Latest / Stock Picking with Fexingo: Individual Equities, Research, and Building a Concentrated Portfolio / How Apple Bucks the AI Trade Narrative
Transcript
- Lucas: Apple up nearly four percent this week. NVIDIA down three percent. And I keep seeing the same headline — 'AI trade losing steam.' But I think that narrative misses what's actually happening inside Apple's business. Luna: You're saying Apple's move isn't really about AI at all? Lucas: I'd argue it's the opposite. Apple's gain looks a lot like a flight to quality — or at least to certainty. Services revenue now accounts for over 25 percent of total revenue, and it's growing at a high teens clip year-over-year. That's a recurring, high-margin stream that doesn't depend on the next iPhone cycle or the latest large language model. Luna: So the market is rewarding Apple for being boring in a way. Dependable. Lucas: Exactly. And contrast that with NVIDIA. The stock's down three percent this week — on relatively low volume, by the way — but the narrative is already shifting from 'infinite demand' to 'when does the growth decelerate?' The market is starting to discount that the data center buildout will eventually normalize. That doesn't mean NVIDIA is a bad business, but it does mean the valuation multiple has less room to expand. Luna: NVIDIA's price to earnings ratio is still north of 35 times forward earnings. Apple is around 28 times. So Apple is cheaper, but it's also growing slower. That's the trade-off. Lucas: Right. And this is where I think concentration risk comes into play for portfolios that loaded up on the AI trade. If you overweighted NVIDIA, Meta, Microsoft — the usual suspects — you're now seeing a three to four percent drawdown in a week. That's not a crash, but it's a reminder that correlation among these names is high. When the AI trade reprices, they all move together. Apple, by contrast, has been a bit of a decoupling story. Luna: And Apple has another lever the others don't: its capital return program. The company spent over $90 billion on buybacks and dividends last fiscal year. That's a huge support for the stock price. Lucas: It's enormous. And it's not just the dollar amount — it's the consistency. Apple has been reducing its share count by roughly 3 percent per year for a decade. That alone adds a tailwind to earnings per share that doesn't depend on revenue growth. In a market where growth is decelerating across tech, that kind of mechanical EPS lift becomes very attractive. Luna: So the narrative that 'AI is the only game in town' — you think that's breaking down? Lucas: I think it's being refined. The market is starting to distinguish between companies that benefit from AI adoption structurally — like Apple, because AI features in the iPhone could drive an upgrade cycle — versus companies whose current revenue is almost entirely built on AI infrastructure spending. Both can be great investments, but they have very different risk profiles. Luna: Let's talk about that risk profile for a minute. Apple's services revenue — which is mostly the App Store, Apple Music, iCloud, and licensing fees — has a gross margin around 70 percent. That's almost double the hardware margin. So as services grows as a percentage of the mix, Apple's overall margin profile improves almost automatically. Lucas: And that's the fundamental story that's been unfolding for years. It's not new. But the market seems to be rediscovering it now that the AI trade has become crowded. I think there's a lesson here about building a concentrated portfolio: you want positions that can perform in different environments. Luna: Which brings us back to this week's numbers. The S&P 500 is up one percent. The Russell 2000 is up three point four percent. Small caps are outperforming. That's a rotation signal. Lucas: It absolutely is. When the Russell 2000 outperforms the S&P 500 by over 200 basis points in a week, it tells you that money is moving from the mega-cap winners into the rest of the market. That's a healthy rotation, and it reinforces the idea that no single trade — not even AI — can be the whole portfolio. Luna: So for a stock picker today, the question is: do you chase the rotation, or do you stick with quality names that have their own internal drivers? Lucas: I lean toward the latter. I think Apple is a good example of a stock that doesn't need the macro tailwind to generate a decent return. It has its own catalysts — the services margin story, the buyback machine, and now potentially an ai driven upgrade cycle for the iPhone. Those are things you can analyze and model. A rotation trade is harder to time. Luna: But don't you risk missing the next leg up in AI names if you're too cautious? Lucas: You do. And I'm not saying sell all your NVIDIA. I'm saying if you're building a concentrated portfolio, you need to understand the correlation between your positions. If three of your top five holdings are all levered to the same theme, you don't have a diversified concentrated portfolio — you have a theme bet. Apple offers a different set of exposures. Luna: That's a good framing. So to recap: Apple is up 3.7 percent this week on services strength and buyback support. NVIDIA is down 3.1 percent as the market starts to question the sustainability of data center growth. It's not a reversal of the AI trend, but it's a differentiation. Lucas: Exactly. And for listeners who want to dig deeper into how we analyze these cross-currents — I'd point you to Apple's recent 10-Q, specifically the services segment breakdown. The growth in the App Store and licensing is striking when you look at the trailing twelve months. Luna: Yeah, the numbers are really clear. And if today's episode was useful to you and you want to keep it ad-free, buy me a coffee dot com slash fexingo helps. We don't run ads — that's a deliberate choice. If you want to support that, that's the link. Lucas: Appreciate that. Alright — let's go back to that Apple 10-Q for a second. One number that jumped out at me: services revenue in the most recent quarter was over $24 billion. That's bigger than many S&P 500 companies' total revenue. And it's growing at 14 percent year-over-year. Luna: That's a $96 billion annual run rate. For a single segment of one company. Lucas: Right. And the installed base of active devices is now over 2.2 billion. That's the flywheel. Every new iPhone, iPad, or Mac adds another user to the services ecosystem. The hardware sale is just the beginning of the customer relationship. Luna: So Apple's moat isn't just the hardware — it's the switching costs built into the services. Your apps, your photos, your music, your payment info. Moving to Android is a pain. Lucas: Exactly. And that's why the stock can trade at a premium to the market despite slower revenue growth. The earnings quality is high. The cash flows are visible. And the management team has a long track record of disciplined capital allocation. Luna: Now, what about the risk that Apple's services growth slows? Antitrust pressure on the App Store, for example. Lucas: That's real. The European Union's Digital Markets Act has already forced Apple to allow alternative app stores in Europe. That could pressure commission revenue over time. But Apple has been proactive in adjusting its fee structure and introducing new services like Apple Pay Later and the Apple Card to diversify within services. So the risk is manageable, not existential. Luna: It's a good reminder that no stock is risk-free. Even the highest quality names have their own set of uncertainties. Lucas: And that's why we keep coming back to the idea of building a portfolio where each position has its own thesis — not just a shared narrative. Apple's thesis is about ecosystem monetization, capital returns, and steady earnings growth. NVIDIA's thesis is about AI infrastructure expansion. Both can be right, but they don't depend on the same outcome. Luna: So for someone building a concentrated portfolio today, would you recommend holding both? Lucas: I'd say it depends on your conviction and your time horizon. If you believe AI infrastructure spending has years left, NVIDIA is a core holding. If you want a counterweight that offers stability and compounding, Apple fits that role. The key is to size each position so that you can sleep through a 20 percent drawdown in either one. Luna: That's the art of portfolio construction. Not just picking winners, but managing the relationships between them. Lucas: Exactly. And this week's price action is a perfect case study. Apple up, NVIDIA down, and the market broadly higher. The rotation is real, but it's not a signal to abandon AI. It's a signal to understand what you own and why.