Apple investors brace for more bad news in latest results
Analysts say iPhone woes and struggles in China are likely to last
Apple investors are braced for more bad news when the tech giant reports its latest results on Tuesday, with analysts warning that the abrupt drop-off in iPhone sales at the end of last year could continue throughout 2019.
Shares in Apple plunged in early January when chief executive Tim Cook said that revenues in the three months to December, typically its most lucrative quarter, were likely to fall by as much as 5 per cent. Wall Street, which had previously anticipated growth of up to 5 per cent, wiped tens of billions of dollars from Apple’s market value within days.
The stock has subsequently recovered almost all of those losses. Yet many analysts remain concerned that Apple’s iPhone woes were not confined to the previous quarter and that its struggles in China go beyond macroeconomic conditions.
“This isn’t a one-off thing. I think this is a potentially year-long problem, if not longer,” said Ben Bajarin, analyst at Creative Strategies. “We don’t know where the bottom is yet [for iPhone sales].”
While Apple has already detailed the problems in its fiscal first quarter, Tuesday’s earnings report will be the first time it has provided any guidance on the rest of the year.
“We think the Street has not fully factored in the repercussions of the miss into [fiscal 2019] estimates,” said Gene Munster, a former Apple analyst turned investor with Loup Ventures. Mr Munster forecasts a 5 per cent decline in overall revenues for the year ending in September, compared with Wall Street’s estimates of about 2 per cent.
Analysts at Morgan Stanley, however, maintain that Apple’s share price already reflects an “extremely cautious” outlook for iPhone sales. The stock could rise further if Apple guides to March-quarter revenues of more than $58bn, Morgan Stanley said in a note to clients on Friday.
The current quarter includes the Chinese new year in early February, traditionally a strong driver of iPhone sales, which will test Mr Cook’s insistence that Apple has a “bright future” in China, despite blaming economic uncertainty there for its revenue shortfall.
Figures from research firm Strategy Analytics released on Friday point to competitive pressures also playing a role in Apple’s drop-off in China. Huawei increased its market share in China during the fourth quarter from 20 per cent a year ago to 27.8 per cent, while Apple saw its share decline from 11.5 per cent to 10.1 per cent. Local rivals Oppo and Vivo also increased their market share.
“Apple iPhone [unit shipments have] now fallen on a year-over-year basis in China for eight of the past 12 quarters,” said Linda Sui, director at Strategy Analytics. “Apple is in danger of pricing the iPhone out of China.”
Tuesday’s results will also be the first to be released under Apple’s new financial reporting regime. The decision to stop revealing iPhone unit sales, announced in November, had already prompted a backlash from some on Wall Street who thought that the lack of disclosures foreshadowed a deteriorating performance for Apple’s flagship product.
However, Apple has also said that it will increase disclosure in other areas, such as providing profit margin details for the first time for its online Services division, which includes iCloud, Apple Music and the App Store.
Mr Munster predicts that Apple will report a 65 per cent gross margin for Services, compared with 27 per cent for its hardware products.
Mr Cook has talked about providing new ways to incentivise existing iPhone owners to upgrade sooner, for instance by providing a larger credit for trading in their old handset.
But Mr Bajarin believes that can only have a limited impact as new smartphone features become more incremental, causing customers to hold on to their existing device for longer.
“The reality is many consumers are quite content with the iPhone they have and they will only get a new one when it breaks or slows down.
“Apple just has to wait that out,” he said. “If [replacement] life cycles are delaying, you can see it being at least a year if not multiple-year stalemate.”