Apple's Q4 revenue returned to growth, but the decline in revenue in Greater China was worse than expected, causing the stock to drop more than 3% after hours.

After the US stock market closed on Thursday, February 1st, the consumer electronics and technology giant Apple, which has been unable to reach a market value of $3 trillion for several days, released its first quarter report for the 2024 fiscal year (i.e., the fourth quarter of the 2023 calendar year) along with Meta and Alphabet-C, marking the end of the earnings season for large technology stocks.

Some analysts pointed out that its massive market value accounts for about 7% of the weight of Pro UltrPro Shrt S&Pro 500, and changes in its stock price can affect the overall market performance. As a consumer electronics giant, this heavyweight shopping season report at the end of the year can also reflect clues about the overall economic health and consumer spending intentions.

Apple's revenue for the quarter returned to year-on-year growth for the first time in a year, with record-high EPS, and both Apple's sales and service revenue exceeded market expectations. However, the revenue from the third-largest market, Greater China, dropped by about 13% year-on-year, confirming market concerns. After rising 1% in after-hours trading, the stock fell more than 3%.

Apple also expects its revenue for the second quarter to be similar to the same period in 2023 when Apple achieved a record-high revenue of $51.3 billion in the March quarter, representing a year-on-year growth of 1.5%. This may indicate that Apple's sales will continue to grow year-on-year for the third consecutive quarter.

On Thursday, Apple rose 1.3%, ending a six-day losing streak and rebounding from a two-week low. However, it has fallen nearly 3% since the beginning of 2024, underperforming Pro UltrPro Shrt S&Pro 500 and the Nasdaq's cumulative gains during the same period, and performing the worst among large technology stocks excluding Tesla, which had a cumulative gain of 49% in 2023.

Most Wall Street analysts are optimistic about Apple. In a survey, 26 analysts gave a "buy" rating, 12 analysts rated it as "hold," and 2 analysts rated it as "underperforming the market." The average target price is around $200, representing a potential increase of 7%.

Revenue Returns to Growth, Record-High EPS, Cook Says "Significant Acceleration" Compared to the Previous Quarter

Apple's first fiscal quarter, which includes the year-end holiday shopping season, is usually its strongest performance of the year. After Apple's overall sales declined in 2023, Wall Street generally expects Apple to resume year-on-year revenue growth this year.

As of December 30th last year, Apple's revenue for the quarter was $119.58 billion, a 2% increase from $117.2 billion in the same period last year. It exceeded analysts' expectations of $117.9 billion and achieved its first growth since the fourth quarter of the 2022 fiscal year, ending the trend of continuous year-on-year decline in total revenue in the 2023 fiscal year. Last year was the first time Apple had experienced four consecutive quarters of negative revenue growth since 2001.Apple's profitability has clearly improved, with adjusted EPS at $2.18 per share, a YoY increase of 16%, surpassing the expected $2.10 per share and reaching a historical high. Net profit increased by 13% YoY to $33.92 billion, higher than the expected $32.6 billion, and the highest in the past two years since Q1 of the 2022 fiscal year. The gross margin was 45.9%, higher than the expected 45.3% and the previous quarter's 45.2%.

Analysts believe that this is due to the rebound in sales of the Apple 15 series launched last year, as well as the double-digit percentage growth in high-profit service revenue. The improvement in demand for personal computers also drove significant growth in Mac revenue compared to the previous quarter. In addition, the overall operating expenses for the quarter were $14.48 billion, slightly lower than the analysts' expected $14.62 billion.

Apple CEO Tim Cook stated in the earnings report that record sales and service revenue pushed up total revenue for the December quarter. The active installed base of devices has exceeded 2.2 billion, reaching new highs in all products and geographic regions. CFO Luca Maestri mentioned that the December quarter generated nearly $40 billion in operating cash flow and returned nearly $27 billion to shareholders.

Cook also emphasized that the record high EPS was achieved despite having one less trading week in Q1 of the 2024 fiscal year compared to the same period last year, indicating a "significant acceleration" in the company's growth compared to Q3 of the 2023 calendar year.

In terms of business segments, the "flagship product" Apple, which accounts for half of Apple's total revenue, achieved sales of $69.7 billion in Q1, a YoY increase of approximately 6% from $65.78 billion in the same period last year, surpassing the expected $68.6 billion. This is the first complete quarterly report after the launch of the Apple 15 series, representing strong sales momentum.

According to Canalys' global smartphone shipment report, Apple's market share in Q4 of last year was 24%, surpassing Samsung's 17%. IDC data shows that Apple's market share for the full year of 2023 was 20.1%, higher than Samsung's 19.4%, making it the world's leading smartphone manufacturer. However, some analysts have warned that with the extension of the consumer replacement cycle, Apple's sales momentum may not be able to be maintained in 2024.

In terms of other hardware, Mac computer revenue, which accounts for 10% of total revenue, was $7.78 billion, a YoY increase of 0.6% and slightly higher than expected. In the previous quarter, it experienced a sharp YoY decline of nearly 34%. iPad tablet revenue was $7.02 billion, a steep decline of 25% YoY or a decrease of over $2.3 billion, weaker than expected.The revenue from wearable devices, home and accessories, including wireless earphones, smartwatches, and smart speakers, was $11.95 billion, a YoY decrease of 11%, but better than the market's expected $11.5 billion.

However, analysts believe that Apple may release new versions of the iPad and Mac in March this year, which will help boost the future sales of these two product lines. The rebound in Mac revenue also reflects the recovery of global PC demand. According to Gartner's statistics, Apple's global market share of computers increased from 9.4% to 10% at the end of last year. Apple stated last year that due to different product release schedules, the growth of iPad and wearable devices will significantly slow down MoM.

The service revenue, which has the highest profit margin and accounts for one-fourth of the total revenue, is $23.12 billion, an increase of 11.3% YoY compared to $20.77 billion in the same period last year. Although the growth rate is weaker than the previous quarter's 16.3% and lower than expected, it has reached a new high for four consecutive quarters and continues the double-digit percentage growth trend from the previous quarter. Before the third quarter of 2023, there were four consecutive quarters of single-digit percentage growth.

Services include the App Store, audio and video streaming services Apple Music and Apple TV+, iCloud storage, AppleCare warranty, advertising revenue from the Alphabet-C search engine licensing agreement, Apple Pay, and payment fees for other products. After Apple has become more mature in its products, services have become an important area of diversification for Apple's business and even earlier reflect consumer demand trends.

Analysts believe that service revenue benefits from the continuous increase in users of the Apple App Store, significant improvement in Apple TV+ viewership, and continued expansion of the device installation base. As of the end of the 2023 fiscal year, Apple's service portfolio has more than 1 billion paid users. Media industry reports also show that the consumption of Apple TV+ doubled in 2023, with a total viewership increase of 42% YoY.

Cook also attributed the growth of services to products such as advertising, cloud services, payments, and the App Store. Apple has over 1 billion paid subscription users, including subscriptions to applications through the App Store.

He also mentioned that the good news is that Apple occupies four out of the top six best-selling smartphones in Chinese cities, and the continued decline in iPad sales is due to a very difficult YoY comparison. 2023 is the first year in iPad's history without the release of a new model, but there will be two updates by the end of 2022.

Greater China revenue fell more than expected by 13%, but the CFO believes there are still significant opportunities in China in the long term

In terms of regional contribution, Apple's revenue from the Greater China region, which accounts for 20% of its annual revenue, reached USD 20.82 billion in the first quarter, marking the worst quarterly performance since the beginning of 2020. It decreased by 12.9% compared to the same period last year, falling short of market expectations of USD 23.5 billion. However, the revenue for the first quarter still grew by 38% compared to the previous quarter, indicating that the release of the 15 new Apple devices had a significant impact on performance.

The Greater China region is Apple's third-largest sales market, following North America and Europe. As the core business with sales far exceeding other hardware products, Apple's health, especially the sales trend in the Greater China region, is of particular concern.

The CFO of Apple stated to the media that the company is not satisfied with the performance in the Greater China region, but also acknowledged that China is the most competitive smartphone market in the world. "In the long run, we still see significant opportunities in China."

The latest research report by Ming-Chi Kuo is relatively pessimistic, stating that Apple's shipments this year may decline by up to 15% due to structural challenges, and it will be surpassed by foldable smartphones with AI technology. In the past few weeks, weekly shipments in China have decreased by 30% to 40% compared to the same period last year:

"According to the Apple supply chain, the company expects to ship approximately 200 million units in the calendar year 2024, which is a decrease of about 15% compared to 2023. In 2024, Apple may experience the most significant decline among major global smartphone brands."

Meanwhile, revenue from the largest market, the Americas, reached USD 50.43 billion in the quarter, a year-on-year increase of 2.3% and a quarter-on-quarter increase of nearly 26% or over USD 10 billion. Revenue from the second-largest market, Europe, was USD 30.4 billion, a year-on-year increase of 9.8% and a quarter-on-quarter increase of 35%. Revenue from Japan was USD 7.77 billion, a year-on-year increase of 15% and a quarter-on-quarter increase of 41%. Revenue from other Asia-Pacific regions was USD 10.16 billion, a year-on-year increase of 6.6% and a quarter-on-quarter increase of over 60%.

This indicates that Apple's sales in the Greater China region only declined year-on-year at the end of last year, seemingly confirming Wall Street's concerns and leading to a post-market decline in stock prices.

Previously, due to concerns about Apple's poor sales in the Greater China region, mainstream investment banks such as Barclays, Piper Sandler, and Redburn Atlantic unusually downgraded Apple's stock rating at the beginning of the new year. Baird and UBS also hold a cautious attitude towards Apple's prospects for the March quarter.

In addition to Apple's sales, attention should also be paid to the launch of mixed reality headsets and the "arms race" in AI.Investors will focus on the future quarterly performance direction provided during the earnings conference call, the official launch of the Vision Pro mixed reality headset in the United States starting on Friday, and Apple's AI efforts. Cook stated during the earnings conference call that Apple will make announcements regarding new AI features this year.

The market consensus is that the Vision Pro, with a starting price of $3,500, will not generate significant initial revenue. UBS estimates that Apple will ship approximately 400,000 units of the headset this year, generating only a "relatively insignificant" $1.4 billion in revenue, which will not have a significant impact on profitability.

However, as Apple's first completely new product category in nearly a decade since the introduction of the smartwatch in 2015, the Vision Pro could improve market confidence in Apple and solidify its position as a leading innovator in AR/VR technology, which could drive the stock price.

Reports on Tuesday indicated that the headset has been almost sold out since pre-orders opened on January 19, with a total of approximately 200,000 units sold. However, "Apple's most accurate analyst," Ming-Chi Kuo of TF International Securities, stated that the shipping time has remained stable after 48 hours, indicating that the Vision Pro is still a "very niche product," and the seemingly explosive demand may "quickly decrease" after hardcore fans place their orders.

In terms of AI technology, Apple has not yet announced specific plans to launch generative AI products, but is focusing on machine learning to improve the accuracy of its auto-complete feature. Previous reports have stated that Apple is working to integrate AI technology into future products. Cook admitted during the previous earnings report that the company is "investing heavily" in generative AI but declined to disclose details, only stating that they are "responsibly researching and developing."

Kuo previously predicted that the Apple 16, set to be released this fall, is unlikely to include significant design changes. Apple is expected to introduce a design more centered around AI by 2025 or later, which could hinder the company's shipment momentum and ecosystem growth.

Thirteen strategists and portfolio managers queried by mainstream media last week all expressed the view that Microsoft's early lead in the field of AI will "decisively surpass" Apple's market value in the next five years. King Lip, Chief Strategist at Baker Avenue Wealth Management, bluntly stated that Apple's most reliant product, the iPhone, is in a fairly mature market, and the company has not provided detailed information on how it will participate in the AI arms race.

Wall Street continues to worry about Apple's market share challenges in Greater China and increased regulatory resistance

Among the investment banks that downgraded their ratings at the beginning of the year, Barclays expressed concerns about Apple's weak hardware sales, while Piper Sandler raised concerns about regulatory resistance, including patent disputes and antitrust lawsuits surrounding Apple's smartwatch and its services. They both pointed out potential weaknesses for Apple in the Apple and services sectors.According to UBS, Apple's inventory in China has increased by 2 to 3 million units, which will help the company exceed expectations in quarterly revenue for December. However, this will transfer the sales risk to the following quarter in March, where inventory levels may exceed demand by 15% to 20%.

In the bullish camp, Bank of America raised its rating and target price for Apple two weeks ago, stating that the Vision Pro headset device gives the company a promising roadmap for artificial intelligence products and will be a catalyst for future growth. The outlook for the services sector has also improved.

Morgan Stanley also believes that Apple's fundamentals are recovering and could bring significant improvements in 2024. This will be the year when the "Apple Edge AI opportunity may be realized," with Siri 2.0 supported by the LLM language model and a more extensive generative AI-supported operating system, which could promote Apple's upgrade cycle.

Goldman Sachs rates Apple as a "buy" and believes it is prepared for accelerated growth in the second half of the year. It expects service revenue to benefit from the continuous improvement in penetration rates for all service categories, especially iCloud+, as data consumption has exceeded device storage. The higher average selling price of devices also makes AppleCare+ insurance services more popular.

Similarly, JPMorgan, which holds a "hold" rating, stated that profit impact will be greater than revenue for Apple's stock price. The push for Apple's high-end and higher-priced product portfolio, as well as strict cost management, is helping to improve hardware profit margins. Changes in the service portfolio will further promote margin improvement.

Wedbush's star tech analyst, Dan Ives, believes that investors' concerns about Apple's sales have been exaggerated. "So far, Apple's demand in China has remained stable and will benefit from strong upgrade demand for high-end smartphones. It is estimated that there are about 100 million Apple devices in China that are in the window of opportunity for upgrades, which will help partially offset the competitive pressure from local brands in the Chinese market."

In terms of regulatory pressure and legal challenges, Apple is indeed facing some difficulties at the beginning of 2024.

The patent dispute with medical device manufacturer Masimo has led Apple to suspend the sale of the Apple Watch Series 9 and Apple Watch Ultra 2, which use blood oxygen sensors. This may affect Apple's profits and wearable device revenue, which accounts for over 10% of total revenue.

At the same time, as Apple's annual agreement to make billions of dollars from Alphabet-C to become the default search engine in Safari may face risks, there are reports that the US Department of Justice is considering whether to launch a major antitrust lawsuit against Apple for alleged anti-competitive behavior.

Apple is currently undergoing some of its biggest changes to date and is preparing for significant modifications to its app store policies in Europe to comply with the EU Digital Markets Act. For example, it will start opening up Apple devices to third-party app stores for European consumers and allow the use of game streaming services like Microsoft's Xbox Cloud Gaming on its devices.According to analysis, Apple is currently going through one of the most turbulent periods since Tim Cook took over as CEO more than a decade ago.