Earnings report exceeds expectations, why does Apple fall instead of rise?

Although Apple's financial performance in the earnings report is impressive, investors are not convinced.

After the US stock market closed on February 1st, Apple released its quarterly report, which showed that the company successfully reversed the trend of consecutive year-on-year decline in total revenue in the 2023 fiscal year, achieving its first growth since the fourth quarter of the 2022 fiscal year. However, despite Apple's sales exceeding expectations and its revenue and profits growing, the company's stock price unexpectedly fell by nearly 3% in after-hours trading.

In fact, analysts believe that Wall Street's previous expectations were overly optimistic, and in reality, Apple's sales in the Chinese market have experienced a significant year-on-year decline. Mac, iPad, and wearable devices have all failed to meet expectations, and service revenue has also been disappointing, which has raised concerns among investors.

Decline in Apple's Sales in the Chinese Market

Although Apple's overall sales are good, the significant year-on-year decline in the Chinese market is the most concerning news for the market.

The financial report shows that Apple's overall revenue in the Chinese market decreased from $23.9 billion in the previous year to $20.8 billion in this quarter, a year-on-year decline of 12.9%, marking the worst quarterly performance since the beginning of 2020. However, the market had expected revenue to reach as high as $23.5 billion.

For some time, there have been rumors in the market about Apple's sluggish sales in China, and this has finally been confirmed in the earnings report.

Apple's sales in the Chinese market have attracted particular attention from Wall Street because China contributes nearly 20% of Apple's annual revenue, making it the company's third-largest sales market after North America and Europe.

However, in this third-largest market, Apple is now facing tremendous pressure, especially as Huawei makes a comeback. The pressure on Apple will further increase.

In January, well-known Apple analyst Ming-Chi Kuo from TF International Securities stated that based on his latest supply chain survey, Apple has lowered its estimated shipments of key upstream semiconductor components for 2024 to around 200 million units, a year-on-year decline of 15%. Among the world's major smartphone brands, Apple may experience the largest decline this year.

Analysts from Jufu Rui also believe that Apple will continue to face greater pressure from domestic Chinese smartphone brands in 2024. The forecast shows that Apple's shipments will continue to decline by double digits in 2024, while Huawei's market share is expected to continue expanding: Huawei's global smartphone shipments in 2024 are expected to reach approximately 64 million units, far exceeding the estimated less than 35 million units in 2023.

Multiple business revenues fell short of expectations.

In terms of product lines, only Apple's sales actually exceeded expectations, while Mac, iPad, and wearable devices all fell short of expectations, with significant declines in iPad revenue. Although Apple's business diversification has grown, judging from the performance of Apple's stock price in after-hours trading, the market seems to be skeptical.

Let's take a look at this set of data:

• Apple's revenue was $69.7 billion, a year-on-year increase of 6%, exceeding the expected $68.55 billion.
• Mac revenue was $7.78 billion, a year-on-year increase of 0.6%, falling short of the expected $7.9 billion.
• iPad revenue was $7.02 billion, a year-on-year decrease of 25%, falling short of the expected $7.06 billion.
• Wearable devices, home, and accessories revenue was $11.95 billion, a year-on-year decrease of 11%, falling short of the expected $12.02 billion.
• Although service revenue reached a record high of $23.1 billion (a year-on-year increase of 11.3%), it still fell short of the expected $23.4 billion.

For example, although service revenue reached a historical high of $23.1 billion, it was still lower than the expected $23.4 billion. Moreover, under the anti-monopoly pressure regulated by Europe, Apple made a historic change in the European Union market by significantly reducing the commission rate of the EU market's App Store from 17% to 10%. Apple's important service revenue will be severely affected.

Not only facing challenges in Europe, but Apple is also under scrutiny in the United States. Under regulatory pressure, Apple is indeed facing difficulties in 2024.

For example, in terms of wearable devices, the Vision Pro, priced at $25,000, officially went on sale. Analyst Ming-Chi Kuo, who understands Apple the most, stated that the delivery time remained stable 48 hours after the launch, indicating that Vision Pro is still "a very niche product," and the market demand for Vision Pro is weakening. Wall Street analysts generally expect that the expensive Vision Pro will not immediately bring significant revenue growth to Apple.

Wall Street's previous predictions were overly optimistic.

Furthermore, analysts believe that Apple's forecasts for future revenue and gross margin are conservative, and the company may still face profit pressure. Chief Financial Officer Luca Maestri said, "About a year ago, due to the impact of the pandemic, our factories were shut down, and the supply of Apple 14 Pro and Apple 14 Pro Max models was forced to be interrupted. With the arrival of the December quarter, the previously "pent-up demand" from users was released, and we met the demand from different channels. In particular, Apple's revenue increased by $5 billion. Excluding this impact, we expect revenue for the March quarter this year to be flat compared to last year."

Analysts believe that this indicates that the previous Wall Street forecasts were too optimistic, as FactSet's consensus was for quarterly revenue of $95.6 billion in March (this figure includes the positive factors from last year), while Apple's revenue for the same period last year was $94.9 billion.