Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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iPhone 15 launch, Arm IPO, and Adobe earnings
Peter Garnry
Chief Investment Strategist
Summary: Next week will be exciting in equity markets as Apple is launching its new iPhone 15 on Tuesday, Arm IPO on Wednesday will be the largest since late 2021, and Adobe earnings on Thursday will test the AI hype. China's ban on the iPhone across various government agencies this week as soured sentiment on Apple shares ahead of the iPhone 15 introduction increasing the risk for Apple shareholders. Arm IPO comes with an excessive valuation amid China risks and recent no growth pinned on AI to reignite growth. Adobe earnings is the next test of whether generative AI can be commercialised at this point.
Key points in this equity note
- China’s initial ban on iPhone use in various government agencies and rumours of bans coming including China Mobile is not going to stock the upcoming iPhone 15 are the worst possible news stream ahead of Apple’s launch of the new iPhone 15 next week.
- Next week the Arm IPO will become the largest initial public offering since Rivian in October 2021 riding the immense AI hype. The Arm IPO comes with an excessive valuation eclipsing Nvidia while juggling China risks and a recent stagnating business.
- Adobe earnings next Thursday after the US market close will be a key test of whether generative AI can be commercialized at this point or whether the AI hype is just a gold rush without any gold mine.
China bans hit Apple stock ahead of iPhone 15 launch
This week’s announcement by Chinese authorities that iPhones would be banned across some government agencies hit Apple shares by 2.9% on Wednesday with the decline extending another 2.9% yesterday as rumours indicated that the Chinese government could possibly extend the ban all government agencies including state-owned enterprises. In that case, Apple would a considerable amount of business in its Greater China segment which in the FY22 (ending September 2022) delivered $74.2bn (around 19% of total revenue).
The negative news around the iPhone in China got worse today as reports indicated that China Mobile, the largest mobile carrier in China, will not have the iPhone 15 available to its customers. The series of events come on the back of US media reporting about significant Chinese breakthroughs in the latest Huawei smartphone using advanced chips produced by the mainland Chinese semiconductor manufacturer SMIC which is under US sanctions; the US is looking into whether SMIC violated US sanctions on semiconductor technology. It is becoming more and more clear that the world is fragmenting along the semiconductor industry and the pace is accelerating with Apple moving a larger part of its production to India from China.
The negative news around the iPhone in China comes at the worst possible time for Apple scheduled to introduce its new iPhone 15 on Tuesday at 10 a.m. PT. with the Apple website at one point teasing the name Wonderlust (this has since been removed and replaced with Apple Event). With three weak quarters of iPhone revenue year-over-year a lot is at stake for Apple and its share price with events in China and the consumer reception of the new iPhone.
A shaky Arm IPO on valuation and high China risk
Arm holdings is expected to be the biggest IPO since Rivian back in October 2021 with the estimated IPO price at $47-51 per share that would value the company as much as $54bn up from its $32bn acquisition value in 2016 by SoftBank. This expected valuation is already down from initial estimates suggesting investors are lukewarm on committing to the high valuation. This is also one of the reasons why Softbank is drumming up strategic investors on the customer side such as Nvidia and Apple. These companies are willing to pay premium price for locking in Arm as an independent co-owned company serving the industry.
The IPO which will price the Arm shares on Wednesday, with day of trading on Thursday, comes after a failed sale to Nvidia, that was blocked by antitrust regulators, and on the back of an immense AI hype. There is no doubt that SoftBank is taking advantage of the recent AI hype to publicly list Arm, but the valuation is quite excessive. Arm executives have said on the IPO road show that they expect 20% increase in revenue from the recent AI uptake. If we assume that this growth translates 1:1 to the operating income then Arm is valued at 67x forward operating income which can be compared with around 30x for Nvidia. While Arm holds many key patents for the global chip industry it is still a high valuation and it has to be weighed against significant China risk (20-25% of revenue comes from the Chinese subsidiary which Arm has little control over) and that the business recently was a no growth business.
Can Adobe show the way to monetize generative AI?
Adobe reports FY23 Q3 earnings (ending 31 August) on Thursday after the US market close with analysts expecting revenue growth of 10% y/y and EBITDA of $2.4bn up from $1.7bn a year ago. Adobe’s revenue growth has been steady ever since the company transitioned to a cloud-based subscription model, but recently revenue growth has come down to 10% and analyst estimates on revenue suggest that analysts do not believe that generative AI features implemented in Adobe’s content creation software will move the needle on growth. However, if the entire AI hype is to continue it requires that companies begin delivering visible commercial gains from implementing generative AI. If not, the AI hype risks being this gold rush that ended up with a lot of sold shovels (Nvidia GPUs) and very few actual gold mines.
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