TL;DR
$102.5B quarterly revenue (+8% YoY) with record 47.2% gross margins, but iPhone growth stalled and China decreased by -4%; Services make around 25% of Apple’s revenue but as much as 50% of its profit.
Defensive moat impenetrable (92% retention), but offensive moat crumbling: Lost US share to Samsung, fell to 5th in China, Apple Intelligence adoption dismal (20% see impact); strategic blindspot confirmed with T. Cook admitting Apple won't compete in LLMs, accepts AI commoditization
Decade of "sugar water" (as marketed by Ben Thompson) trade-offs now visible: $20B+ annual Google payments created muscle atrophy in data/search/AI infrastructure (see my essay on this topic, here); CapEx staying ~$4B (vs Google's $50B+) signals acceptance of hardware-only future
Verdict: Eroding moat over the next 12-24 months as AI shifts value from devices to intelligence. Confidence: 4/5.
Snapshot
PE ratio: 36
Rule of 40: 29.84% (growth 2.0% + FCF margin 27.8%)
Moat Score (1–5): Scale 4.5, Network 4.5, Switching 5.0, IP/Reg 3.0, Brand 5.0
1) About the Company & Its Moat
What it does:
Apple’s strategy is vertical integration: designs, manufactures, and markets premium smartphones, computers, tablets, and wearables, monetizing a 2.35 billion device ecosystem through high-margin Services ($100B+ run rate) and unmatched customer retention (92%).
Moat levers: Ecosystem lock-in (primary), brand premium (secondary).
Evidence:
Retention fortress: 92% iPhone retention vs 77% Samsung; 79% stay within Apple ecosystem across devices
Cross-device ownership: 88% of Apple users own iPhones, 73% iPads, 58% Apple Watch, 50% Macs, hence creating compounding switching costs
Services monetization: 1+ billion paid subscriptions growing 14% YoY at 75.7% gross margins; attach rate accelerating as installed base grows
Pricing power intact: iPhone ASP reached $987 (up from ~$900 historically); Pro models now 61% of mix; gross margins expanded to record 46.9% from 38-39% historical range
Premium dominance: 62% share of $400+ smartphone segment, 78% of ultra-premium ($1,000+)
Trend: Eroding because, while the defensive moat (retention) remains fortress-like, the offensive moat (new customer acquisition, innovation leadership, strategic positioning) is materially weakening. US market share declined 7pp to 49% as Samsung surged; China collapsed to 5th place (13.7%); Apple Intelligence adoption was dismal (only 20% of users see impact per surveys).
More critically, Apple has made a strategic choice to cede AI leadership: CEO Tim Cook confirmed in August 2025 all-hands that Apple views LLMs as commoditized and won't compete with OpenAI/Google/Anthropic, maintaining CapEx at ~$4B vs peers' $40-60B. A decade of accepting $20B+ annual Google payments rather than building search/data infrastructure has left Apple without the "muscles" needed for AI, and management is doubling down on hardware-only strategy. As Ben Thompson notes, "Apple is increasingly on the periphery" of tech innovation for first time in 15 years, content to be "a hardware provider for delivery of others' innovation".
Services growth offsets hardware pressure today, but strategic positioning for next computing paradigm is weakest since the pre-iPhone era. Anyway, it’s impressive that after a decade, most of Apple’s revenue still comes from selling iPhones:
Share price evolution for the last 5 years, as of 1st of November 2025:
2) Latest Investor Call - Key Messages
Record September-quarter revenue of $102.5B (+8% y/y), led by Services $28.8B (+15% y/y) and iPhone $49B (+6% y/y), despite supply constraints on several iPhone 16/17 models. Guidance for the December quarter: +10% to +12% revenue growth and gross margin 47–48% (includes ~$1.4B tariff headwind vs ~$1.1B last quarter).
China: September quarter -4% y/y, primarily from iPhone supply constraints rather than demand collapse; management expects a return to growth in Q1. Subsidies are supportive but capped by price bands that exclude some higher-priced models—helpful for momentum, not a structural fix. Store traffic is up significantly year over year.
Installed base & mix: iPhone and Mac installed bases at all-time highs; nearly half of Mac buyers and over half of iPad buyers were new to the product; upgraders set September-quarter records.
AI & infrastructure: OpEx up on R&D as Apple ramps AI investment; private cloud compute (PCC) build-out included in 2025 CapEx; the Houston plant began shipping AI servers; Apple reiterates a hybrid first-/third-party data-center model; a more personalized Siri is slated for 2026.
Tariffs: Q4 absorbed ~$1.1B; December-quarter guide includes ~$1.4B—partly offset by China tariff cuts from 20% to 10%.
What the market missed:
The China print looked soft, but management pinned it on supply, not end-demand. With constraints persisting on several iPhone 17 models and guidance pointing to double-digit iPhone growth, the setup favors a catch-up quarter rather than a trend break.
Subsidies help, but don’t redefine demand.
Search/licensing opacity remains. Services strength called “organic”. Advertising (first- and third-party) hit a record, but Apple avoided breaking out search/licensing. Translation: no extra clarity on the Google revenue-share line (ie. $20B / year); the antitrust overhang remains.
India as the steady offset:
All-time revenue record in India, with momentum across devices and retail, which is still small versus China, but compounding into a meaningful regional hedge.
AI strategy (the Cook Doctrine):
Apple is spending more, but within a hybrid, efficiency-first frame. PCC capacity is scaling, Apple Silicon is the lever, and Siri’s next step lands in 2026 (hopefully!). This is Apple doing AI the Apple way: integrated, private, device-centric, on cloud as an extension, not the business model. It won’t match hyperscaler CapEx optics, but it should maximize differentiation per dollar inside the ecosystem.
Tone:
Confident in a record December for both the company and iPhone. Classic Apple: under-promise, operationally grind, let the installed base do the talking.
Capital allocation:
$24B returned in Q4 ($20B buybacks, $3.9B dividends). Still a cash machine (net cash $34B) with few external targets that clear Apple’s bar, so the flywheel spins: shrink the share count while the ecosystem widens. Or, less politely, when you can’t buy an edge, you buy your float.
We kind of see this in their year-to-date performance:
Source: SeekingAlpha.com
3) Plans (Strategy & Catalysts)
Next 12 months:
Apple Intelligence language expansion (April 2026) to French, German, Italian, Portuguese, Spanish, Japanese, Korean, Simplified Chinese across 17 total languages, which are critical to unlocking the international upgrade cycle currently constrained by English-only availability
India's manufacturing scale-up to 25% of iPhone production (from 20% currently), targeting 80M+ units annually, and the majority of US-bound iPhones from India by the end of 2026; four new retail stores to capture 3.98% market share with 35% shipment growth momentum
Services accelerating to $110B run rate through 1.5 billion paid subscriptions target (from 1 billion), three new AI-enhanced service offerings projected at $5B combined revenue, and low double-digit growth sustained by recurring revenue mix shift
Strategic AI Limitation: Tim Cook: “We've rarely been first...This is how I feel about AI”. Likely an Anthropic partnership for ChatGPT-equivalent functionality rather than building internally.
1–3 years:
Manufacturing diversification, completing with $600B US investment building 79 supply chain factories, Vietnam scaling to 40% of AirPods and 30% of MacBooks, and TSMC Arizona producing tens of millions of advanced chips to reduce single-sourcing risk to 15% of critical components
Vision Pro ecosystem maturation launching M5-powered Gen 2 with sub-$2,000 pricing (2026), lighter "Vision Air" consumer model (2027), and enterprise partnerships targeting 10M+ annual units by 2027 from current <500K run rate
Next-generation product categories, including foldable iPhone (Fall 2026, ~$2,000 starting price with 7.8-inch display), smart home command center (Spring 2026 with Apple Intelligence integration), and smart glasses (2026), to diversify beyond iPhone dependence.
4) Challenges (Bear Case)
Risk matrix:
Here is what I wrote in my essay “Apple’s lost decade”.
Instead of building the future, it took a dividend from the present. While Google plowed billions into search, data infrastructure, and foundational AI research, Apple signed a check to license Google Search as the default on Safari. That check, estimated at over $20 billion per year, was enough to keep Apple’s services revenue growing, but it was also the price of a decade-long delay in understanding how to work with data at scale. Today, that decision has metastasized into the embarrassment that is Siri, the me-too nature of “Apple Intelligence”, and the company’s palpable absence from every major AI inflection point.
The first conclusion would be that Apple didn’t just miss the AI wave. It never built the boats, ports, or maps to navigate it. The decision not to invest in search meant not investing in the infrastructure that powers AI: data engineering, retrieval pipelines, recommendation systems, user behavior models, large language fine-tuning, or inference-time optimization. In AI, there are no shortcuts. You cannot bolt it on, you must build it in. And Apple didn’t.
Let’s continue with the challenges:
Strategic AI Blindspot / "Sugar Water Trap" - Probability:High Impact:Critical
Decade of accepting $20B+ annual Google payments rather than competing in search has left Apple without data infrastructure capabilities ("muscles") needed for the AI era. If AI becomes the primary computing interface (conversational, agentic), Apple risks a "Nokia moment" where device excellence becomes insufficient. Public perception already shifting: "Apple is increasingly on the periphery" with iPhone 17 launch met with indifference despite solid hardware improvements.China structural decline - P:High I:High
Fell to 5th place (13.7% share) as Huawei reclaimed #1 with 18% share and the HarmonyOS 5 ecosystem. Apple Intelligence unavailable with no China launch date; nationalist sentiment favoring local brands acceleratingTariff/supply chain shock - P:High I:High
75% of iPhone production is still in China despite diversification effortsApple Intelligence adoption failure - P:Medium-High I:High
TidBITS survey of 760 users found only 20% saw any impact from AI features, with 70%+ "Haven't Used It" responses; Ming-Chi Kuo: “No evidence of Apple Intelligence boosting iPhone replacement demand”;Regulatory assault on App Store - P:High I:Medium-High
€1.8B ($1.9B) EU fine in 2024; forced to allow third-party app stores and alternative payments under Digital Markets Act. The EU represents 20% of iPhone market share with precedent risk for other jurisdictionsUS market share erosion - P:Medium I:Medium
First meaningful decline in a decade as Apple fell to 49% (from 56% YoY) while Samsung surged to 31% (from 23%).
5) Conclusion
Verdict: Hold with negative bias for a 12-18 month horizon, shifting toward. Avoid if key triggers materialize.
Apple's moat presents a paradox: impenetrable in defense, crumbling in offense. The company retains industry-leading customer retention (92%), unmatched ecosystem lock-in (2.35 billion devices), and exceptional capital efficiency (ROIC of 34% vs WACC of 9%).
However, my analysis reveals a critical strategic vulnerability that elevates risk substantially: Apple has consciously chosen to cede AI leadership, viewing large language models as commoditized infrastructure rather than a competitive necessity. This is the culmination of a decade-long “strategy” - accepting $20B+ annually from Google rather than building search and data infrastructure capabilities. The cost of those payments was foregone muscle development in exactly the areas (data gathering, reasoning across large corpora, serving intelligent responses) that define AI competence. Cook's August 2025 confirmation that CapEx will stay at ~$4B annually ("not exponential growth") vs. peers' $40-80B signals Apple has made peace with being “a hardware provider for delivery of others' innovation".
The defensive moat (retention, switching costs, installed base) scores 9/10 and protects existing cash flows. But the offensive moat (new customer acquisition, innovation leadership, strategic positioning for next paradigm) has deteriorated to 5/10, evidenced by US share losses, China's structural decline, and explicit strategic choice to not compete in foundational AI capabilities.
The question is whether being late to AI is like being late to the table (fine) or being late to internet services (costly).
What I would do: Hold but watch the next three quarters closely for inflection signals. The strategic choice to not compete in LLMs may prove prescient or catastrophic, but it definitively marks the end of Apple as an innovation leader and the beginning of Apple as a premium hardware provider for others' intelligence. For a company whose brand and valuation rest on being “insanely great”, this represents material moat erosion regardless of near-term financial performance.
Here is my portfolio structure:
● Company A: 12%
● Company B: 8%
● ….
● Index A: 4%
● Index B: 5%
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