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Apple (NASDAQ:AAPL) returned to sales growth in its fiscal first-quarter for the first time in five period, but concerns over the coming quarter and its vulnerable position in China may keep the stock “range bound” for a while, several Wall Street analysts said.
“China remains a bumpy ride,” Wedbush Securities analyst Dan Ives wrote of the Tim Cook-led company. “China represents roughly 20% of iPhones (17% this quarter) and clearly [it’s] no secret Apple is struggling to battle Huawei and geopolitical headwinds near-term.” Ives rates Apple shares Outperform.
Apple shares fell 2.5% in premarket trading on Friday.
Sales from Greater China were $20.8B during the period, below the $23.5B that analysts had expected.
Cook attempted to defend the company’s position in the region, telling analysts the iPhone accounts for four of the top six smartphone positions in urban China.
“If you look at iPhone in China Mainland … and you look at it in constant currency, so more of an operational view, we were down mid-single digits on iPhone,” Cook said, adding that the iPhone saw “solid growth” from upgraders and it became the country’s top smartphone brand in 2023, according to research firm IDC.
“And so, there’s some good news along with – obviously, we’d prefer not to [contract].”
The increased competition in China — coming from Huawei, Xiaomi and others — is not likely to change in the near-term, KeyBanc analyst Brandon Nispel said. When combined with a premium valuation and limited growth, the stock is likely to be “range-bound and perform in line with the Nasdaq at best,” Nispel said. Nispel has a Sector Weight rating on Apple.
Forward concerns
Apple’s first-quarter results were aided by the iPhone, which generated $69.7B in sales during the period, above estimates. However, that same benefit is not likely to occur in the coming quarter, giving Wall Street some concern.
“And in the March quarter a year ago, we were able to replenish channel inventory and fulfill significant pent-up demand from the constraints,” Chief Financial Officer Luca Maestri said on the company’s earnings call. “We estimate that this impact added close to $5 billion to the March quarter’s total revenue last year. When we remove this impact from last year’s revenue, we expect both our March quarter total company revenue and iPhone revenue to be similar to a year ago.”
With the weaker-than-expected guidance, it’s likely earnings and sales expectations will need to be lowered again, Nispel said.
Investors may “partially accept” the excuses of tougher comparisons and COVID-19 supply related impacts for the weak guidance, but there are no “rose colored glasses,” Ives explained.
While the guidance may be softer-than-expected, Apple is likely to continue seeing gross margin expansion and double-digit services growth in the coming quarter, suggesting the longer-term thesis is still intact, Citi analyst Atif Malik, who has a Buy rating on Apple, said.
Malik lowered his fiscal 2024, 2025 and 2026 estimates by 1% to 2% and tweaked his price target to $225 from $230 after the results.
