Craig Moffett, MoffettNathanson co-founder and senior analyst, joins 'The Exchange' to discuss the latest tech earnings results, what would encourage Moffett to add more to his position in Apple and much more.

Cupertino

Apple is under pressure to deliver a strong quarterly performance to meet investor expectations, according to analyst Craig Moffitt. While Apple is considered more stable than its tech peers and is not heavily involved in AI capital expenditures, its current valuation is seen as high relative to its growth rate.

Key risks for Apple include the impact of recent legal decisions, such as the Epic Games case allowing alternative payment processing and the Google antitrust case, which could affect service revenues. Moffitt notes that while iPhone sales are stable and well-tracked, the services segment could present surprises, both positive and negative, in the upcoming earnings report.

Apple needs a pristine quarter to satisfy investors: Analyst

We'll all be in focus. Joining me now is Craig Moffitt, co-founder and senior analyst at Moffitt Nathanson. Craig, first of all, maybe we could take a step back and get a sense of what you think the read-through is from the three reporters, the three companies we saw report yesterday, Meta, Microsoft and Alphabet. What's the read-through from those reports for Apple? Well, first of all, hi, Leslie. I don't know that there's a direct read-through from the operating results. I think one of the read-throughs is that it's going to have to be a pretty pristine quarter to satisfy investors. The investors are sort of skittish at the moment. But Apple's in a pretty different category than any of the others in that it's not really playing this giant AI CapEx game. And so the big questions about the ROI on CapEx that are so important for the bigger company or for the other companies really aren't the ones that are going to move Apple. You upgraded the stock a little less than two months ago to neutral, and the stock is actually up 13 percent since then. Is there anything that might show up in earnings that would encourage you to upgrade it once again to buy or outperform? Yeah, look, the reason we upgraded it was partly because there were some giant risks that we didn't think were discounted in the stock. Tariffs were one of them, but the biggest was the risk of a negative outcome of the Google antitrust case and a limitation on the Google service revenue that accounts for so much of Apple's operating income. That case turned out that the decision was fairly benign, and so we upgraded the stock. The reason we didn't go all the way to a buy rating was simply valuation. I mean, right now, Apple is enjoying a better-than-expected cycle on the iPhone, but it's still trading at 41 times trailing earnings. And even if you assume sort of 11 percent type of growth this year for earnings, you're still talking about a company that's 35 times with roughly half the growth rate of its closest peers. So it's a tough one to get excited about at these valuations. But look, it's a great company and there are great products, and it's certainly a more stable business than its peers. So I get why there's a willingness to pay up at least to some degree. It just looks to us to be still too rich a valuation to think that it's going to be able to compound anything like the same growth rate as the other tech peers. Yeah, it sounds like the stability comes from the phone side and that the surprises, whether it's to the upside or downside, will be on the services side. What are you looking for there? And do you think the likelihood is that it's tilted more toward the downside or the upside? Well, yeah, Leslie, there are some some risks there. You're exactly right. We're looking for about 12 percent growth, 12 and a half percent growth. I think consensus is a shade higher than that. But there are some risks, right? I mean, it wasn't just the Google antitrust case that mattered. They also lost a case to Epic Games that allows for anybody that sells on the platform. So that's not just game makers, but that's the Netflix is of the world to say they can now process payments outside of the Apple platform and not have to give Apple their giant 27 percent share of all of those payments. So that could start to show up in the numbers. We don't know whether it will, but it's certainly a risk. There's also the risk that any Q raised, and this is probably the largest and most important risk that any Q a couple of months ago in the Google antitrust case noted that search volumes were down. Is there a risk that that A.I. is actually starting to replace some of the traditional search that generates a lot of the revenue that Apple gets from Google? The upside risk here is that A.I. itself is generating some incremental revenue because there are a lot of people that are downloading and using the chat GPT app, for example, and the ones that are paying Apple gets a piece of that revenue. So there are a lot of puts and takes and services. I think the numbers for the iPhone have been so carefully poked and prodded and everybody has tracked every detail about what's happening in China with the base model versus the pro models versus the the air model and so on and so on and so on that I don't think there's much room for a surprise on the iPhone side. But I think there is room for surprises either up or down on the services side.

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