Apple's financial report showed that iPhone sales in China have declined, and investment firm JPMorgan lowered Apple's target price by $10. Overall, Apple's earnings report showed a rebound from its 2023 trough, but the details in the announcement led JPMorgan to predict future declines. Analysts were particularly unimpressed with Apple's attempts to explain its earnings results by highlighting multiple reasons why direct year-over-year comparisons are impossible.
JPMorgan Chase wrote in a note: "Apple hopes to explain the prospect of a year-on-year revenue decline of approximately -5% in the second quarter through the difficult comparison caused by iPhone supply replenishment in the second quarter of last year. Despite the severe macro backdrop, revenue is expected to be flat year-on-year, excluding iPhone supply replenishment."
"However, comparability aside, the main reason for the company's lower-than-expected second-quarter outlook is headwinds in Mac, iPad and wearables, which have a more profound impact on the outlook beyond the second quarter."
JPMorgan Chase said that it "expects iPhone revenue to decline by approximately -10% year-on-year" and that the services industry will only grow at a "low double-digit percentage".
"[But] iPad, Mac and Wearables headwinds, which overall declined year-over-year in the fiscal first quarter and are expected to decline significantly again in the fiscal second quarter, are key variables in the macro impact of the product categories and have a more profound impact on revisions to our revenue forecasts beyond the fiscal second quarter," the analysts said.
JPMorgan Chase pointed out that according to Apple, iPhone sales in China fell by "only mid-single digits," but financial report data showed that Apple's overall revenue in China fell by about 11% year-on-year.
This means "larger declines in other product categories," the analysts said. "This challenges the company's medium-term outlook in the region, with greater revenue challenges leading us to now forecast a modest revenue decline in FY24, as opposed to the modest growth we had previously expected."
But at the same time, JPMorgan Chase pointed out: "Apple's performance in terms of profit margins continues to surprise investors. The total profit margin in the first fiscal quarter reached 45.9%, which is at the high end of the guidance range of 45%-46%. The current guidance gross profit margin is higher than 46% (the guidance range is 46%-47%), which will set a new record for the company."
Analysts also expect Apple's gross margin to continue to expand as this margin is coupled with a "higher services revenue mix."
As a result, JPMorgan said that "iPhone remains resilient even on the revenue front" but "the outlook for iPad and Mac raises broader concerns."
"While the iPhone contributes the majority of the company's product revenue, even small differences compared to comparable products can lead to large differences in financial data," the report said. "We believe demand for other hardware product categories will be a greater focus based on earnings per share evidence."
JPMorgan Chase expects that "Apple's Mac and iPad revenue will still increase by approximately $2 billion and $4 billion respectively in FY24 compared with FY19." JPMorgan noted that this leaves "room for demand/income to return to pre-pandemic levels."
The report does not include any specific forecasts for Apple's Vision Pro, whose first sales figures will be released in the next quarter's earnings report. In addition, JPMorgan Chase also reminded investors not to over-interpret the reasons why Apple Vision Pro was sold out quickly.