Financial Report Preview | iPhone sales in China plummeted by 19%, investors may be more concerned about Apple's "AI grand plan"

According to the Zhītōng Finance and Economics APP, the US consumer electronics leader Apple (AAPL.US) will announce its financial report for the second quarter of the 2024 fiscal year (corresponding to the first calendar quarter of 2024) after the US stock market closes on May 2 (Thursday). Wall Street analysts generally expect Apple's second-quarter earnings per share to be $1.50, with total revenue of approximately $90.1 billion. In comparison, the earnings per share for the same period last year were $1.52, with total revenue of $94.84 billion. Due to a sharp decline in iPhone sales in the Chinese market, investors may pay more attention to Apple executives, including Cook, discussing the outlook and application plans for AI technology during the earnings conference call, as well as whether they can reveal more information about AI PCs and AI smartphones. Tesla CEO Musk has provided a good example, where management's ability to "paint a picture" is strong enough and the "painted picture" is recognized, which can still boost investors' confidence in the stock.

Since the beginning of this year, compared to strong performances by US tech giants such as Nvidia, Google, and Microsoft, Apple's stock price has shown signs of weakness, even falling over 11% compared to the S&P 500 index's year-to-date increase of 7%. This makes Apple one of the most disappointing tech stocks alongside Tesla this year.

Looking back over the past six months, Apple's stock price has remained relatively unchanged, with a decrease of less than 1%, while the S&P 500 index has risen by as much as 22% during the same period. This has left Apple investors feeling very frustrated. However, the earnings per share that investors favor have exceeded expectations for two consecutive quarters, with an average earnings per share exceeding analyst expectations by 4.67% in the previous two earnings reports.

For investors paying attention to Apple's financial report, the second quarter may not bring many surprises, especially as the largest portion of Apple's total revenue, iPhone revenue (which accounts for nearly 60% of total revenue), may appear pessimistic. After all, iPhone sales sharply declined in the first quarter in the crucial Chinese market, with a decrease in global shipments in the first quarter as well, while Android competitors have been rising strongly.

The latest statistics from the well-known independent research firm Counterpoint Research show that as of the first quarter of March, Apple's iPhone series sales in the Chinese market saw a year-on-year decline of up to 19%. This is the worst quarterly performance for Apple's iPhone in the Chinese market since around 2020 when the COVID-19 pandemic broke out. This US tech giant's market share in the fiercely competitive Chinese smartphone market has dropped to third place, roughly on par with the rapidly rising Chinese competitor Huawei. Led by domestic Chinese brands such as Honor and Xiaomi, the entire Chinese smartphone market saw a year-on-year growth of approximately 1.5% in the first quarter, achieving year-on-year growth for two consecutive quartersIn the eyes of some analysts, the attention to the soft sales of iPhones in the Chinese market is mainly due to the fact that the first quarter is the time when China celebrates the Lunar New Year, traditionally the peak consumption period for Chinese consumers. In contrast, Huawei's sales have increased by an astonishing nearly 70%, highlighting its comprehensive rise in the high-end smartphone market once dominated by Apple.

China remains one of Apple's largest markets, but with the introduction of a smartphone by Huawei that is equipped with chips manufactured using 100% Chinese technology, Chinese consumers have welcomed the launch of Huawei's new smartphones.

Huawei's growth is largely attributed to the strong sales of its 5G-supported Mate 60 series, coupled with its well-known brand awareness, leading to a significant increase in its market share in the high-end segment above $600. Additionally, despite Huawei's strong comeback impacting other manufacturers in the market, Honor achieved a 11.5% year-on-year growth in the first quarter with its popular models such as X50 and Play 40, along with the expansion of its offline channels.

Prior to Counterpoint's latest data release, global iPhone sales were showing a downward trend due to weak demand under pressure from interest rates. According to the latest statistics from IDC, in the first three months of 2024, global iPhone shipments fell by nearly 10%, triggering a growing pessimistic sentiment among global investors towards Apple's latest financial data to be released on May 2.

IDC statistics show that iPhone shipments in the first quarter of this year fell significantly by nearly 10%, while the global smartphone industry as a whole showed a clear rebound. IDC data shows that global smartphone shipments increased to 289.4 million units, an increase of approximately 7.8% compared to the same period last year. Among them, Samsung Electronics reclaimed the top spot. Budget brand Transsion saw a significant 85% increase in shipments, and Xiaomi's first quarter data also rebounded, narrowing the gap with second-ranked Apple

Compared to performance data, investors may pay more attention to Apple's "AI grand plan"

Looking ahead for the rest of the year, some Wall Street analysts believe there are still many reasons to be optimistic about Apple's performance growth prospects, including the company's efforts to integrate artificial intelligence technology into applications such as the iPhone. Therefore, relative to the performance data for the second quarter, investors may pay more attention to Apple executives, including Cook, discussing the AI technology roadmap during the earnings conference call, and whether they can reveal more information about AI PCs and AI smartphones. After all, Tesla CEO Musk has provided a good example - even though the company's actual performance is poor, strong management "pie-making" skills and convincing "pie-making" can still boost investors' bullish confidence in the stock.

According to media reports, the upcoming major update of iOS 18 will include artificial intelligence features that will be processed efficiently and quickly on the device itself, rather than through time-consuming responses in the cloud. Some analysts speculate that the upcoming iPhone 16 will be equipped with chips capable of performing edge AI inference, as well as artificial intelligence security and related privacy features, known as "changing the game rules."

According to information revealed by Apple leak expert Mark Gurman from Bloomberg, Apple is developing its own AI large language model to enhance generative artificial intelligence features similar to ChatGPT on the iPhone 16. In some cases, Apple's AI tools may not be as powerful and knowledgeable as generative AI tools like ChatGPT, so some analysts suggest that Apple may fill some technical gaps by collaborating with Google and other AI providers such as OpenAI. Apple's approach of embedding large AI models on the edge will significantly reduce response times, and Apple will find it easier to maintain privacy.

These features are expected to be launched at a critical moment for Apple after the global decline in smartphone shipments. But this is not just an issue for the iPhone, on Thursday, Apple's services division will also be closely watched by investors. The services business is likely to continue to maintain double-digit revenue growth in the second quarter and fiscal year 2024, which may help offset the macroeconomic softness affecting iPhone sales. Therefore, considering the company's growth momentum in the services business, efforts to improve operational efficiency, and Apple's focus and determination in AI, Wall Street institutions such as Bank of America and Wedbush remain optimistic about Apple's stock price.

Analyst Dan Ives from top Wall Street investment firm Wedbush expects that in terms of its artificial intelligence development opportunities, Apple's over 2 billion system installed user base brings the "best" opportunities in the world. Ives believes that Apple's upcoming global WWDC in June will be a "key moment" for the company's AI ambitions, and the analyst expects Apple to achieve a leap in AI smartphones through the iPhone 16 set to be released in September this year"When it comes to artificial intelligence, they won't just observe from the outside. This is one of the bases with the largest number of system installations in the world, and it is a key moment for Apple to announce its artificial intelligence strategy," Ives said. Wedbush reiterated Apple's $250 target price (as of Friday's US stock market close, Apple closed at $169.30) and an "outperform" rating.

Another major Wall Street firm, Morgan Stanley, recently predicted that Apple's WWDC in June this year will be the market's focus, with the highlight possibly being the new smartphone embedded with AI large models that Apple may introduce.

Currently, leading smartphone hardware manufacturers are developing their own large models, and are embedding offline-operable edge large models into new generation models to create the so-called "AI large model smartphones." Compared to general AI large models that rely on cloud computing power, edge local large models can allow smartphone users to use products like ChatGPT more efficiently, conveniently, and securely, and with edge AI, they are expected to achieve a more personalized "private AI assistant" that better meets individual needs.

According to market research firm Canalys' forecast, by 2024, 5% of smartphone shipments will be AI phones, and this proportion is expected to rise to 45% by 2027. Canalys stated that as the smartphone industry seeks new growth opportunities, each manufacturer will prioritize the introduction of generative AI as a strategy, focusing on personalization and experience-oriented innovation. Canalys emphasized that with Samsung's release of the new Galaxy S24 AI smartphone, it is clear that Samsung's vision for the future is also becoming evident: Generative Artificial Intelligence (GenAI) has become an indispensable element of its long-term product strategy, especially in the high-end and flagship markets