D.A. Davidson Managing Director Gil Luria Delivers His Apple Earnings Takeaways

Joining me now in person here in studio is Gil Luria. He's managing director and head of Technology Research at DA Davidson. Gil, it's good to see you.

Good to see you.

Yeah, great to have you here in studio amid a lot to discuss.

Yes.

Let's start with the state of play when it comes to this AI trade. How would you describe it?

Well, I would say that what's happening right now is AI is working out great. All the companies that have reported about their AI business reported better than expected results, better outlooks, more visibility. And it's actually the rest of the technology sector that's slowing down. That's not what the market is saying right now though. It's actually the AI stocks that have been beaten down the most in spite of the fact that that is still going strong. So, the market is interpreting any weakness as a sign the AI trade's over, when in fact, it's actually the AI investment, the AI ecosystem that's thriving right now. We think that'll balance out.

Mhm. So I guess would you call it a rotation that we've seen maybe out of this AI trade, but uh one that you would anticipate we'll see buyers in the future.

Exactly. And of course, we have to get through the elections. Uh once the elections are over, we have more visibility as to what policy is coming, when everybody feels more comfortable about that, feels more comfortable about the fact that we can still build data centers, we expect investors to rotate back into the AI sector, into the semis, into the hyperscalers. We just need to get through today.

Is there data or commentary that indicates to you that after the midterms, some of these policy makers will become more friendly to these AI data centers and the build out?

Yes. The fact is that the lobbying happen is happening at a federal level for Senate uh candidates, House candidates, when in reality, data center's decisions are made in a municipality level. So as long as you can prove to a community that your data centers are not going to be intrusive, not going to be polluting, not going to be noisy, you can build data centers, regardless of what the federal and state level policies are. So, a lot, there's been a lot of discussion, a lot of campaigning. Once the campaigning is over, we could just get back to microeconomics. Does this community want a data center because it'll drive uh the local economy without being polluting? If they do, then we're we're going to proceed and AI is going to have the supply of compute that it needs.

So some of the the backlash, if you will, that we've heard about data centers during this campaign cycle is, as you reference, right? That they are polluting, that they drive up costs, that they are noisy, among other factors. Is that true?

It is for old data centers. Yes, many data centers were built in locations that are too close to people with generators that are polluting and noisy and with tax breaks. New data centers aren't getting built that way. New data centers are getting built without tax breaks while investing in the local community with some new technologies like Bloom Energy that allows it to run without making noise and without polluting. So, uh the change has happened, the market has spoken, and therefore we do expect data centers to get approved as they all move to this new reality.

Mhm. How does Apple, after its earnings last night, fit into this AI story?

The good news is that it doesn't fit at all and it doesn't need to. In fact, Apple has been a safe haven from the AI trade and it'll go back to being that once we get through today. Because Apple did the right thing. We a couple of years ago, they decided, we don't need our own frontier model, we don't need to build data centers, we're just going to focus on what we do well, which is build a very compelling ecosystem for consumers. At the time there was criticism, as we sit here today, they clearly made the right choice. They don't need to participate in this race. They can wait to see who wins in the race and they'll incorporate it into their ecosystem. Whoever model we use, whatever genetic personal assistant we use, we're going to be using it on an iPhone. We're going to be using it through a Mac, and they're going to get paid. So they don't have to participate, they don't have to put hundreds of billion dollars into the ground. They don't have to hire hundred million dollar AI engineers. They can just sit there and wait and the market has rewarded them for that. The market is saying, you know what? Because your cash flow is intact, we're going to pay a premium for Apple. And again, there's going to be some puts and takes after last night's earnings today, but once we get past that, Apple will go back to being a safe haven.

Mhm. So how would you interpret the results that we got from Apple last night and of course, the new CEO?

Yeah. So it was a little bit of a shaky start because what's happening is last year was the best iPhone upgrade cycle in five years, right? iPhone 17 was the biggest cycle since iPhone 12. And what happens when you have a great iPhone upgrade year is the next year is a down year. And that's what we're going to start seeing. We're going to start seeing units go down. Now, fortunately for Apple, they have room to increase prices, which they did, double digit price increases across many of the projects and services. But that still means decelerating growth. And investors are going to react to that today. And the other thing that happened is memory is very expensive. And so they are having to buy memory at far higher prices than they used to. Even the price increases that they took are not enough to make up for that. Gross margins will be down, and they said they'll probably be down for the rest of the year, for the balance of next year, and that's what investors will react to today. Having said that, they've secured memory for the next few years. They've locked in the prices. So even that should fade away over time.

All right, Gil Luria, managing director and head of Technology Research at D.A. Davidson. Uh Gil, thank you so much for joining us in studio.

Thank you, Krista.

Great to have you.

Yeah, thank you.