side as a driver, while FX will continue to have an adverse impact on margins. Increasing gross margin from the low 43% range in FY22 to the 45% to 46% range in FY24 is no small feat at Apple’s scale.

Management added that they were “particularly pleased with our performance in emerging markets with revenue reaching an all-time record in fiscal 2023 and double-digit growth in constant currency.” Apple “achieved an all-time revenue record in India, as well as September quarter records in several countries, including Brazil, Canada, France, Indonesia, Mexico, the Philippines, Saudi Arabia, Turkey, the UAE, Vietnam and more.” iPhone sales also reached “quarterly records in many markets, including China mainland, Latin America, the Middle-East, South Asia and an all-time record in India.”

Conclusion:

Apple’s fiscal Q4 fell relatively in line with expectations, but Services shine as it surged back to double-digit revenue growth. iPhone revenues reached a September quarter record, but a weaker-than-expected December quarter guide and hints of demand weakness raise concerns about a return to growth in the upcoming fiscal Q1. Apple is showing a tremendous ability to expand gross margin at scale, which will ultimately be aided by Services in the long-run, which has multiple levers for continual growth in the double-digit range.

Damien Robbins, Equity Analyst at the I/O Fund, contributed to this article.

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