Apple Earnings Preview: iPhone Growth and AI Development in Focus

iPhone sales have been facing headwinds due to slowing global cycles and increased competition in China, which is expected to drag down revenue performance by 1.82% June Q. iPhone sales account for 52% of Apple's total revenue in FY23. The market expects iPhone shipments to reach 43.6 million June Q.

China remains a key market for Apple, accounting for 19% of its sales in the Greater China region in FY23. Over the past year, as the smartphone market becomes increasingly competitive and saturated, iPhone sales have continued to slow, especially in China, where Apple faces significant competition from local brands like Huawei, which has demonstrated strong sales performance since the release of Pura 70 in April 2024, challenging iPhone shipments.

According to the latest data from Canalys, China's smartphone market has further recovered with a 10% year-on-year growth in shipments in Q2 2024, following a turnaround in the previous quarter. However, Apple has fallen out of the top five in China's smartphone sales for the first time in four years. Despite lowering iPhone prices in Q2, Apple's market share in China still fell by 2 pct to 14% compared to the same period last year.

Investors are looking forward to hearing more about Apple Intelligence development in the upcoming earnings report, as AI is expected to drive a device upgrade cycle that could boost iPhone and iPad sales.

At the WWDC conference in June this year, the highly anticipated Apple Intelligence, Apple's personal AI system, was officially unveiled. According to sources familiar with the matter, Apple Intelligence is expected to be delayed until October, which means the first batch of iPhone 16 shipments will not be equipped with AI and will require a software update to access this feature. The delay may be due to Apple's concerns about the stability of Apple Intelligence functionality and the need for developers to have sufficient testing time.

Gross margins will also be under the spotlight amid a steady upward trajectory over the past few years, lifted as the firm has bought more of its supply chain in-house and grown its IT services businesses. Wall Street expects a gross margin of 46.06% for this quarter.

Compared to product sales, services revenue is stickier and has a higher profit margin. Apple's services revenue has grown significantly in recent years, with services revenue hitting a historical high of $23.9 billion March Q, with a yoy growth of 14%, accounting for 26% of total revenue. The service business is anticipated to continue its strong performance thanks to higher App Store sales and rising subscription services.

According to Wells Fargo analysts, "We expect the combination of the rollout of Apple Intelligence on the iPhone 16 along with a historically aged iPhone installed base to drive a significant upgrade cycle. While we think it's possible that Apple continues to lose some unit share in China, we expect them to benefit from an ongoing bifurcation in the market between premium smartphone ASPs rising and low-end smartphone unit shipments increasing."

Baird analyst William Power mentioned in an investor report that almost 95% of iPhones globally are estimated to require an upgrade at some point to better utilize Apple Intelligence, which will also benefit other Apple devices such as Mac and iPad.

Several Wall Street investment banks have raised their target prices for Apple ahead of the earnings release. TD COWEN raised Apple's target price from $220 to $250. Power also raised Apple's target price from $200 to $240 and maintained an "outperform" rating on the stock. Needham analyst Laura Martin maintained a buy rating on Apple and raised the target price from $220 to $260.

by moomoo News Olivia