Apple Stock Pops As Tim Cook Masters The Art Of Spinning Terrible iPhone Sales—"Services", Baby...

Apple’s latest earnings report dropped, and Wall Street’s reaction was like watching someone try to convince themselves that The Substance wasn’t that bad. Shares popped 3% in after-hours trading for reasons NOT due to the iPhone. In short, Apple’s bread-and-butter product, which practically prints money, missed expectations with $69.14 billion in revenue versus the $71.03 billion analysts were hoping for. 

(Source: Giphy) 

But don’t worry, Timmy Glowup had a backup plan: services revenue. Apple’s services division (think App Store, iCloud subscriptions, and Apple Music) nailed a record $26.34 billion in revenue, beating Wall Street’s $26.09 billion estimate. Apparently, all those $0.99 in-app purchases from Candy Crush whales are doing the heavy lifting. Cook called services the “growth engine” of Cupertino’s empire, but honestly, when it comes to this earnings drop, it solidified itself as the MVP. 

The issue though is none other than China. Apple’s third-largest market by revenue saw an 11.1% sales decline in the December quarter, dragging in just $18.51 billion. Tim Cook blamed about half of that slump on “channel inventory issues”---a.k.a. Apple in all its glory, overestimated how many CCP die-hards wanted their stuff. The other half? That’s in China's increasingly competitive smartphone market, where local heavyweights like Huawei and Vivo are eating Apple’s lunch with devices that don’t cost as much as a used car.

(Source: CNBC) 

Additionally, Apple Intelligence is still MIA in China. Cook pointed out that iPhone sales were stronger in markets where Apple Intelligence was live, but over in the People’s Republic, the feature is stuck in regulatory limbo. Meaning, until that gets sorted, Apple’s basically playing defense against local brands that don’t have to jump through as many hoops.

But, but, but… is Tim Cook really worried? Ehh not really. He’s betting on a nationwide subsidy program in China, rolled out on January 20, to boost Apple’s fortunes. The program slaps a 500-yuan (about $70) discount on eligible smartphones and other products, which sounds great—until you realize it doesn’t apply to Apple’s pricey Pro models. So, sure, the subsidy might help move some iPads and lower-end iPhones, but it’s not solving the bigger problem: Apple’s high-end devices are losing their must-have status in China.

(Source: CNBC) 

To make matters worse, this is the sixth straight quarter of revenue declines for Apple in China. Even Cook had to admit that it’s “the most competitive market in the world.” Translation: “We’re getting smoked, and there’s not much I can do about it right now.”

Overall though, Apple’s revenue for the quarter came in at $124.3 billion, up 4% year-over-year and just barely beating Wall Street’s $124.12 billion estimate. Gross margins were a solid 46.9%, better than the 46.5% analysts expected, and Cook gave a rosy outlook for the March quarter, projecting “low to mid single digits” revenue growth. Services are expected to keep crushing it, with “low double digits” growth on deck.

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So yeah, while services are playing the safety net for Apple these days, the iPhone is still the core. And sure, missing iPhone revenue estimates isn’t the end of the world, but it’s a red flag. Add in the China struggles, and you definitely have yourself a recipe for investor uncertainty in the short run. 

But for now, even though the stock is poppin’ and lockin’ in pre-market, it’s clear Apple has two stories going on here. On the one hand, services are carrying the team, and on the other, the iPhone—the thing that built Apple’s empire—is showing cracks, especially in China. Of course, only time will tell if the subsidies that Cook is banking on will pay dividends, but in the meantime, try not to let love blind you here. 

(Source: Giphy) 

Even though Apple is still drowning in cash, there’s an alarming issue that needs to be resolved to keep the growth rate churning. Meaning, place your bets accordingly and keep your eyes on Apple. As always, stay safe and stay frosty, friends! Until next time… 

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Stocks.News holds positions in Apple as mentioned in the article.