Dan Niles: How Well Is Apple Really Doing?

Apple’s (AAPL) latest quarterly earnings have sparked a mix of optimism and concern among investors, with the company reporting an overall revenue increase but iPhone sales falling short of expectations. Despite this, Apple’s services sector continues to outperform, pushing the stock price to an intraday high of $247 per share. Dan Niles, founder and portfolio manager at Niles Investment Management, provided insights on these developments during a segment on CNBC’s ‘Squawk Box’.

Niles pointed out that Apple’s revenue growth has been modest, at 5% over three years and 3% last year, which raises questions about the company’s valuation, trading at 31 times earnings compared to the S&P 500’s 22 times. He highlighted the challenges Apple faces, including stiff competition, loss of market share in China, and a slow rollout of AI technologies that haven’t yet excited consumers. This scenario frames Apple as a low-growth company with a high multiple, less appealing compared to faster-growing tech giants like Google (GOOG), Meta (META), or Microsoft (MSFT), which offer lower multiples and higher growth rates.

The conversation then shifted to the implications of DeepSeek’s AI developments. Niles suggested that while DeepSeek’s innovations could lower hardware costs, potentially benefiting Apple by allowing it to “free ride” on external technological advancements, the immediate impact might be limited. Apple’s own AI initiative, Apple Intelligence, is expected to drive upgrades, though Niles predicts significant results might not come until next year due to the time needed for technology adoption across the ecosystem.

On the broader impact of DeepSeek, Niles argued that the open-source nature of AI development means that innovations are shared across the industry. He likened it to the early internet era where hardware companies initially thrived but were later commoditized, with value shifting towards service providers like Amazon (AMZN). The current trend, he suggests, is a move from hardware-centric spending to a focus on software platforms and AI agents that directly engage consumers. This shift could eventually benefit companies like Apple if they can leverage these trends to enhance their service offerings, potentially accelerating growth beyond the current 5% annual rate.

In conclusion, Niles emphasized that the evolution in AI, exemplified by initiatives like DeepSeek, isn’t detrimental but rather indicative of where future revenue growth in tech might be directed – from hardware to more consumer-facing software solutions. This perspective offers a nuanced view of Apple’s position in the rapidly evolving tech landscape, where strategic adaptation to AI and open-source innovations will be key to unlocking new growth avenues.

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