Apple continues to spend less to earn more: Chart of the Week

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As Big Tech continues its spending spree, building its infrastructure for the next wave of AI, Apple continues its own shift.

iPhone sales, which account for about half of the company’s revenue, have been declining, and Thursday’s quarterly report showed another 10% drop in sales.

But the company’s quarter was well-received thanks in part to its services business, which emerged as a bright spot and a source of continued profit margin growth for the world’s second-largest company.

The Services segment, which includes the App Store, Apple Pay, Apple TV+ and Apple Music, saw revenue growth of 14% in the company’s second quarter.

And as CFO Luca Maestri noted on Thursday night’s earnings call, these gains, along with some cost cutting, were instrumental in increasing the company’s gross margins to a 12-year high of 46.6%, up from 45.9% in the previous quarter.

As our Chart of the Week shows, the company has been increasing its margin profile, to use analysts’ parlance, for years.

Efficiency has emerged as a new theme for technology following last year’s shift to profitability and lean following the industry’s post-pandemic talent acquisition phase.

And now, at least in one part of the sector, growth mode is back as AI fuels an investment boom.

On Apple’s earnings call, CEO Tim Cook ignored any AI announcements and told investors almost no details about plans or spending.

The general idea, however, is that they are in fact spending less than their Magnificent peers.

Which, as Evercore analysts wrote on Thursday, investors should appreciate, as “Apple executes AI in a more capital-efficient manner compared to other technology companies.” Spend less to earn more, hopefully unlike, say, Meta.

And perhaps this is an integral part of the company’s AI strategy, which has been entirely consistent with the company’s long-standing philosophy of not rushing into one product category. Instead, Apple preferred to be a thoughtful late adopter, inflexible to trends.

Computers, MP3 players, phones, tablets, headphones, VR headsets. Most were hits for Apple; everyone was “behind” the competition.

Unlike the raw investment power that its peers are investing in AI, Apple’s services business depends on the company’s shiny brand and walled garden ecosystem.

We expect Apple’s pending AI strategy to capitalize on this approach, continue to drive the company’s margin boom that defined its final years of corporate life, and differentiate the company from its peers.

The story continues

Ethan Wolff-Mann is a senior editor at Yahoo Finance and runs newsletters. Follow him on Twitter @ewolffmann.