Apple in Peril Ahead of its Quarterly Results

Apple in Peril

Apple is going through a rough patch, with headwinds in its core business, weakening China demand, lack of growth and innovation, regulatory challenges and more. The company that established the smartphone market roughly two decades ago, changed the tablet market with the iPad release in 2010 and popularized wearables with the AirPods and the iWatch nearly ten years ago, has not innovated in a long time.

It missed another chance to do so, since it has reportedly abandoned its electric vehicle (EV) project ^[1], right as rival smartphone maker Xiaomi made its foray into the market, with the SU7 all-electric sedan. It has already delivered 5,781 units in just 28 days and secured 75,723 lock-in orders, 51.9% of which come from Apple users, according to its CEO. ^[2]

More importantly, it is behind in the Artificial Intelligence arms race and a late entry can create a significant handicap. This lag is notable and worrying, as competitors like Samsung are already pushing hard on this front, with AI enabled smartphones. ^[3]

At the same time, the tech behemoth is losing its grip on China amidst resurgent domestic makers and strained Sino-Western relations that can hurt the appeal of American brands. Sales in Greater China fell nearly 13% y/y in the last quarter of 2023 (Q1 FY24), despite the release of the latest iPhone ^[4]. Moreover, the latest report by Counterpoint Research revealed that iPhone sales dropped around 19% in the first quarter of the year, as Huwaei surged nearly 70% and Xiaomi took the top spot ^[5].

On top of all that, Apple is also facing regulatory scrutiny that threatens its lucrative walled garden business model. Earlier this year, it was forced to open up its app store in the EU, changing the way distribution works and lowering its lucrative fees, in order to comply to comply with the Digital Markets Act (DMA) ^[6]. In another challenge to its business model just a few weeks ago, the US Department of Justice sued Apple for illegal monopoly over the smartphone market in a landmark antitrust case. ^[7]

On the financial front and largely due to the above developments, the tech giant lacks growth and will need to establish a new market to find a runway. It recently posted its worst slump in twenty-two years, with four straight quarters of revenue contraction and the worst streak in the iPhone era. Although sales rose 2% y/y in the last reported quarter (Q1 FY24), it is in risk of another contraction, as its CFO pointed to similar y/y revenue for the March quarter. ^[4]

AAPL in Risk of Bear Market

These headwinds have been weighing on the stock. Even though it was able to move higher last year, the sub-50% y/y increase was the lowest amongst its Magnificent Seven peers, most of which surged due to their AI advance. The situation deteriorated this year, as Apple conceded the title of the most valuable company to Microsoft and the stock shed more than 10% in the first quarter.

AAPL.us extended the losses in April, hitting the lowest levels in a year and is now in risk of bear market. Moves below $160 would mean losses of 20% and more from the December record high, which is generally viewed as the threshold for a bear market. The technical and fundamental outlook looks grim and although the stock rebounds over the past few days the upside contains multiple roadblocks. Closes above the EMA200 (black line) would be needed to pause the downside momentum, which does not look easy under current conditions.

Investors now turn to the next earnings report for the March quarter (Q2 FY24), which is due on May 2 and could determine the trajectory of the stock. Top and bottom lines, guidance, China & India performance, AI progress, will be some of the focal points.

Reasons for Optimism

Despite the perilous situation, Apple remains one of the most valuable companies of the world and investors are unlikely to give up on it. Furthermore, there are reasons for optimism that the firm can turn things around and the stock can recover.

After a rough couple of years, the smartphone market is poised for a rebound and iPhone sales are resilient. The company launched its first major new product in years, the Vision Pro AR headset, trying to move early in still nascent segment. It could also showcase AI progress soon, with the June annual developer's conference (WWDC) being a likely venue, as this is where new products and technologies are typically unveiled. Furthermore, Bloomberg reported that the firm explores home robotics in its quest to find the next big thing. ^[8]

Furthermore, Tim Cook seems unwilling to let China fall, as indicated by his recent visits in the country and also looks to India, which has significant untapped potential. Despite the overall lack of growth, the increasingly important Services segment goes from strength to strength, generating record revenue in the last quarter.