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Apple earnings top expectations but sales drop in China, iPhone sales weighs on stock

·5 min read

Apple (AAPL) reported fiscal fourth-quarter earnings after market close on Thursday that topped expectations, with sales from the company’s services offerings and Mac computers hitting quarterly records. However, shares traded lower by more than 3% immediately following the report, as investors focused on a worse-than-expected drop in iPhone sales during the third quarter, and a steep decline in sales in China.

The results came just weeks following Apple’s highly anticipated unveiling of its 5G-enabled smartphone, putting additional emphasis on the company’s outlook for the current quarter and next year. The iPhone 12 and iPhone 12 Pro were not included in fourth-quarter results, as the new products were introduced after the end of the fourth quarter this year.

Here were the main results from Apple’s report, based on consensus estimates compiled by Bloomberg:

  • Q4 revenue: $64.70 billion vs. $63.47 billion expected and $64.04 billion year-over-year

  • Q4 earnings per share: 73 cents vs. 70 cents and 76 cents year-over-year

Revenue from Apple’s service offerings like Apple News, Apple TV+ and iCloud have comprised a growing portion of the company’s overall sales and hit a quarterly record during the three months ending in September. Services revenue grew to an estimates-topping $14.55 billion, from $13.16 billion in the third quarter and $12.5 billion in the fourth quarter of last year.

Mac sales also rose to a quarterly record as demand for new computers increased during the pandemic. These sales came in at $9.03 billion to handily top estimates for $8.04 billion. Wearables revenue also grew over last year and last quarter, after the company launched new versions of the Apple Watch in September. Wearables and home accessories sales totaled $7.88 billion, topping estimates for $7.35 billion.

Revenue from the iPhone, however, came in lower during the fourth quarter this year than in the same period in 2019, with customers having waited for the next generation of iPhone devices to get released. Sales dropped nearly 21% to $26.44 billion, missing expectations for $27.06 billion.

The company also posted a 29% drop in Greater China sales to $7.95 billion, comprising just 12% of Apple’s overall sales. In the same period last year, sales out of Greater China accounted for more than 17% of company-wide revenue.

[Also read: Earnings results from Alphabet, Facebook and Amazon.]

Apple unveiled the iPhone 12 and iPhone 12 Pro — the first suite of 5G-enabled handsets from the company so far — at an event earlier in October, or about one month later than it typically releases its new phones each year due to disruptions from the pandemic.

“For investors the September quarter takes a back seat to the main event which is around gauging the demand growth trajectory for iPhone 12 into the holiday quarter and the rest of 2021,” WedBush Securities analyst Dan Ives, who rates Apple’s stock as Outperform, wrote in a note ahead of results. “We expect some directional commentary from Cook around pre-order demand from iPhone 12 which based on our analysis thus far is tracking more than 2x its predecessor iPhone 11, a bullish sign coming out of the gates.”

Apple has declined to give firm guidance since spring this year due to uncertainty around the coronavirus pandemic, which resulted in store closures for the company. Still, the timing of the iPhone 12 launch just ahead of the holiday shopping season has left some analysts relatively bullish on the sales trajectory for the new handsets.

Ives added that he believes about 350 million of the estimated 950 million iPhone installed worldwide are currently in the “window of an upgrade opportunity,” leading to what may be an “unprecedented” round of iPhone-buying this year for the tech company.

SHANGHAI, CHINA - OCTOBER 26, 2020 - Customers lined up in the apple store to buy the 5g version of the iPhone 12. Shanghai, China, October 26, 2020.- PHOTOGRAPH BY Costfoto / Barcroft Studios / Future Publishing (Photo credit should read Costfoto/Barcroft Media via Getty Images)
SHANGHAI, CHINA - OCTOBER 26, 2020 - Customers lined up in the apple store to buy the 5g version of the iPhone 12. Shanghai, China, October 26, 2020.- PHOTOGRAPH BY Costfoto / Barcroft Studios / Future Publishing (Photo credit should read Costfoto/Barcroft Media via Getty Images)

Promotional activity has also been more aggressive around the iPhone 12 than in previous cycles, likely as a bid to boost sales during the pandemic. Carriers including AT&T, T-Mobile and Verizon (the parent company of Yahoo Finance) have each offered a number of trade-in credits to incentivize customers to make the switch to the new handset.

In terms of Apple’s stock, Wall Street may stay on the sidelines to gauge the success of the iPhone 12 launch until early next year, when more data becomes available on its debut. That could serve as a near-term drag on stock appreciation, according to at least one analyst.

“Coupled with an elevated valuation, we believe the shares are likely to remain range-bound until investors gain clarity on the initial success of the iPhone 12 launch,” UBS analyst David Vogt, who rates Apple shares as Neutral, said in a note Tuesday. “Although incremental data points are expected through the end of 2020, we believe investors typically reserve judgment on the success until the company reports December results in late January/early February 2021.”

Shares of Apple have risen 57% year-to-date through Thursday’s close, outperforming the S&P 500’s just 2.5% gain.

This post will be updated with Apple’s fiscal fourth-quarter results after market close on Thursday.

Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck

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