That was the big question at Apple’s quarterly earnings call on Thursday. By the end of the conference call, Apple’s stock had risen more than 6%, and CEO Tim Cook repeatedly touted his “great view” of Apple’s China business.
But despite Wall Street’s positive reaction to Apple’s results (helped by the announcement of a major stock buyback), questions about the iPhone’s place in China have become more complex following the latest results. It is possible that The company’s surprisingly better-than-expected performance in China and the divergence from the forecasts of several prominent independent research firms concern one of the most important pillars of the company’s $2.8 trillion business. It reveals a disconnect.
Greater China, which includes mainland China, Hong Kong, and Taiwan, is Apple’s third largest region by revenue, accounting for 19% of Apple’s total revenue in fiscal 2023.
As tensions between the United States and China have escalated over the past year, demand for American tech products, including the iPhone, has declined among Chinese consumers. Meanwhile, Chinese tech companies such as Huawei are developing new smartphones and taking market share that Apple is losing. The Chinese government supports this shift to domestic technology, and last year ordered state authorities to stop using non-Chinese cellphones for business purposes.
Apple’s revenue in the region has declined year over year in five of the last six quarters, and all signs pointed to further hardship in the first three months of 2024.
According to Ming-Chi Kuo, a well-known analyst at TF International Securities known for his accurate insight into Apple’s business, Apple’s weekly shipments to China at the beginning of the year were down 30-40% year-on-year on a weekly basis. .
“We expect this downward trend to continue,” he said in a January blog post. “Apple could experience the steepest decline of any major mobile phone brand in the world in 2024,” he said.
Market research firm Counterpoint estimated that Apple’s iPhone sales in China fell 19% in the quarter from a year earlier.
Apple’s sales in Greater China did decline in the first three months of this year, falling 8% below the same period last year. But the drop wasn’t as deep as Wall Street was prepared for. That was actually an improvement compared to the 13% drop in Q4 2023. Apple said iPhone sales actually increased in mainland China during the quarter (though it didn’t say whether that increase was from the previous quarter or the year before).
This surprise was enough to prompt multiple questions from analysts during a call with Apple executives. One analyst on the call put it bluntly: “What are we missing?”
Chief Executive Officer Tim Cook did not respond, saying he could not deal with numbers that Apple did not release publicly. “All I can say is how it turned out,” Cook said. “You can’t bridge numbers that we didn’t come up with.”
Cook said the two best-selling phones in “urban China” in the quarter were the iPhone 15 and 15 Pro Max, and said he was impressed by the reception he received from consumers when he visited Shanghai in March to open a new store. He described the “warm and energetic” welcome he received. .
What is actually happening in China?
It’s not immediately clear why Apple’s numbers don’t align more closely with independent research.
Between quarterly earnings reports, Wall Street analysts rely on independently collected data to evaluate a company’s performance. These investigative reports include everything from supply chain information to retail inventory levels, gleaned from both official sources and leaks from insiders. This data can’t tell the whole story, but it gives analysts a strong impression of what’s going on.
However, the discrepancy between third-party research reports and Apple’s report in the first quarter left many investors and observers scratching their heads.
Apple reports sales in China, but many industry analysts focus on shipments, which leaves room for divergence if prices change. Cook’s comment that new iPhone 15 models, including the 15 Pro Max, are best-selling in urban China suggests the company benefited from higher prices, even if overall unit sales declined more sharply. suggests that it is possible.
IDC analyst Will Wong predicted a 10% decline in iPhone sales in China and told Bloomberg that differences in how prices are measured may have caused some of the confusion. .
“While IDC calculated the street price (i.e. the price paid by the consumer), Apple likely uses another price level in its financial reports, such as the factory price,” Wong said. Said.
Following the earnings call with Apple executives, many Wall Street equity research analysts appeared to support Apple’s view. Analysts significantly revised their models to reflect more favorable China operations, according to a research note published Friday. Analysts at Bank of America say concerns about China are “unfounded,” and analysts at investment firm Wedbush say sales in China will hit a turning point by June and remain stagnant by September. It is predicted that growth will be seen in the future.
“The worst-case scenario is that Apple is currently lagging behind Apple in China,” Wedbush analysts wrote.
Apple’s overall revenue for the quarter fell 4.3% to $90.8 billion, beating analysts’ expectations. Apple also beat expectations for earnings per share, hitting last year’s figure of $1.53. Management announced a $110 billion share buyback, the largest increase from the $80 billion to $90 billion Apple has offered in recent years.
However, some analysts remain cautious. While the independent research report may not be consistent with Apple’s performance in China, UBS analysts noted that the iPhone clearly appears to be losing market share in China.
“The peak of 50 million units in China in 2022 is unlikely to be replicated considering it was only 300 to 500 units.” [basis points] ” UBS analyst David Vogt wrote in a note to investors on Friday, stressing that Apple is “not yet clear.”
UBS, which has a neutral rating on Apple, does not expect the company to sell more iPhone 16 devices, scheduled for release in September, than the iPhone 15. The company said this sentiment was due in part to a loss of market share in China.
And even though Cook talked about China on Thursday’s conference call, the company also appeared to be laying the groundwork for a future in which China becomes less important to its business. CFO Luca Maestri pointed out that other “emerging markets” such as India, Saudi Arabia, Mexico, Turkey and Indonesia are becoming increasingly large, collectively approaching the size of China.
“If you compare it to China, the gap is closing, and we hope this trajectory continues for a long time,” Maestri said.
