Shares of Apple AAPL plummeted over 9% Thursday morning after the firm lowered its quarterly sales guidance for the first time in more than a decade Wednesday. Apple’s announcement during the vital holiday shopping period is hardly a good sign for investors already worried about slowing iPhone sales. So, let’s see what’s next for Apple.
Holiday Quarter Guidance
Apple CEO Tim Cook in a letter to investors late Wednesday afternoon revised the firm’s fiscal first quarter 2019—ended on December 29—revenue guidance to roughly $84 billion. This marked an approximately 6%, or $5 billion downturn from the low-end of Apple’s previous quarterly outlook that called for revenues between $89 billion and $93 billion. The move marked the first time in over 15 years that Apple lowered its quarterly guidance.
The iPhone giant’s chief executive pointed to a difference in iPhone launch timing, as well as a strong U.S. dollar and supply constraints, due to a massive number of new products, as some of the reasons for its lowered guidance. Yet, Cook said slower sales in emerging markets, such as Greater China, as well as fewer iPhone upgrades, were the two main reasons for Apple’s newly dimmed quarterly sales outlook.
Shares of Apple opened down 8.7% at $144.29 on Thursday, which marked their lowest level since April 2017. Meanwhile, Apple suppliers Micron MU, Lumentum Holdings LITE, and others saw their stock prices fall. Other tech giants, including Facebook FB, Alphabet GOOGL, and Microsoft MSFT also dipped in morning trading.
Cook said that the slowing Chinese economy and the impact of the continuous trade war between the world’s two largest economies led to poor sales. “While we anticipated some challenges in key emerging markets, we did not foresee the magnitude of the economic deceleration, particularly in Greater China,” Cook wrote.
“In fact, most of our revenue shortfall to our guidance, and over 100 percent of our year-over-year worldwide revenue decline, occurred in Greater China across iPhone, Mac and iPad.”
Apple’s CEO tried to put a positive long-term spin on the company’s prospects in China. Still, it is tough for investors to hear since the region accounted for roughly 18% of overall revenues in each of the last two quarters. The announcement also highlights how Apple’s high prices have held the company back in markets where a plethora of much cheaper smartphones are available.
Overall iPhone Sales
Lower than expected iPhone revenue, mostly in Greater China, accounts for “for all of our revenue shortfall to our guidance and for much more than our entire year-over-year revenue decline,” according to Cook. On top of that, iPhone upgrades were weaker than Apple anticipated in developed markets.
The company pointed to macroeconomic challenges in some markets, along with strong U.S. dollar-related price increases, and some customers taking advantage of lower iPhone battery replacement costs as the main factors for fewer upgrades.
Clearly, Apple investors have a lot to worry about. But price-based concerns in markets such as China and India have been around for a while. And Apple practically told everyone last quarter that iPhone growth was over for the foreseeable future when it said it would no longer breakdown unit sales.
With that said, Apple’s non-iPhone business grew by almost 19% year-over-year. This included all-time record Services, Wearables, and Mac revenues. Going forward, these segments could continue to drive growth since they have less exposure in emerging markets.
Plus, Apple’s services business, which features Apple Music, is related to the size of the firm’s total installed base. Cook said that Apple’s installed base of active devices grew by more than 100 million units in 12 months to hit a new all-time high. The company’s Services business pulled in over $10.8 billion in quarterly revenues. This would mark roughly 27% growth from the year-ago period’s $8.47 billion, though Apple’s actual quarterly results may change.
On top of that, Apple’s less-talked-about Other Products unit—AirPods, Apple TV, Apple Watch, Beats products—performed well, with wearables sales up almost 50% in the quarter.
Apple has known for some time now that it would face slowing iPhone unit growth overall. Therefore, it seems that investors might be the most nervous about Apple’s inability to expand in China and India.
Looking ahead, our current Zacks Consensus Estimate calls for Apple’s fiscal 2019 revenues to jump 4.4% to reach $277.17 billion. But clearly this projection could come down after Apple’s lowered Q1 guidance. With that said, we should note that Apple expects to report all-time record quarterly earnings per share results.
In the end, Apple has become a victim of its own success, with large top-line revenue gains harder to achieve based on its size. Yet, Apple’s Services business, which fights against the likes of Spotify SPOT and others, looks poised to expand. Plus, Apple is projected to launch a streaming TV service to challenge Netflix NFLX, Amazon AMZN, Disney DIS, and AT&T T.
Apple could also easily jump into other new growth industries and introduce a gaming-changing product. But it is hard to tell what will happen with AAPL stock in the near-term. Therefore, the question is will 2018 and the start of 2019 become a minor slip—which has happened before—or the start of something much worse for the tech powerhouse.
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