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Apple (AAPL) slides toward key test of October lows as concerns mount

AInvestMonday, Mar 18, 2024 2:12 pm ET
3min read

Shares of AAPL are under pressure as the company faces a deluge of negative headwinds. Shares of AAPL are down -11% year to date as investors question its growth potential following a year where it saw the top line decline in three of the four quarters. 

Recent headlines have added to the pressure as the European Union announced it would pursue a $1.9 billion dollar fine around the company"s third-party app business. This morning reports of a slow down in China weighed on the stock. AAPL was already under scrutiny as it is perceived to be falling far behind in the AI-space.

The stock fell to $170 today, marking its lowest level since early November. The $165 area marks the low for both May and October and represents critical support. The question for investors is whether the stock can hold these levels. While the company faces mounting challenges it does have an enviable two-billion-person ecosystem at its disposal. So, should investors be buying the name at these levels? We look at the stock in this article. 

Apple has been struggling in China, as recent news reports indicate a 24% drop in iPhone sales during the first six weeks of the year. This follows multiple discouraging developments surrounding Apple's sales in China, such as the need to discount iPhones significantly and weak DecQ sales, which fell over 13% year-over-year. While Apple exceeded iPhone sales estimates in DecQ despite the softness in China, the recent trends in the region paint a moderately gloomy picture.

Competition is heating up in China, and while Apple still commands the lead among smartphone makers in China, current economic woes could nudge consumers toward cheaper alternatives. Apple's iMessage, often pointed out as a key feature of why consumers opt for iPhone over Android alternatives, may not be as strong a switching defense in China as it is in the U.S., given the popularity of other messaging apps like WeChat.

In addition to the China headwinds, regulations could shrink future revenue for Apple, as it has been dealing with heightened regulatory scrutiny from the European Union as it handed down a nearly $2.0 billion fine this week. The same scrutiny could intensify in China, where Apple has already faced a fair share of regulations, such as enforcing a new check on apps listed in its App Store. 

Investors are concerned about App Store revenue over the long term given today's EU fine and Apple's European App Store changes that took effect March 1st. This is going to be a decade-long cat-and-mouse game between Apple and regulators across the world. Regulators will force Apple to make changes, Apple will comply, and then find new ways to charge developers. If developers are getting value from Apple, they will pay up, and Apple's App Store economics will remain largely intact.

Geopolitical risks could severely disrupt Apple's supply chain, which is predominantly located in China, and tensions have already led the Chinese government to tell its officials to no longer use iPhones for business purposes.

However, buying opportunities are opening as shares of Apple head toward October lows. Apple still boasts a portfolio of products to help cushion the softening of iPhone sales in China, and it recently launched the Vision Pro, a VR headset with incredible potential. While additional reports of deteriorating demand in China may crop up throughout the year, as we saw with DecQ performance, Apple's geographical and technological diversification more than offset shaky economic conditions in China. It would not be surprising for this to remain the case going forward.

Apple reported upside to Dec-qtr with a print of $119.6 billion/$2.18 vs street at $118 billion/$2.10, overall sales were up 2% year-over-year (adjusted for an extra week LY was up +4%) – driven by strength across iPhones (+6%) and services (+11%) that was partially offset by weakness in iPad (-25%) and wearables (-10%). One of the concerns was the softer Mar-qtr guide, which implies sales will be ~$90 billion (down 5% year-over-year) vs street at $96 billion and EPS should be ~$1.50 (vs. street at 1.58). 

China revenues were down 12% year-over-year, though iPhone sales were down mid-single digits in China (in constant currency). Weakness in China was more around wearables and iPads, reflecting a weaker consumer spending environment.  Bulls would argue that the concerns around China were foreshadowed in the outlook. 

In the upcoming March-qtr, expectation are for iPhone revenues to be flat year-over-year (adjusted for a $5 billion benefit they had last year, ~$46 billion range). Services should grow double digits, and the rest of the hardware products (iPad, Wearables) should decline high single digits year-over-year in March. 

Apple continues to see gross-margins work higher and expects Mar-qtr gross-margins in the range of 46-47% (street was at 45.5%), which dampened the impact of revenue miss to the bottom-line in March-qtr. Additionally, Apple has an impressive 10% increase in its 2.2 billion iOS install base. Net/net, while understanding the disappointment around Mar-qtr guide, there are a host of tailwinds stacking up in Apple's favor, ranging from Gen AI product launches to Vision Pro adoption to sustained FCF generation and uptick to capital allocation.

In conclusion, while Apple faces challenges in China and on the regulatory front, it remains a formidable player in the tech industry. Not many companies can boast an ecosystem of two billion in its user base. The company's diversified product portfolio and geographical reach help cushion the impact of softening sales in China. Additionally, the upcoming Vision Pro and Gen AI products have the potential to drive growth and increase shareholder value. As Apple navigates through the regulatory challenges and geopolitical risks, it is important to keep an eye on the company's ability to innovate and adapt to changing market dynamics.


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