Can Apple overcome China slowdown and boost iPhone sales this year?

Apple Inc. (NASDAQ: AAPL) entered the new fiscal year on an upbeat note, delivering impressive sales and earnings performance in the first three months of the year. The key financial metrics topped expectations in the first quarter, though the gadget giant experienced a slowdown in its China business.

The Cupertino-based tech firm’s stock dropped soon after the announcement, reflecting the China setback and the management’s cautious guidance on iPhone sales. However, the stock regained momentum in the following sessions and stayed above the 12-month average. Earlier, AAPL had set a new record in mid-December and traded near the $200 mark. Since the positive aspects of the business outlook have already been factored into the price, the valuation is high right now, though the stock has dropped around 5% after the December peak. It makes sense to wait until the price moderates before buying Apple’s stock.

Business Mix

iPhone, the company’s flagship product that continues to be the main revenue driver, has remained resilient to headwinds in key markets like China but the recent sales slump is a concern. Meanwhile, continued expansion of the service business should help in balancing the slowdown in product sales to some extent. The Services segment, which includes offerings like Pay, Music, iCloud, and TV+, accounted for about 19% of total revenues in the most recent quarter.

From Apple’s Q1 2024 earnings call:

“The color we are providing today assumes that the macroeconomic outlook doesn’t worsen from what we are projecting today for the current quarter. And we expect foreign exchange to be a revenue headwind of about 2 percentage points on a year-over-year basis. As a reminder, in the December quarter of a year ago, we faced significant supply constraints on the iPhone 14 Pro and 14 Pro Max due to COVID-19 factory shutdowns. And in the March quarter a year ago, we were able to replenish channel inventory and fulfill significant pent-up demand from the constraints.”

Strong Q1

After posting lackluster growth throughout 2023, iPhone’s sales rebounded in Q1 and came in line with the long-term average. Total revenues increased modestly to $119.6 billion in the December quarter from $117.2 billion last year, even as a 6% rise in iPhone sales was partially offset by double-digit declines in the sales of iPad and Wearable. The topline growth, after a four-quarter streak of flat or falling revenues, could be the beginning of a rebound.

The fast-growing Services business maintained the uptrend. Apple’s business grew across all major geographical regions except in China where sales dropped 13% year-over-year. First-quarter profit rose to $33.92 billion or $2.18 per share from $30.0 billion or $1.88 per share in Q1 2023. Both earnings and revenues topped expectations, marking the fourth beat in a row.

Vision Pro

Setting a new record, Apple’s installed base crossed 2.2 billion active devices during the quarter. Recently, the company rolled out its much-hyped Vision Pro VR headset, which promises to redefine how users interact with technology. The launch came around four months after the company released iPhone 15.

After opening at $188.15, shares of Apple traded higher throughout Monday’s session. Last year, AAPL outperformed the S&P 500 index by a big margin.