Are the iPhone’s best days in China behind it?

That was the big question going into Apple’s quarterly earnings call on Thursday. By the time the call concluded, Apple’s stock price was up more than 6%, and CEO Tim Cook had repeatedly enthused about his “great view” on Apple’s business in China.

But despite Wall Street’s positive reaction to Apple’s results (helped by a massive stock buyback announcement), questions about the iPhone’s standing in China may only have become more complicated in the wake of the latest earnings. The company’s surprisingly better-than-expected results in China, and the disparity from what several prominent independent research firms had predicted, reveals a disconnect involving one of the most important pillars of the $2.8 trillion company’s business.

Greater China, which includes mainland China, Hong Kong, and Taiwan, is Apple’s third largest region by revenue, representing 19% of Apple’s total sales during the 2023 fiscal year.

Get AfriPrime Android Web View app....Click the link to Amazon app store to download https://rb.gy/3xek46

As tensions between the U.S. and China have increased over the past year, demand for American tech products, including iPhones, has fallen among Chinese consumers. Meanwhile, Chinese tech companies like Huawei are making headway on new smartphones and guzzling the market share Apple is losing. The Chinese government has supported this shift toward domestic technology, last year ordering state officials to stop using non-Chinese phones for work.

Apple’s revenue in the region has declined on a year-over-year basis in five out of the six most recent quarters, and all signs pointed to more pain in the first three months of 2024.

In the beginning of the year, Apple’s weekly shipments into China declined by 30% to 40% year over year on a weekly basis, according to Ming-Chi Kuo, a renowned TF International Securities analyst known for his accurate insights into Apple’s business.

“This downward trend is expected to continue,” he wrote in a January blog post. “Apple may have the most significant decline among the major global mobile phone brands in 2024,” he said.

For the quarter, market research firm Counterpoint estimated Apple’s iPhone sales in China were down 19% from the same time last year.

It turns out that Apple sales in Greater China did indeed decline in the first three months of the year, coming in 8% below levels a year ago. But that decline was far less severe than Wall Street had been bracing for: Compared with the 13% decline in the fourth quarter of 2023, it was actually an improvement. Sales of iPhone, Apple said, actually increased in mainland China during the quarter (though it didn’t specify if the increase was from the previous quarter, or the previous year).

The surprise was enough to prompt multiple questions from analysts during their call with Apple executives. As one analyst on the call bluntly put it: “What are we missing?”

To that, CEO Tim Cook wouldn’t give an answer, saying he couldn’t address numbers that Apple didn’t produce. “I can only address what our results are,” Cook said. “I can’t bridge to numbers we didn’t come up with.”

Cook said that the iPhone 15 and 15 Pro Max were the two bestselling phones in “urban China” during the quarter, and he recounted the “warm and energetic” reception he received from consumers in Shanghai when he visited and opened a new store in March.

Get AfriPrime Android Web View app....Click the link to Amazon app store to download https://rb.gy/3xek46

What’s really going on inside China

It isn’t immediately clear why Apple’s numbers aren’t more closely aligned with the independent research.

Between quarterly earnings reports, Wall Street analysts rely on independently collected data to gauge how a company’s business is faring. These research reports can include anything from supply-chain information to retail store inventory levels, gleaned from both official sources and leaks from insider contacts. While this data can’t tell the full story, it does give analysts a strong impression of what’s going on.

But the disparity between the third-party research reports and Apple’s report in Q1 left many investors and observers scratching their heads.

Apple reports revenue for China, while many industry analysts look at unit shipments, creating some room for divergence if prices change. Cook’s comments about the newer iPhone 15 models, including the 15 Pro Max, being top sellers in urban China suggests that the company may have benefited from higher prices even if overall units were down more sharply.

Will Wong, an analyst at IDC, which had projected a 10% unit decline in China iPhone sales, told Bloomberg that different methods of measuring pricing may have prompted some of the confusion.

“IDC counted the street prices (i.e., the prices that consumers paid), while Apple is likely using another price level, such as factory price, in its financial report,” Wong was quoted as saying.

Following the earnings call with Apple executives, many of Wall Street’s equity research analysts appear to have sided with Apple’s version of the story. Analysts have largely revised their models to reflect a more favorable China business, according to their research notes published on Friday. Bank of America analysts called the China concerns “unfounded,” while analysts from investment firm Wedbush said they expect to see China sales turn a corner by June and show growth by September.

​​“The worst is now behind Apple in China,” Wedbush analysts wrote.

Apple’s overall revenue declined 4.3% to $90.8 billion during the quarter, which is better than analysts expected. Apple also beat earnings per share predictions, meeting last year’s number at $1.53. Executives announced its largest stock buyback of $110 billion, an increase from the $80 billion to $90 billion repurchase Apple has offered in recent years.

But some analysts remain cautious. While the independent research reports may not have aligned with Apple’s results in China, UBS analysts noted that the iPhone clearly appears to have lost market share in China.

Get AfriPrime Android Web View app....Click the link to Amazon app store to download https://rb.gy/3xek46

“Peak China units of 50M in FY 22 is also not likely to be repeated given 300-500 [basis points] of share loss in that region,” UBS analyst David Vogt wrote in a note to investors on Friday, stressing that Apple is not “in the clear yet.”

UBS, which has a neutral rating on Apple, doesn’t expect the company to sell many more iPhone 16 devices, which are expected to premiere in September, than iPhone 15s. This sentiment is partly because of lost market share in China, the firm said.

And even as Cook talked up China during Thursday’s call, the company also appeared to be laying the groundwork for a future where China was less vital to its business. CFO Luca Maestri noted that other “emerging markets” like India, Saudi Arabia, Mexico, Turkey, and Indonesia were getting larger and in aggregate nearing the size of China.

“The gap as you compare it to China is reducing, and hopefully that trajectory continues for a long time,” Maestri said.

The next iPhone will probably feature AI — but Tim Cook still keeps us guessing

• Tim Cook has said major AI announcements are coming.

• Analysts are hoping Apple's AI strategy can boost slumping iPhone sales.

• Wedbush's Dan Ives said Apple's AI efforts are set to drive a "supercycle" starting with the iPhone 16.

Tim Cook is still keeping his cards close to his chest when it comes to AI.

Analysts pushed the Apple CEO to talk about its upcoming generative AI announcements on Thursday's earnings call — with very little success.

Cook continued to keep a tight lid on all things AI, merely teasing big AI announcements in the "coming weeks." It's a standard play from the CEO, who has been hesitant to publicly discuss Apple's AI development.

Cook reiterated that the iPhone maker was "well positioned," saying there were "big opportunities" across Apple products for generative AI.

The remarks — and slightly better-than-expected numbers — appeared to reassure investors, with the stock climbing 6% premarket. A $110 billion share buyback also helped.

Wedbush analyst Dan Ives described the earnings call as a "drumroll moment," adding Apple looked set to unveil its long-awaited AI strategy at its Worldwide Developers Conference in June. Cook has previously promised to share details of the company's AI work later this year.

Ives said Apple's AI efforts were set to drive a "supercycle starting with iPhone 16 this fall."

Get AfriPrime Android Web View app....Click the link to Amazon app store to download https://rb.gy/3xek46

iPhone issues

Apple needs to ride the generative AI wave.

It's had a rough year, struggling in China, been slapped with a massive fine, and is facing a lawsuit.

Now, despite beating Wall Street's pessimistic estimates, sales of its flagship product are declining. iPhone sales slumped by 10% in the past three months, with the company facing increasingly tough competition in key markets like China.

Investors are hoping that new generative AI features for its products can boost Apple's slumping smartphone sales.

Analysts have been scrambling for updates on Apple's AI progress for months, with some concerned that it's moved more slowly and fallen behind its Big Tech rivals.

In March, Brian Mulberry, a portfolio manager at Apple shareholder Zacks Investment Management, told The Wall Street Journal the company hadn't really made a "big splash in the AI space yet."

A month later, Apple's reported dismantling of two projects and teams only served to fuel concerns that the company had lost focus and was slipping behind rivals in critical areas.

Other Big Tech companies, including Google, Meta, and Microsoft, put AI front and center during recent earnings calls. For Google and Microsoft, investors cheered AI progress despite high spending on infrastructure.

The news of an upcoming announcement on Apple's progress is likely to bolster investor confidence.

Last month, a Bloomberg report that Apple was working on revamping its Mac lineup with new processors that forefront AI gave the stock a boost.

Representatives for Apple did not immediately respond to a request for comment from Business Insider, made outside normal working hours.

Apple sales fall in nearly all countries

Apple sales have fallen in almost every market across the globe, according to the latest results from the tech giant.

The company said that demand for its smartphones dropped by more than 10% in the first three months of this year, while overall sales fell in every geographic region except for Europe.

Get AfriPrime Android Web View app....Click the link to Amazon app store to download https://rb.gy/3xek46

Apple said that overall, revenues across the company declined by 4% to $90.8bn (£72.5bn), which was the biggest drop for more than a year.

Nevertheless, the results were not as bad as expected and Apple's share price rose in after-hours trading in New York.

The company said the figures were distorted by Covid-related supply disruptions, which led to unusually strong sales during the same period last year.

It said it expected sales to return to growth in the months ahead, noting upcoming product launches and investments in artificial intelligence (AI).

Overall sales in the critical greater China market dropped by 8%. Mr Cook attempted to reassure investors about the state of the business in the world's second largest economy, noting that iPhone sales were actually up in "mainland" China.

"I maintain a great view of China in the long term," he said.

Competition in that market has been intensifying from local rivals such Huawei.

Gil Luria, senior software analyst at DA Davidson, said companies such as Huawei do well in China because "it is the homegrown brand".

"But in terms of features, functionality and prestige, iPhone still has an advantage over any other handset," he told the BBC's Today programme.

"So any time consumers get the choice and have the resources they’re going to buy an iPhone – that’s not any different in China."

Struggles at the company - which has endured a streak of sales declines for five of the last six quarters - marked a contrast with the wider market.

Globally, smartphone shipments rose 10% in the first three months of the year, expanding after a long lacklustre period, according to research firm Canalys.

Mr Luria said that for Apple, there hasn't been "significant improvements to the handset" since the iPhone 12 was launched almost four years ago "when Apple introduced 5G connectivity which compelled a lot of consumers to upgrade the phone".

He added: "What they’re hoping for now is that they can introduce enough new AI features into the iPhone 16 which will come out later this year in order to finally drive a big iPhone upgrade cycle.”

Get AfriPrime Android Web View app....Click the link to Amazon app store to download https://rb.gy/3xek46

Apple is also facing legal battles with regulators in the US and Europe over its app store fees.

A separate anti-monopoly lawsuit in the US against Google threatens the lucrative payments Apple receives from the search giant in exchange for making Google the default search engine on Safari, Apple's internet browser.

According to court filings, those payments amounted to about $20bn in 2022, a sum that helped lift Apple profits.

Pre-tax profit for the three months was flat at $28bn and the company announced that it was setting aside $110bn to buy back shares.

Finance chief Luca Maestri said Apple sales were expected to rise in the "low single digits" in the three months to June.

He added that the firm expected double digit growth in its services business, offering more guidance than the company typically provides.

Looking ahead, Angelo Zino, senior equity analyst at CFRA Research, said: "China is holding up better than expected and there are a host of upcoming events/catalysts on the horizon that could improve investor sentiment."

Analysis-Apple has big AI ambitions - at a lower cost than its rivals

For most of the past year and a half, Apple Chief Executive Tim Cook has fielded questions from Wall Street analysts about his plans for artificial intelligence amid grumbling that the iPhone maker has no AI story to tell.

After the company reported quarterly earnings on Thursday, Cook insisted that Apple will have concrete details about its plans for AI to talk about very soon.

"We continue to feel very bullish about our opportunity in generative AI and we're making significant investments," Cook told Reuters in an interview, noting the company has spent $100 billion over the past five years on research and development.

Apple's Big Tech rivals have spent comparable or even greater amounts on R&D over the same period, but they have also been spending heavily to build data centers to host AI services.

Microsoft shelled out $14 billion in the most recent quarter on capex, with Alphabet's Google not far behind, at $12 billion. Meta Platforms told investors last week to expect as much as $40 billion in capital expenditures this year.

Apple thinks different. Its capital expenditure for all of 2023 was just over $10 billion.

Apple, which makes most of its money selling consumer devices, has paid a price for that stance most of this year, with its shares falling 10% as investors worried the company was falling behind in the AI race.

On Friday, Apple share rose 6.4%, recovering some of their recent losses.

Shares of Meta, Google and Microsoft - all of which make money selling software or advertising services - have all soared to record highs as the companies grapple to dominate the emerging AI landscape, though investors have also flinched at skyrocketing price tags for data centers and specialized processors required to train AI models.

Get AfriPrime Android Web View app....Click the link to Amazon app store to download https://rb.gy/3xek46

Apple hinted Thursday it won't take the same tack. While Apple is expected to unveil new AI features at its annual software conference next month and overhaul its product lines with AI-ready chips, Chief Financial Officer Luca Maestri said Apple investors should not expect a huge change in how the company handles capital expenditures.

Responding to an analyst's question, Maestri noted the company's longstanding practice of splitting the cost of manufacturing tools with its suppliers, which has kept Apple's costs down and its cash generation up for more than a decade.

"We do something similar on the data center side," Maestri said. "We have our own data center capacity, and then we use capacity from third parties. It's a model that has worked well for us historically, and we plan to continue along the same lines going forward."

That could be just as well for Apple, because it remains unclear whether AI features such as chatbots that run directly on a device will spur users to buy new phones, tablets or laptops, which remain Apple's biggest source of revenue and profits.

Ben Bajarin of Creative Strategies said that while better processors could serve as a "line in the sand" for some users who need AI tools for professional use, those features may not ignite a sales boom.

"It'll be something that helps lift sales, but I don't expect it to be super cycle," Bajarin said. "You have to be careful to temper expectations."

Why Apple Stock Jumped on Friday

Apple (NASDAQ: AAPL) stock popped in early trading on Friday, helping lift the entire market higher as well. The tech giant accounts for an outsized portion of the broader earnings of the S&P 500, making it among the most closely watched companies when earnings season rolls around. It also helps that the iPhone maker's market capitalization sits near $3 trillion.

Apple didn't disappoint investors with its late-Thursday earnings update. While sales declined, the slump was modest. And CEO Tim Cook and his team had some good news for investors to offset that sales weakness.

Declining sales

Revenue landed at $91 billion, down from $95 billion a year ago. The iPhone business was the main reason for this drop, as consumers were cautious in their upgrade commitments following the launch of the iPhone 15. Apple collected $46 billion from iPhone sales this quarter, down from $51 billion a year ago.

There was plenty of good news for investors, though, both around Apple's finances and in its non-iPhone businesses. The company's cash flow generation remained high at $63 billion over the past six months. Profit margin is rising, too. And the company committed to a much higher level of cash returns. Apple raised its dividend by 4% while describing a massive new stock buyback program that was nearly double its previous target.

Apple's services segment is expanding, too, helping offset much of the weakness in the iPhone unit.

New launches ahead

Investors won't have to wait long to receive further big updates from the tech stock leader. Apple is planning a new product announcement next week, executives said this week, and will likely detail its services growth plans during next month's developer's conference.

Still, the short-term outlook is modest for Apple achieving growth this year, as demand is soft for consumer tech products in key markets like the U.S. and China. The company can help offset that weakness with more service sales, but a big growth acceleration will depend on Apple launching new products that resonate with its massive customer base.

Get AfriPrime Android Web View app....Click the link to Amazon app store to download https://rb.gy/3xek46

Should you invest $1,000 in Apple right now?

Before you buy stock in Apple, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Apple wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $525,806!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.