iPhone revenue recovery is difficult to "drive up"! Apple's business in China is under pressure, and revenue growth this quarter may slow down

According to Zhitong Finance, Apple (AAPL.US) announced its fourth-quarter performance. Total sales increased by 6.1% year-on-year to $94.9 billion, slightly above the average expectation of $94.4 billion. Apple stated that earnings per share were $0.97, but if not for a one-time charge related to the European General Court ruling, the adjusted earnings per share would be $1.64, exceeding analysts' expectations of $1.60. The closely watched gross margin was 46.2%, slightly above the expected 46.1%.

Apple's AI-enhanced iPhone got off to a good start, with quarterly sales exceeding Wall Street's expectations, but as Apple is about to enter its most critical sales period of the year, a modest revenue forecast has raised doubts about whether this momentum can be maintained during the holiday sales season. Additionally, the decline in sales in China during the fourth quarter has also raised concerns among some analysts and investors. In the quarterly earnings report, Apple stated that total sales for the quarter ending in December would grow at a low to mid-single-digit percentage, below the previously expected increase of 7%. The company's revenue in China also declined last quarter, falling short of expectations.

Overall, the situation indicates that the company is still struggling to rebound from the longest sales slump in its history. In fiscal year 2023, the company's revenue declined for four consecutive quarters, only stabilizing in the past two quarters. Apple remains the world's most valuable company, but it has to contend with a sluggish smartphone market, intensified competition in China, and regulatory scrutiny worldwide.

After the earnings announcement, these concerns dragged down its stock price in after-hours trading, falling about 2%. However, as of Thursday's close, driven by optimism about Apple's AI prospects, the stock has risen 17% year-to-date.

Apple's Business in China Under Pressure

Driven by global iPhone demand, Apple's overall revenue last quarter slightly exceeded Wall Street's expectations, but the results showed that the company is still struggling in a key market. Apple is competing with local brands in China, which is a major manufacturing hub for the company. For the fourth quarter ending September 28, revenue in the region slightly declined year-on-year to $15 billion, compared to analysts' previous estimate of $15.8 billion.

Cook visited China earlier this month, promising future cooperation and further investment in the country. Apple has not yet announced plans to launch the AI feature Apple Intelligence in China and is seeking local partners to bring this feature to Chinese users. More broadly, Apple Intelligence remains a question mark for the company. So far, only a small portion of the platform's capabilities has been delivered, making it difficult to assess how much they will drive demand in the long run In December this year, Apple will integrate OpenAI's ChatGPT into its software and introduce generative artificial intelligence capabilities for editing images. A comprehensive improvement to the Siri digital assistant will not arrive until next year.

Apple CEO Tim Cook stated that the iPhone is growing in every regional market, indicating that the issues in Apple's Chinese market may lie with other product lines. China is Apple's largest revenue source after the Americas and Europe.

Before a conference call with analysts, Maxim Group analyst Tom Forte attributed the decline in Apple's stock price to lower-than-expected sales in China for the fourth fiscal quarter.

iPhone Business Rebounds

Apple launched the iPhone 16 in September, driving AI upgrades for its flagship phone. Apple also updated the Apple Watch and released new AirPods. These consumer devices account for a large portion of the company's revenue.

Investors have been betting that Apple Intelligence—the company's new suite of artificial intelligence features—will help drive device sales. However, this software was released weeks after the iPhone launch, and many of its key features will take months to be realized.

Apple's competitors, Microsoft (MSFT.US) and Meta (META.US), both indicated this week that they expect to continue increasing spending to support their own artificial intelligence strategies. Apple reported that property and equipment spending (a measure of its capital expenditures) increased by $2.91 billion from the previous quarter, reaching $9.45 billion.

The lower portion of Apple's spending is due to its use of third-party data centers to complete some AI work. Certain aspects of Apple Intelligence do rely on Apple's own data centers, but the company is using its own internal chips to support these features.

iPhone revenue was $46.2 billion, exceeding the expected $45 billion. This represents a 5.5% increase compared to the same period last year. In 2025, the business may receive another boost when the company plans to release a new iPhone SE with Apple Intelligence features and make more significant hardware adjustments to its flagship model.

Apple's fourth fiscal quarter ended on September 28, which means it only reflects a few days of sales for the iPhone 16 series that began on September 20. Cook stated that the sales growth of the iPhone 16 is faster than that of the iPhone 15, with both phones having the same number of sales days in the fourth quarter However, Ahan Vashi, head of Quantamental Investor, stated that the results did not show any increase related to Apple’s smart products. Vashi wrote in an email, “Given Apple’s high price-to-earnings ratio (around 35-36 times), its thin revenue and revenue growth do not provide much comfort. Until there is concrete evidence of an artificial intelligence supercycle, I still consider Apple stock to be ‘dead money.’”

Service revenue slightly below expectations

Apple previously stated that sales growth would be around 5%, with the services segment performing particularly well. The department's revenue did reach a record high last quarter, climbing to $25 billion. However, this was slightly below Wall Street's forecast of $25.3 billion. In a conference call with analysts, outgoing CFO Luca Maestri stated that service revenue is expected to grow at a double-digit rate in the December quarter, similar to the growth rate for fiscal year 2024.

Although Apple’s services business has been a highlight, it also faces its own challenges. The App Store has been criticized worldwide, including in the European Union, where new regulations have forced policy changes. Apple now allows third-party app stores and payment methods in the region, which could put pressure on revenue.

Apple did indicate that it expects service revenue to achieve double-digit growth in the first fiscal quarter, leading some analysts on the conference call to ask Apple executives whether overall hardware revenue would decline. The executives did not answer this question and did not clarify how the iPhone was performing in China, where Apple’s new artificial intelligence features are still unavailable. Apple has not announced when they will be available.

Weak growth in other hardware businesses

However, other product segments performed below analysts' expectations last quarter. This includes the iPad business and Apple’s wearables division. Mac revenue was $7.74 billion, in line with expectations. It was not until this quarter that Apple released significant updates to its Mac product line; earlier this year, Apple launched the MacBook Air equipped with the M3 chip.

This week, Apple added the M4 chip product line to the iMac, Mac mini, and MacBook Pro—processors designed to accelerate artificial intelligence processing speed. These three products should help the Mac succeed during the holiday sales period. Reports indicate that Apple plans to launch the M4 chip on the MacBook Air, Mac Studio, and Mac Pro next year.

Sales of the iPad series were $6.95 billion, below the expected $7.07 billion. After about 18 months without any changes, Apple underwent a comprehensive reform of the iPad this year, updating the iPad Pro with the M4 chip and releasing a larger version of the iPad Air Earlier this month, Apple launched the iPad mini equipped with a new chip and supporting Apple Intelligence features, but the sales of this product were not included in the fourth fiscal quarter. Apple plans to release a new low-end model aimed at students in the first half of next year to give the iPad another boost.

In September this year, Apple updated its wearable devices, home, and accessories product lines, launching the Apple Watch Series 10 and a new black version of the Ultra 2 watch. The company also introduced two models of AirPods 4. However, these relatively mild changes did not lead to a significant increase in sales. This segment generated $90.4 billion in revenue, down 3% from the same period last year, with analysts estimating it at $91.7 billion.

Apple has also been striving to find one of its famous "next big things"—a major new category that can drive growth. The Vision Pro headset was first unveiled in February this year and has so far remained a niche product. In the same month, the company canceled its plans to develop a car.

However, Apple is making new attempts in the smart home market, launching devices featuring robotics and artificial intelligence, and is working to produce more affordable headsets