Apple’s ‘free-rider’ Status Isn’t Changing Anytime Soon

The post Apple’s ‘Free-Rider’ Status Isn’t Changing Anytime Soon appeared first on 24/7 Wall St..

Earnings from Apple (NASDAQ:AAPL) and Alphabet (NASDAQ:GOOGL) came a week apart, and AI now pays off differently for each. Alphabet spent $51.36B on capex in Q3 and ended with negative free cash flow. Apple held John Ternus’s first call as CEO. It posted a September-quarter revenue record of $114.5 billion and launched Siri AI without building its own data centers at hyperscale.

iPhone Duo Pulls Buyers While Cloud Drains Alphabet’s Cash

iPhone revenue reached $57.6 billion, up 17%, and the foldable iPhone Duo is still supply constrained. Demand is ahead of supply. Services set an all-time record of $31.6 billion, up 10%, supported by more than 2.5 billion active devices. Ternus called the iPhone “the intelligent personal hub”, and he means it as a strategic claim. Apple owns the device that holds your personal context.

Alphabet’s growth looks stronger on paper. Google Cloud revenue rose 103% to $30.71B. Sundar Pichai pointed to “strong demand for our TPU systems across a wide range of customers.” The cost shows up elsewhere: capex rose 114.4%, free cash flow came in at negative $9.07B, and Alphabet raised $28.7 billion in senior notes. Alphabet is borrowing money to fund that growth.

That expansion still has to be powered, cooled, and networked by somebody, which is the whole point of a free report we put together on seven AI infrastructure suppliers that aren’t chipmakers: you can grab it here.

Apple Rents the Brains While Alphabet Builds the Factory

Apple uses Google’s Gemini and other partners’ models for AI capability instead of building its own compute at hyperscale (capital-light AI strategy). That gives Apple leverage. Hyperscalers need Apple’s installed base far more than Apple needs any single model provider (hyperscalers desperately need Apple). Alphabet’s Search business depends on that kind of distribution.

Apple still pays a price for this approach. December-quarter gross margin guidance of 45% to 46% reflects higher memory costs and the Siri AI ramp. Operating expenses are expected to grow 11% to 13%, mostly on AI R&D. Apple pays for AI as an operating cost. Alphabet pays for it up front as capital spending.

Memory Costs and Siri AI Usage Will Test the Model

I will be watching whether price increases hurt iPhone Duo demand. Management said it is too early to assess price elasticity. Server-side Siri AI costs flow through services cost of sales. If heavy usage drives those costs up, Services margins will show it first. For Alphabet, you should watch whether Cloud profit keeps growing faster than debt and dilution from its share sales.

Why I Prefer Apple’s Leverage Despite the Higher Price

I find Apple’s position more durable. It gets the benefits of AI without the debt Alphabet is taking on to fund its expansion. Investors are paying for that safety. Apple trades at a P/E of 43, compared with 13 for Alphabet. Apple shares are up 22.42% year to date, while Alphabet is down 10.36%. Alphabet’s case depends on TPU demand justifying the spending. My view would shift if Apple’s margins keep shrinking in the quarters after December.

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