US tech giant Apple (US:AAPL) has issued its first revenue warning since 2002, citing lower-than-expected iPhone sales in China, where “economic deceleration” had been exacerbated by trade disputes with the US.
As recently as last November, Apple guided towards revenues of $89bn-$93bn (£69bn-£73bn) for the first quarter of 2019, but now expects revenues of around $84bn – down 5 per cent year on year. The shares tumbled nearly a tenth on the news, while other stocks with exposure to Apple, or to China, also suffered – including Frankfurt-listed chipmaker Dialog Semiconductor (GER:DLGX) and luxury-goods purveyor Burberry (BRBY).
Chief executive Tim Cook noted that China’s GDP for the September quarter hit its second-lowest level in 25 years, while the Caixin manufacturing index for China – which was released on the same day – revealed a decline from 50.2 per cent in November to 49.7 per cent in December. Any reading below 50 represents a contraction in activity.
Greater China was Apple's third-largest region by net sales for the 2018 financial year – contributing $51.9bn to a total of $266bn. Meanwhile, iPhones contributed the majority of net sales by product, at $167bn.
China and the US are currently engaged in a 90-day truce, with fresh talks under way, and China has unveiled targeted economic stimuli. However, there may be more to Apple’s predicament, namely that we may have reached ‘peak smartphone’. Research organisation IDC expected the worldwide smartphone market to decline by 3 per cent in 2018, before experiencing low single-digit growth from 2019-22.
Tellingly, Apple’s iPhone unit sales didn’t grow in FY2018, rather product revenue was boosted by price increases. Expensive products, without transformative innovation, are likely to drive consumers elsewhere. Moreover, inter-country hostilities might inspire citizens to favour domestic brands – in China, the likes of Huawei or Xiaomi.
For Apple, beyond Greater China and other emerging markets, iPhone upgrades were also weaker than expected i some markets. Management now plans to simplify the process of trading in phones and financing purchases over time.
That said, the most obvious growth generator for Apple is services. Thanks to record sales from services (such as Apple Music and iCloud), wearables and Mac products, non-iPhone revenues grew by nearly 19 per cent in the first quarter.
“Apple has been consistently highlighting its focus on services, which now accounts for $40bn, but growing solid double digits," said Amit Kumar, manager of the Columbia Threadneedle American Extended Alpha Fund. "Apple is likely to continue with this strategy as well as try to tap into newer markets." The fund continues to hold Apple due to its strong balance sheet and cash position, he added.
