Earnings Report Preview | Will Apple's Q1 performance bring new surprises after a series of setbacks?

Zhitong App has learned that Apple (AAPL.US) will announce its first-quarter earnings after the US stock market closes on February 1st (morning of February 2nd Beijing time). It is expected that Apple's Q1 revenue will be $117.95 billion, compared to $117.15 billion in the same period last year, with earnings per share of $2.11, compared to $1.88 in the same period last year.

Looking at Apple's stock performance for the full year of 2023, it has achieved good results with a nearly 50% increase. However, in fact, the stock's performance in the past six months has not been outstanding. During this period, the stock has remained flat due to challenges such as lower-than-expected iPhone 15 sales and the ban on Apple Watch sales in the United States due to patent issues, while the S&P 500 index has risen by more than 7%.

Looking ahead to the new year, Apple still faces many challenges, but there are still analysts who are optimistic about Apple's growth prospects. The reasons for optimism include the upcoming release of Apple's MR headset Vision Pro and the growth brought by artificial intelligence.

Performance Review

In the previous quarter, Apple's revenue and profits exceeded market expectations, but sales continued to decline year-on-year, marking the first consecutive four quarters of sales decline for the company since 2001.

In terms of business segments, the services department achieved a record revenue of $22.31 billion, a year-on-year growth of 16%.

iPhone revenue in the previous quarter reached $43.81 billion, reaching a new historical high. Moreover, iPhone was the only hardware product line of Apple that achieved growth in the fourth quarter, while Mac and iPad businesses experienced a year-on-year decline. It is worth mentioning that Apple started selling the newly launched iPhone 15 series on September 22nd, and the impact on iPhone sales in the fourth quarter is not yet clear.

Wearable devices, including AirPods and Apple Watch, declined by more than 3% year-on-year.

Competition in the Chinese Market

According to the latest reports from market research firms IDC and Canalys, Apple became the global leader in smartphone sales in 2023, surpassing Samsung for the first time to become the annual sales champion of smartphones.Based on the outstanding performance of the iPhone, analysts predict that Apple's revenue will reach a historic high. According to Morgan Stanley analysts, Apple's first quarter revenue is expected to reach approximately $119 billion, thanks to the launch of the new iPhone series, especially the iPhone 15 series, which is expected to bring substantial revenue to Apple.

However, investors are concerned about the 2.1% YoY decline in Apple's smartphone shipments in the Chinese market in the fourth quarter of last year. One of the main reasons is the competition that Apple faces in the Chinese market, including the strong comeback of Huawei.

Morgan Stanley analyst Samik Chatterjee stated that the flagship product Mate 60 Pro launched by Huawei has intensified the competition for Apple in the Chinese market, making it more difficult for Apple to continue to increase its market share in that market. Similarly, Citigroup analyst Atif Malik also believes that the Mate 60 Pro has had a negative impact on Apple.

Recently, Apple even offered a discount of up to 500 yuan ($70) on its latest iPhone models in China for the first time in years, which has raised concerns about the decline in demand for its main devices.

However, the market generally expects that the revenue from the services sector will continue to achieve double-digit growth in the first quarter and in 2024, helping to offset the negative impact of the iPhone. Morgan Stanley stated that the performance of the services business is excellent and is expected to grow healthily in the first quarter.

Other Challenges

Apple not only faces challenges in the smartphone field, but its other products are also facing varying degrees of resistance.

Due to an intellectual property dispute with medical device company Masimo, in October last year, the International Trade Commission ruled that Apple's blood oxygen sensor infringed on Masimo's intellectual property. This ban prevents Apple from importing related devices, including the Apple Watch Series 9 and Ultra 2. In December last year, Apple chose to temporarily remove the affected watches from its online and retail stores.

Analysts predict that if the dispute is not resolved, it could have a 2-3% impact on Apple's earnings per share in the 2024 fiscal year.

In addition, in order to comply with the EU's Digital Markets Act, Apple has allowed users in the EU region to download software from app markets other than the App Store, marking the first concession the company has made since the launch of the App Store in 2008. At the same time, for developers who continue to use the App Store, the "Apple tax" has been reduced from the previous 30% to 17%, almost halved.However, while reducing fees, Apple has introduced two additional charges. First, a 3% payment processing fee for apps using the Apple in-app purchase system. Second, a €0.50 installation fee for each app that has been installed over 1 million times, regardless of whether it is installed through the Apple Store or third-party sources.

Although Apple emphasizes that the new rules only apply to the European market, regulatory agencies around the world may follow the footsteps of the European Union and require similar measures. For example, the United States has already planned to conduct an antitrust investigation into Apple's App Store.

However, JPMorgan recently commented that the fee structure implemented by Apple in Europe will not directly impact the overall revenue of the App Store, and the impact is not significant. JPMorgan stated that the new rules implemented in Europe will not have a significant impact on Apple's revenue, as Europe only accounts for about 6% of the App Store's revenue, and the €0.50 fee for "first-time installations" can offset the decrease in commission rates.

Additional Driving Force

During the fourth quarter earnings conference call, CFO Luca Maestri stated that Apple expects first-quarter revenue to be similar to last year.

The cautious guidance has shifted investors' focus to longer-term prospects. Morgan Stanley stated that the upcoming earnings report will help investors lower their expectations for the next 12 months and shift their attention to the fundamental turning point that will occur in 2025.

In this context, the upcoming launch of Vision Pro and discussions about future artificial intelligence may become new focal points for investors.

Previously, Vision Pro was in high demand during pre-sales. According to the official Apple website in the United States, the pre-order server for Vision Pro was overwhelmed within 5 minutes of the start of pre-orders, and many orders could not be processed. Due to insufficient initial inventory, the stock was sold out 18 minutes after the start of pre-orders.

Renowned Apple analyst Ming-Chi Kuo stated that the first week of pre-orders for Vision Pro met expectations but raised a key concern. He stated that early signs may indicate a weakening demand for Vision Pro in the market. Within 48 hours of the opening of pre-orders, there was no change in the extended delivery time, which raised a significant concern: that demand may quickly decline after core fans and heavy users place their orders.

However, from a long-term perspective, Morgan Stanley remains optimistic and believes that Vision Pro will be a longer-term success for Apple. The bank predicts that "by the third year, Apple's AR/VR headset revenue will reach $8 billion, making it the second-highest revenue-generating product in this business, second only to AirPods but surpassing the Apple Watch."

Bank of America also has a positive outlook. Analysts from the bank stated, "With the development of spatial computing technology and the increase in differentiated use cases, driving service upgrades, the sales of Vision Pro may surpass that of the iPad over time."According to reports, Apple is expected to launch iOS 18 with groundbreaking AI features at this year's WWDC in June. Insiders have discovered that Apple has already started testing its AI capabilities in the first beta version of iOS 17.4. This includes a new version of Siri voice assistant. At least the code indicates that Apple is conducting relevant tests and comparing the results with ChatGPT internally.

Bank of America believes that with the integration of new artificial intelligence technology into future iPhones, it is expected to drive a strong upgrade cycle for iPhone users who are still using older models.