Apple Earnings Preview: iPhone Demand Concerns Wane; Apple Intelligence Likely Dominate the Call.

iPhone consensus sales is expected to be 44.91 billion in 4Q, FY24, a 2.5% growth year over year.

Investors are looking toward Apple $Apple (AAPL.US)$ Intelligence as the catalyst for the next major iPhone sales cycle.

Apple is expected to report its 4Q fiscal 2024 earnings on Thursday, October 31 after market close. Analysts expect Apple’s revenue to come in at $94.215 billion and adjusted net income to be $24.239 billion. Adjusted earnings are likely to be $1.59 per share, according to Bloomberg's unanimous expectations.

Apple China in Focus
For Apple, the iPhone remains by far its most important product, as it directly contributes roughly half of all sales and draws consumers in to buy accessories like the Apple Watch or subscription services like Apple Music.

It has been a complicated time for Apple investors, who have struggled to get a clearer picture of the outlook for iPhone demand. iPhone consensus sales is expected to be 44.91 billion in 4Q, FY24, a 2.5% growth year over year.

The iPhone 16 debuted in September and has outperformed its predecessor so far, according to Counterpoint Research data. Consumers continue to shift to the pricier models, and sales of the top-end Pro and Pro Max models gained 44% compared with last year’s equivalents.

Sales of Apple’s newest iPhones in China are up 20% in their first three weeks compared with 2023’s model, a positive sign for a device that struggled this year to gain traction in the world’s largest smartphone market. China remains the world’s largest — and by Apple Chief Executive Officer Tim Cook’s estimation, most competitive — smartphone market in the world.

Given the smooth production ramp-up, consistent pricing strategy, and the initial wave of upgrades by existing iPhone users, the iPhone 16 series has experienced substantial growth in the Chinese domestic market.

This makes management remarks about its reception in China more critical than in previous quarters, given the uneven impact the region might have on Apple's sales growth next year. Sales from Greater China are expected to be 15.7 billion in 4Q, FY24. This represents a 4.3% increase over the last year.

Apple Inc has reduced iPhone 16 prices by up to 1,600 yuan ($225) on its Alibaba Group Holding's BABA Tmall store to boost sales during Singles’ Day, the world's largest shopping festival.

Apple Intelligence Likely Dominate the Call
Apple announced its generative artificial intelligence software, Apple Intelligence, in June. Consumers and investors alike were excited to see the company introduce a major update to its products.

Apple is preparing to roll out the first raft of its much-hyped Apple Intelligence features next week. But the company is already preparing its next phase of AI offerings, complete with ChatGPT integration and Visual Intelligence, as part of its latest developer beta available Wednesday.

Apple Intelligence will likely dominate the call, but R&D expenses are not expected to ramp up in 4Q FY24. 0perating margins might see a marginal lift, driven by double-digit growth in services and favorable product mix.

Investors and analysts are looking toward Apple Intelligence as the catalyst for the next major iPhone sales cycle. Shares of Apple are up some 35% over the last 12 months, and 19% since the company announced Apple Intelligence during its Worldwide Developer Conference (WWDC) in June.

Apple’s initial Apple Intelligence update, which includes notification summaries, Writing Tools for summarizing and rewriting text, and the AI image editing Clean Up tool in Photos, is unlikely to get consumers to start buying up the company’s latest iPhones, iPads, or Macs in droves.

Analysts’ Opinions
JPMorgan analysts led by Samik Chatterjee said they see demand improvement for the iPhone 16. iPhone average lead times - a key industry metric measuring the time from when an order is received to when the phone is delivered to the customer -- is now in line with the iPhone 15. Chatterjee rates Apple stock an Overweight with a price target of $265, implying a 12% potential upside to its current share price.

While average lead times for the iPhone 16 series have been tracking below the iPhone 15 until the fifth week after the launch, the lead times are back to tracking in line with iPhone 15 in week 6, providing more reassurance around recovery in demand momentum, Chatterjee said.

Evercore ISI analyst Amit Daryanani wrote in a research note Monday that the "staggered rollout of AI should also result in a stronger-for-longer iPhone upgrade cycle as the release of new features and new geographies should drive strong word-of-mouth advertising." He rates Apple as Outperform with a $250 price target.

TF International Securities' analyst Ming-Chi Kuo said iPhone 16 orders have been cut by around 10M units for the next few quarters.

"iPhone 16 orders were cut by around 10M units for 4Q24–1H25, with most of the cuts affecting non-Pro models," Kuo wrote on his blog. "As a result, iPhone 16 production for 2H24 is now estimated at 84 million units (down from around 88 million previously)."

Kuo added that after the cuts, total iPhone production for the next three quarters are forecast to be around 80M, 45M and 39M unit, respectively, compared to 84M, 48M and 41M in the fourth-quarter of 2023 and first two quarters of 2024, respectively. He also said mass production of the iPhone SE4 will start in December, with projected production around 8.6M units.