WEBVTT - Deepwater Asset Management Managing Partner/Co-Founder Eugene Munster Talks Apple and Amazon Delivered Earnings  

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news.

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<v Speaker 2>Let's get more into what is driving this positive sentiment

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<v Speaker 2>in tech shares. The earnings from Apple. The iphonemaker posted

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<v Speaker 2>weaker sales of its flagship cell phone and saw big

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<v Speaker 2>revenue plunge in China during the holiday quarter. But it's

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<v Speaker 2>the forecast for what's to come this quarter that seems

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<v Speaker 2>to be giving the stock a boost this morning and

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<v Speaker 2>reassurance to investors for more. We are joined by someone

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<v Speaker 2>who follows this company very closely, Genemunster, the managing partner

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<v Speaker 2>at Deepwater Asset Management.

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<v Speaker 3>Gene, Good morning. We heard from CEO Tim Cook.

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<v Speaker 2>They're looking for load of mid single digit increases in

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<v Speaker 2>revenues in the current quarter.

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<v Speaker 3>Is that enough and can Apple pull through on that? Well?

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<v Speaker 1>That might seem modest that load of mid single digit

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<v Speaker 1>and growth when we think about some of the growth

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<v Speaker 1>what's going on around AI. But in the world of Apple,

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<v Speaker 1>that is a win, and it's an even bigger win

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<v Speaker 1>when it's put in the context of what they just

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<v Speaker 1>report in the December As you mentioned, they missed the iPhone.

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<v Speaker 1>The miss was the streets looking for a percent and

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<v Speaker 1>a half growth. They came in at down one percent,

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<v Speaker 1>and so that to see them essentially maintain the guidance

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<v Speaker 1>for March after them missing the iPhone guidance and the

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<v Speaker 1>overall guidance after missing December, I think was just a

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<v Speaker 1>big boost of confidence for investors that this narrative that

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<v Speaker 1>they will accelerate iPhone growth based on the backs of

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<v Speaker 1>Apple intelligence is intact. And so that's kind of the

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<v Speaker 1>substance I would say this is also as the call

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<v Speaker 1>went on, it became more clear that their benefit from

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<v Speaker 1>this channel inventory adjustment. Essentially they've got they had a

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<v Speaker 1>negative headwind from an adjustment in China and their channel inventory,

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<v Speaker 1>but that was temporary and they'll reverse that in the

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<v Speaker 1>March quarter. And I just want to shine a little

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<v Speaker 1>bit more light on that China piece, is that their

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<v Speaker 1>China iPhone business was probably down around fourteen percent, their

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<v Speaker 1>overall China business down eleven but Cooke mentioned on the

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<v Speaker 1>call that half of that decline was that adjustment and

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<v Speaker 1>channel inventory. They will again reverse that in the March quarter.

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<v Speaker 1>And so putting this all together is that December we'll

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<v Speaker 1>call it a good quarter. But the outlook is that

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<v Speaker 1>this trajectory for them accelerating growth on the backs of

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<v Speaker 1>Apple intelligence is intact.

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<v Speaker 2>Well, we've seen Apple try to diversify and it to

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<v Speaker 2>some extent putting more of its production in India. Is

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<v Speaker 2>Apple going to have to do more to diversify from

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<v Speaker 2>China given the threat that we've heard once again from

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<v Speaker 2>President Trump that tariffs on China could be coming quickly.

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<v Speaker 1>Absolutely right now, about sixty percent of excuse me, forty

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<v Speaker 1>five percent of Apple's revenue is built in China, and

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<v Speaker 1>they've been diversifying that down That was sixty percent about

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<v Speaker 1>four years ago, and so they've been doing more outside

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<v Speaker 1>of China and that's going to continue. India is a

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<v Speaker 1>smaller part of that, but the bigger theme is that

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<v Speaker 1>they want to diversify from China. It's probably the single

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<v Speaker 1>biggest risk to the Apple story is just the whole

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<v Speaker 1>China logistics piece, and so it's less about the you know,

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<v Speaker 1>so that is just a trend in general. The tariff's

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<v Speaker 1>question came up was the second to last question on

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<v Speaker 1>the call. I'm surprised it took that long for analysts

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<v Speaker 1>to ask the question, but Cook had a really quick

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<v Speaker 1>and short answer, which was a non answer, that they

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<v Speaker 1>are monitoring the situation and so I think, you know,

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<v Speaker 1>the big picture related to production in China, it's less

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<v Speaker 1>about tariffs, it's more just about wanting to have diversification

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<v Speaker 1>away from China.

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<v Speaker 2>How do you see Apple competing on artificial intelligence given

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<v Speaker 2>the drop in sales that we saw for the newest

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<v Speaker 2>iPhone that becomes equipped with Apple Intelligence.

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<v Speaker 1>So the message was pretty clear that they reiterated this

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<v Speaker 1>three times on the call, that in the regions that

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<v Speaker 1>Apple Intelligence is available and most of that is the US,

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<v Speaker 1>they've got other English speaking regions, is that the iPhone

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<v Speaker 1>performed better than in the regions where it was not available.

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<v Speaker 1>And then more broadly, they said that the upgrade take

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<v Speaker 1>of iPhone sixteen has been better than iPhone fifteen, and

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<v Speaker 1>obviously sixteen is this is the first year we've had

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<v Speaker 1>Apple Intelligence in those regions, and so they're building the

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<v Speaker 1>case that Apple Intelligence is having an impact, and I

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<v Speaker 1>think that that's accurate, but I think that the true

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<v Speaker 1>breakout impact of this just really hasn't been unlocked. And specifically,

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<v Speaker 1>this is Apple's game plan. They typically are a little

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<v Speaker 1>bit slow to get into a market and then eventually

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<v Speaker 1>they have a great product, and I think their Apple

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<v Speaker 1>Intelligence product, even in the US and the countries that

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<v Speaker 1>it's available. It still hasn't quite hit the mark where

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<v Speaker 1>consumers are using it and going out to their friends

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<v Speaker 1>and telling them they have to have this, and I

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<v Speaker 1>think that that day is coming. I think we're probably

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<v Speaker 1>a year away from that. But ultimately it is having

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<v Speaker 1>a positive impact, and the product still in my view,

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<v Speaker 1>is not complete, and then of course they need to

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<v Speaker 1>roll it out to Europe and to China to get

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<v Speaker 1>further uptakes. So the outlook is still the opportunity and

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<v Speaker 1>potential around Apple Intelligence is still there. I think that

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<v Speaker 1>it's going to be core features. It's just taking a

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<v Speaker 1>little bit longer for those features to really hit stride.

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<v Speaker 2>We're going to get more mag seven earnings next week.

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<v Speaker 2>What is your outlook for Amazon and Google parent Alphabet.

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<v Speaker 1>It's still obviously all about the cappex question, and my

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<v Speaker 1>sense is that it's going to go in the same

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<v Speaker 1>direction that we heard from Meta and Microsoft and what

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<v Speaker 1>just an incredible reversal in the last few days that

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<v Speaker 1>around this whole deep seek and that's the a topic

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<v Speaker 1>of course around earnings is just what's going on with

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<v Speaker 1>this AI trade, And just to give everyone kind of

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<v Speaker 1>the bottom line is that that Deep Seek was an improvement,

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<v Speaker 1>but it's I think improvements have been embellished in at

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<v Speaker 1>least what the big tech companies that are saying and

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<v Speaker 1>what the venture community is seen around this upcoming raise

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<v Speaker 1>for open AI that could double its valuation over the

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<v Speaker 1>past six months. It's pretty clear that they're not seeing

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<v Speaker 1>this is a negative what happened with deep Seek, rather

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<v Speaker 1>a positive. And so that's what is going to be

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<v Speaker 1>the primary focus for next week, obviously, is those capex

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<v Speaker 1>numbers related to the AI spend.

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<v Speaker 3>Yeah, thinking about the capex.

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<v Speaker 2>We just got a note this morning from a Bank

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<v Speaker 2>of America strategist Michael Hartnett, who coined the phrase Magnificent seven.

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<v Speaker 2>He's saying that these stocks could become the Lagnificent seven.

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<v Speaker 3>Your thoughts on that in our last minute.

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<v Speaker 1>I think you're going to start to see that shift.

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<v Speaker 1>I believe you should still own some the mag seven.

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<v Speaker 1>We're starting to do more focus on frontier tech. We

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<v Speaker 1>have the Deep Water Frontier Tech Index. It basically invests

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<v Speaker 1>in companies that are below it's an ETF that's below

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<v Speaker 1>five hundred billion. It's been around for five years, but

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<v Speaker 1>I think these are tech companies that are power and AI,

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<v Speaker 1>and I think that that opportunity on kind of these

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<v Speaker 1>smaller companies sub five hundred billion is probably where some

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<v Speaker 1>of the outperformance shifts over the next few years.

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<v Speaker 2>And just quickly, why is Microsoft lagging compared to some

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<v Speaker 2>of these other stocks right now?

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<v Speaker 1>They're guidance This is really splitting here is but was

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<v Speaker 1>about a half a percent below where the street was

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<v Speaker 1>for the March quarter. And when you guide in line

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<v Speaker 1>in this environment, it's a slight negative. When you guide down,

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<v Speaker 1>it's a little bit more of a negative. And that's

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<v Speaker 1>why Microsoft got clipped yesterday.

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<v Speaker 2>I really appreciate this Gene monster talking tech with us

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<v Speaker 2>from deep Water Asset Management.

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<v Speaker 3>Gene Thank you.