Episode 56 | Can Apple Catch Up in the AI Race? A Key Question for Investors

In Episode 56 of “Market News with Rodney Lake,” Professor Lake, director of the GW Investment Institute, revisits  Apple, one of the first companies purchased by the GW Investment Institute’s student-managed fund in 2005. He highlights Apple’s enduring strength in its iPhone-centered ecosystem, with a $3.4 trillion market cap, $408 billion in revenue, and $96 billion in free cash flow over the past 12 months. At the same time, he raises concerns about regulatory pressures, slowing revenue growth, and Apple’s lag in artificial intelligence, pointing out its relatively low CapEx spending compared to competitors like Microsoft, Google, and Meta. While CEO Tim Cook has successfully led Apple since Steve Jobs, questions remain about whether management will prioritize investments in AI development and acquisitions.

Chapters

• 0:00 Introduction
• 4:00 Business
• 12:07 Management
• 18:07 Price/Valuation
• 19:11 Balance Sheet
• 20:18 Conclusion

Transcript

Thank you for joining Market News with Rodney Lake. This is a regular program for the GW Investment Institute where we talk about timely market topics. I'm Rodney Lake, the director of the GW Investment Institute. Let's get started.
Welcome back to Market News with Rodney Lake. I'm your host, Rodney Lake. We're coming to you from the George Washington University School of Business. Duquès Hall. Duquès family studio right here in the heart of Foggy Bottom, Washington, D.C.. Lots of excitement. The semester is about to get underway. We're recording here in August. And so a couple of things that we want to cover is our framework, of course.
And today we're going to cover a company that's one of the largest companies in our portfolio and is actually the company that we've owned for the longest period of time, 20 years ago, 20 plus years ago, we started this experiment, let's say, for the GW investments with one student investment fund and Ross and Norma Ramsay were kind enough to put in $1 million to start that.
The first company that we bought and one of the first companies, rather the first among the first set of companies that we bought in the spring of 20 2005, excuse me, was Apple. And it remains one of our largest positions. It's been it's gone up a lot. This is not an investment advice. And you can look back and, you know, we held it.
We trimmed it a little bit, but we held most of our position and we continue to hold it now. So going into the fall semester here, for 2025, we're going to be talking about Apple. We're going to use the GW Investment Institute framework. This is the GW Investment Institute podcast. Thanks to all who watched the show on YouTube who listen on Spotify or Apple or Amazon.
And thanks, for any of the new people watching the show or listening to the episode. Welcome and welcome back. What we're going to do the business, management, price valuation and balance sheet, which is the hallmark of the GW Investment Institute framework and the way that we analyze our companies on the fundamental side. We do have a quant class where people come up with all kinds of different models and the way to evaluate, but in our security analysis classes, but not but, but and in our security analysis classes, we use this framework business, management, price valuation and balance sheet.
And we use that because it is a consistent way to evaluate these companies. Apple we've owned for now more than 20 years, just over 20 in the the Ramsey Student Investment Fund for an example. And it's done very well. But you always have to continue to do the analysis because it's about what's happening today. And what do you think is going to be happening in the future?
And how is this company positioning in itself? What's management doing about that? What's the business model today? What are we paying for that? If we own it, we're still we still own in our portfolio. We're, you know, living with this valuation. And we have to understand, do we think it's going to get rerated higher or lower. Stayed the same.
So we still need to continue to think about the valuation even if we own that. And certainly we got to think about the mix on the balance sheet for us at the investments, who were equity investors. So we have to pay attention to what's the risk there. And if you're a debt investor, you're certainly thinking about risk two in a different way.
So we're going to cover Apple. We're going to go over the business, the management, the price valuation, and the balance sheet. And then we'll bring it together at the end of the episode. Everyone really knows this company. And we've covered this company on the podcast before. But it's been a little while. And again, we're kicking off the fall 2025 semester.
So I thought a company that we could start with or at least, start to think about ahead of our students and our analysts doing this, for the fall is Apple, you know, where do we stand? Where are we now? Lots of people know this company. There's certainly lots of news about it. Some people have some legitimate concerns, including me, around
What's the direction for Apple on the AI front? And how do we position ourselves at the Investment Institute and make sure that we're up to the task of analyzing this company and making sure that we have the best view that we possibly can, based on all the analysis that we can do. All right, so let's jump in for the business.
I think most people know Apple's business, right? It relies heavily on this, right? The phones, lots of people have an iPhone. Installed base in the billions. And so it's super important, they own and control this platform and have been really dominant since 2007. Right. And when the iPhone came out, and really it was the, you know, category killer.
And it certainly still collects a lot of the profits that come out of the smartphone business. And it's really about a way for them to distribute their services, which continues to grow even if the phones, you know, flatten out here and there, they still have a way to continue the App Store, of course. A huge marketplace that they own.
So these are and obviously the other hardware devices like the laptops, the M4 MacBooks, for example, which have done well, you know, the wearables, if you have the, you know, the, you know, AirPods, and certainly if you're doing the Apple Watch and so but, you know, it's all built around this ecosystem that starts with the phone and Apple getting you into their ecosystem and then selling you services, you know, having other apps and then them paying Apple as well.
Which is also, you know, a concern that, you know, that businesses has, going to get eaten into, from government regulation. And so that's something that we have to pay attention to. But overall, let's get some stats. That's generally how Apple makes its money. Right. And again I think everybody's familiar with that. But I do think you have to really think about that mix of businesses.
It's not just the hardware, it's the software. It's the services, and it's how they're all interconnected. And and Apple really has done a beautiful job of connecting all those pieces. They make that, you know, seamless for their consumers. And that's what consumers appreciate, right? A business is designed to, you know, bring value to customers. If you ask customers what value Apple brings to them, most people would say Apple brings a lot of value to them, right?
Their their phone keeps them in communication, you know, text and other, you know, other ways. Calls, if you really do an old school thing and you actually make a phone call, on your phone, you know, taking pictures, all these things provides lots of value to their consumers. It connects them to work. It connects them to their email.
It connects them, to their all their apps, including social media and otherwise, it connects them to, you know, their banking products, maybe lots of people, you know, if they're, you know, doing things that are mobile first, you know, they're only, doing things, maybe not only, but maybe the vast majority of times that they interact with some of these apps is not through a web application, it's through their phone.
And so Apple provides lots of value to their customers. And it's our job to think about, well, what value, you know, where does that value relative to where it was before and where do you think that value is going. So one of the things that's been eating away, though, at their value is their lack of really position in the AI market.
So when you talk about what's happening in the AI world, Apple's really been behind. So if you look at the large language models and certainly the one that took everybody by storm initially was ChatGPT, but now you have Anthropic, you have Grok, and now you have Gemini, as well. And so Apple's really nowhere in this equation.
And so this is something on the business side that we have to be concerned about. But let's let's check some of the numbers. All right. So if you talk about you know let's first just talk market cap. Apple is one of the largest market cap companies in the world. No longer the largest but very significant 3.4 trillion.
Again. This is about mid-August 2025. So an enormous company. All right. So let's get into the financials here. Now, to describe the business. All right. So what's the revenue? $408 billion is the last 12 months. And for the full year three, for 2024, they have a September 30th and, is their fiscal year 391. And you talk about the trailing 12 months, that's through June 28th, 2025, 408 billion.
Let's stick with the trailing 12 months. You're talking gross profit of 190 billion. That is a 46, almost 47% gross margin. Again, that puts Apple in the elite class for gross margins, especially when you consider that typically hardware companies don't, you know, have those high gross margins. But when you have the integrated hardware software ecosystem, services, you know, the blended rate is, you know, nearly 47.
That's very high. So let's look down, at the net income, you're talking $100 billion of net income trailing 12 months to June 28th, 2025. 26, almost 27% net margins now. And let's just do the free cash flow. And then we're going to go and as we talk about in other episodes, you got to make sure, like, you have some connection of where things are, where they've been.
And really where they're going. But you want to make sure that, okay, this is not a one off. These margins are not just a temporary thing, you know, and then obviously that helps you understand where they might go in the future. But free cash flow $96 billion. So this is an elite class. When you talk about trailing 12 months of almost 100 billion of free cash flow, now part of some of the criticism which we'll get into on the management side is they're not deploying this, for investments, especially not in the AI they do some small acquisitions, but no big headline ones.
You know, there's talk out there they should acquire perplexity. I don't think so. But they need to likely do something that is bigger and certainly to deploy more resources towards AI. All right. So 96 billion of free cash flow in the trailing 12 months. Let's go back and we'll talk 21, 22, 23, 24 on the revenue side, 365, 394, 383, 391 you know, you've had, you know, big growth in the beginning there, but then you flattened out and now, you know, for the projected growth for 2025 full year, this is through September, 6% and then 26, 2026, 5.5%.
So these are not huge numbers. And you kind of flattish. And when you look at, you know, the gross margins, over time from 21, 22, 23, 24, 41, 43, 44, 46, 46 so very good. And I actually had bumped up some projected 46 and 47, for the next, you know, full year, 25 through June.
That's sorry, September 30th and September 30th, 2026. So good. They're now looking at the net margins starting at 21, 25, 25, 25, 26, 26, 26, 26 so very consistent. So, you know, give them lots of credit for holding the line. You know, it's a huge business, achieving consistent, and growing net margins, consistent net margins and consistent and growing gross margins, not enormous growing and on the free cash flow side, starting at 21, you're talking 92 billion, 111, 99, 108, 96 and so you're still producing lots of free cash flow.
And if you look at, okay, what are the CapEx budgets? This is where they're getting some criticism and I would criticize as well, starting in 21, 11 billion, 10 billion, almost 11, just under 10, 12. This past 12 months, through June 30th, projected 12 and 15 for the full year, 25 and 26. Those are nowhere near the 50 plus billion dollars, tens of billions of dollars that other companies like Microsoft, like Meta, like Google, are deploying to really run the table in the AI game.
And that that's something that on the business side is a concern. So as analysts, as business people, as investors at the Investment Institute, being a large position, it's something that we think about a lot and something that our analysts, our students this fall really need to think about what's happening with Apple and why really, are they not deploying more resources in this AI arms race effectively and making sure that there's at the front of the table.
So that’s something that we should be really thinking about. All right. So let's move on to management. So Tim Cook has been the CEO since Steve Jobs passed away. Rest in peace. Great CEO of Apple. Founder co-founder Steve. You know, after Steve Jobs passed away, obviously, you know, people are super concerned. Tim Cook has been a printing press. Has been really fabulous CEO and, you know, you can say really fabulous things about him.
And he's done a fantastic job running Apple. I would say the only caveat is right now, what is the AI plan now? Apple is well known for not being the first. They were not the first smartphone, but they dominated the category, right. As an example. They weren't the first tablet, but then they dominate the category. So okay, you know, they have some history.
They're trying to get it right. But really, if you look at the products and if anybody used Siri lately, it's I think terrible is maybe the best way to describe it. These things are way behind. You can have full on conversations with ChatGPT, full on conversations with Grok, and have it quiz you as you questions go back and forth.
Siri has trouble, you know, telling you the time as an example. And so this is just obviously a small window into the larger problem that Apple is not dedicating the resources. And when you look at the CapEx budgets, you can you see it. It's not there. They're not deploying the tens of billions of dollars that other companies are doing, and they're absolutely falling behind.
Now, Apple on the management side, we talk about capital allocation. What can they do? They've been buying a lot of shares back which is great. They reduced the share count. That's fantastic. As investors. But and they're paying a dividend. So if you look at okay. Well what are the dividends about you know .45 right now.
Dividend yield. So not significant right. And many people don't own Apple for the you know for the dividend. But it's not terrible. You know you're getting some dividend and you're hoping to get some growth out of the company. Excuse me, but more concerning on the capital allocation side is they're buying lots of shares back and they're not investing in acquisition or in-house built AI.
Apple has all the talent in the world, right? They certainly. And they have access to that. Right. They know they're one of the, you know, old school Silicon Valley companies. They're right in the heart of that world. They certainly have the resources to figure this out. They certainly have fantastic management. Tim Cook really good, really great even. But this is something that is a big concern as again, one of our largest holdings in the portfolio, the Investment Institute, what's going on, we understand okay, they're going to be late to the game.
But you know when does late become too late? And certainly if you look at what's in their portfolio of products, that doesn't give you a lot of confidence as an analyst to say, well, next year, remember, we're concerned about what's going on and really, what do we think is going to happen a year or two years, three years from now?
Do you think if you ask yourself the question as an analyst, is Apple positioning itself? Is the management team positioning itself for the next 3 to 5 years, where I will continue to play a bigger role? When you see the numbers and the CapEx budgets that they're spending versus what Meta, Google, Microsoft are spending, it's not they're not even in the same ballpark.
They're not even in the same league. They need to really consider, you know, how they're going to do this. Now, maybe we're all waiting for this news. And this is something, that, you know, obviously, we need to pay attention to. And speaking of news, you know, they were recently out, and they got a deal done with, with the Trump administration around some relief on the tariffs.
They agreed to spend another 100 billion or invest another hundred billion, now, 600 billion, over the next three and a half years, into the US and getting manufacturing supply chains, across the US and really, you know, let's say frontier AI manufacturing in the US. And so this is something that's super important. Those are big numbers.
That's great. But how is that going to translate for Apple? That's something that we have to pay close attention to. Now those are big numbers. And those are, you know, something that we need to watch. And so that news is good news. From the standpoint of okay, Apple seems to be much more serious about that. But you know, how much of that is going to be the balance between trying to bring some of the the supply back, for the phones and other aspects of the components in 100% of the glass is going to be made by Corning, for example, in the US, in Kentucky, a lot of it, over, probably not over that much time in the short period there. And you make a lot of it anyway. And so how much of it's really going to be the high end stuff? That's the AI focus the AI piece, that Apple really needs the game, at least in my mind, some market share and really establish itself not just have ChatGPT but be integrated into their system.
But really, what chops does Apple itself have? What teams do they have in-house? What can they bring to bear? If you're going to be reliant on a third party, in this case or an outsource, you know, that you run the risk of they're going to win all the economics, for that and so on the management side, you know, we have to think about that.
So and we didn't give a score for the business, we can go back. You look at the stats for the business and then we'll score management as well. You look at the stats for the business. They're good. The thing that you were ding on the business are the growth numbers. And so when you look at revenue growing, you know, 6%, five and a half of the next couple of years.
Not great, obviously. Great. You know, gross and net margins for, for our business, great brand, all those things. Great. The revenue growth is an issue and the lack of an AI game issue connected to management. So getting the business right now, I would say a seven and a half, you know, now moving on to management management's also seven and a half also because the AI capital allocation game.
All right. So let's move on to the price valuation. So when you think about price valuation for this company you know it's not trading at some huge premium. And if you look at where the PE is the forward PE is 31. It's still trading at a premium to the S&P around 22, 23 times right now in the forward.
And, you know, some people would say, oh, even that's too expensive for where it is. But obviously Apple has a big brand. It has a big ecosystem. Lots of return buyers. Not, you know, terrifically ahead of, you know, where it's been, in the past. You know, if you look over the past ten years, it's certainly not, you know, supremely high, it's higher, though, if you look at the median 24 times for Apple.
And so that is a little bit of a concern, let's say on the, on the valuation side. But something that we need to watch probably give that, a seven, maybe a six and a half for that. All right. So valuation not, you know, not incredibly concern but certainly it's not cheap. Right. At the current valuation, 31 times.
All right. So now let's look at the balance sheet here. Net cash of 30 billion, 132 billion in cash in the trailing 12 months, and 100 billion of debt. They're managing that. So net net cash, 32 billion, generating 100 billion of free cash flow. This helps us sleep at night. And so no concerns here on the balance sheet.
The way that they're using the debt, that's actually gone down, if you look at what's happened, the cash was 190 in 2021 and then 170, 162, 156 now 132 and the debt was 136, 132, 123, 119 billion and 100 now and so but net cash 32 billion right now over time they've managed that really well.
They've been net cash over that time period. So really no concern and again generating 100 billion in free cash flow through this, you know, the last 12 months through September, projected for the full year, this year through September, to generate 111 billion in free cash flow. So no concerns there. Again, sleeping like babies at night with Apple's balance sheet.
So you can give that a nine and a half or a ten even if you like. So let's pull it all together though. If you're thinking about this again, maybe the business, is great in some aspects and everybody knows it, and they built a quality business. But really seven and a half right now because the concerns for growth in revenue, what's the AI play.
You know they can give those economics away. Moving on to management Tim Cook and company. Fabulous. They've been great. Been doing a great job. Capital allocation is where they get dinged. Not having a real AI game yet seven and a half. What's happening. You know they're bought a lot of shares back. Great. On the fundamental side, reducing share count, increasing our stake in the business without us doing anything that is fantastic.
However, some of that cash could have been used for acquisitions and they're doing small ones, but some bigger acquisitions in the AI game or a huge commitment internally to build their own teams, making Siri better. As an example, seven and a half their price valuation, you know, 30 times, you know, versus the historical median for them 24 times.
So certainly you're going to give them a six and a half, let's say they're not a huge concern. But not a distinguishing factor. You're not getting Apple cheap right now. And on the balance sheet nine and a half ten. So again, if you massage those scores, you know, overall, you're thinking more like, let's say, being very generous, a seven and a half overall.
And you know, because I would probably think the balance sheet, to get to there. And so that's not great a seven and a half and maybe it's 7.75, but it's certainly not a huge concern. But for our analysts, they're gonna need to watch that. The fall semester is coming fast. So they're going to be checking out that position.
Apple, again, a very large position. We've owned it since 2005 and it's been very good to us. Non-investment advice, but it's been very good to us. But you gotta figure out what's happening today, what you think's going to happen tomorrow and how this company is positioning itself accordingly. That's it for this episode, for Market News with Rodney Lake.
We'll see you back on the next one. Thank you.