Apple Returns to Growth & Offers Optimistic Guidance but China Woes Persist

Apple Returned to Growth

Apple has struggled over the past several quarters and its sales have contracted for most of the last two fiscal years. Thursday's result though showed a rebound as total revenues expanded by nearly 5% y/y in Q3 FY24 (period ended June 29) ^[1] and executives offered an upbeat view for the current quarter during the earnings call ^[2]. CFO Luca Maestri expects "similar" increase in Q4 FY24 that would mean back-to-back growth, something that has not happened in two years.

The increasingly important services sector was once again the star of the report, as revenues reached new records. The installed base is important for the segment and the CFO spoke of "new all-time high in all geographic segments". Although he did not disclose exact figures, back in February he had mentioned more than 2.2 billion active devices. Apple did not have much success with its tablet recently, but the new iPads launched in March changed that, leading to a nearly 24% y/y jump in sales during the reported period. However, its biggest product provided a source of concern, as iPhone sales contracted for second straight quarter, although the CEO attributed this to currency headwinds.

Much of Apple's financial underperformance comes down to the lack of innovation, which prevents it from finding a new growth market. Crucially the tech giant took a long time to enter the generative Artificial Intelligence arena, but that changed in June as it showcased a series of AI features ^[3] that sparked hopes for a much needed device upgrade cycle that would reinvigorate its financials. During the earnings call, CEO Tim Cook said that the firm will continue to invest in this transformational technology and that Apple Intelligence is "another compelling reason" for consumers to buy new hardware.

However, Apple has catching up to do. These AI capabilities (not all of them) are supposed to be included in the next software overhaul (iOS 18), with the new versions typically rolled out in autumn. But Bloomberg casts doubt over this timeline, reporting that the first AI features will miss the initial OS launch ^[4]. In the meantime, other smartphone giants like Samsung have been rolling out AI capabilities since the start of the year, gaining a potentially critical head start. The Korean maker is also looking to challenge Apple dominance in wearables, with the launch of its Smart Ring ^[5], a product category Apple does not have.

Another source for Apple's recent difficulties is weak demand in China, an important market for the firm, which coincides with broader strained Sino-Western relations that can exacerbate the issue. Sales in Greater China shrunk 6.5% y/y, marking the fourth quarter of contraction. Mr Cook downplayed the underperformance, attributing half of it to the adverse FX impact and painted a rosier picture, speaking of an improvement compared to H1.

It is hard to determine if Apple's China problems are cyclical or structural, but the persistence definitely raises concern over the latter. Underscoring the diminished appeal of the iPhone in the region, Canalys' Q2 shipments report showed that Apple was knocked off the top five spots. ^[6]

With the latest results Apple creates hope that better days lay ahead, expecting back-to-back revenue growth. Its foray into AI can spark excitement around its products and has the potential to provide a growth runway. On the other hand, the firm made a late entry that can create a handicap, while China woes persist.