Apple may be able to phone it in
Apple’s biggest business is struggling. The fact that investors are finally wrapping their arms around that idea could turn out to be a good thing for the company ahead of its expected entry into tech’s AI party.
It has been a pretty bleak year so far for Apple. The federal government is trying to break up the company’s closed-ecosystem for its App Store and—in a separate case— challenge the lucrative payments Apple gets from Google every year to make the popular search engine the default on mobile devices including the iPhone.
The company is also losing ground in China, a market that historically has accounted for about 19% of Apple’s annual revenue. Three third-party market-research firms recently issued reports showing Apple experiencing a sharp drop in iPhone unit sales in mainland China, mostly thanks to a resurgent Huawei Technologies. Counterpoint estimates that Huawei’s smartphone unit sales jumped 70% year over year in the March quarter while Apple’s slid by 19%. IDC estimated a more mild 7% drop for Apple, though it also estimates that Huawei’s unit sales more than doubled in the same time frame.
Such a bum run of news would normally be a poor setup for Apple’s stock ahead of its fiscal-second-quarter report, due Thursday afternoon. But the shares are already in a funk, down around 12% this year. That is the worst performance by far among megacap techs valued at more than $1 trillion. Microsoft, Amazon, Nvidia, Meta Platforms and Google parent Alphabet have logged a median gain of 23% for the year. More notably, the drop has put Apple’s multiple to around 25 times forward earnings, which is in line with its five-year average and down more than 16% from last summer, when hype over the company’s Vision Pro mixed-reality headset helped drive the stock above 30 times.
That should help temper any negative reaction to what is expected to be a weak report. Analysts expect iPhone revenue to fall 10% year over year—the worst drop for that key business unit in more than three years. Revenue from all of Apple’s device segments is expected to show a year-over-year decline for the period, which would be the first time that has happened in at least a decade. Service revenue is expected to rise 11% year over year. Hopes are modest for the company’s outlook as well; analysts expect Apple’s total revenue to rise less than 2% year over year in the June quarter.
Apple’s biggest challenge in the near term will be its longstanding reluctance to talk about anything new. The company has given strong hints about its interest in generative artificial intelligence, but it remains unclear if that will manifest in new types of software and services or in an AI-enabled iPhone.
Apple is widely expected to lay out more of its AI vision at its developers conference in June. Other big techs are focusing more on generative AI services, but Apple’s hardwaredominated business model means on-device AI could have a bigger impact on sales.
“If Apple saw a 15% increase in revenues, in line with the OLED iPhone 10, this would be a $30 billion uplift to revenues,” Bernstein analyst Toni Sacconaghi wrote in a recent note to clients.
The iPhone could use the help. Apple has long dominated the premium category, but smartphones are a mature market, with users holding on to their devices for longer periods. The current iPhone 15 family is leading the third consecutive cycle of weak sales; analysts project a 1% drop in global iPhone unit sales for the current fiscal year following a 4% decline last year and a gain of only 1% in fiscal 2022, according to consensus estimates from Visible Alpha.
An AI iPhone might or might not reverse that trend. Fortunately, Apple’s market value is no longer riding its new gadgets’ becoming surefire hits.