Apple is poised to release its earnings for Q2 fiscal year 2024 after the US market closes on 2 May. Investors will be watching for key metrics that shape its stock trajectory.
ADVERTISEMENTApple’s stocks underperformed most of the US tech shares this year due to weakened iPhone sales and a lack of AI advancement. Apple’s shares declined by 12% year-to-date, following Tesla’s 32% drop, making it the second-worst performer among the Magnificent Seven stocks. It has also lost its crown to Microsoft as the world’s largest market cap company due to these setbacks.
However, Apple has beaten earnings expectations in the past four quarterly reports. Though this doesn’t guarantee a positive reaction from share prices, as investors tend to look at more comprehensive metrics when assessing the company's performance.
iPhone sales
iPhone sales account for about 60% of Apple’s overall revenue and are seen as the core business of Apple. Typically, Apple’s share prices respond to any news about the newest iPhone sales instantly. In 2023, Apple’s net sales growth experienced a significant slowdown as users tended to hold onto the current phone for longer periods before upgrading, and there was a sales slowdown in China, which accounts for approximately 20% of Apple’s global market share.
In the final quarter of 2023, iPhone sales in China fell by 13% year on year due to weakened Chinese consumer demand and competition from rivals. In the first quarter of 2024, global smartphone shipments dropped to 50.1 million, down 9.6% from the same quarter in 2023.
Services revenue
Apple Services has been a bright spot for Apple in recent years as the segment is the second biggest revenue contributor, representing about 20% of its overall sales. The division, comprising Apple Store, Apple Pay, Apple TV+, Apple Music, Apple Arcade, and iCloud, generated $85.2 billion in revenue in the fiscal year 2023. Notably, Apple Services is a much more profitable segment than its hardware business.
In the final quarter of 2023, the services segment’s gross margin was nearly 73%, while the margin of its product sales, including iPhone, iPad, Mac, and other products revenue, was only 40%. This makes Apple’s overall profit margin 46%, rising from 43% in the same quarter last year.
Other hardware sales
Other hardware sales include iPad, Mac, and wearables, home & accessories, which contribute about 20% of Apple’s total revenue. All three segments saw a sales decline in the full fiscal year of 2023, with iPad sales down 27%, Mac sales down 3%, and wearables, home & accessories sales also down 3%, respectively, compared to the fiscal year 2022. In fact, services is the only segment that experienced growth, up 9%, while iPhone sales were down 2% during the same time frame.
Apple’s AI talk
Apple’s underperformance is largely attributed to a lack of AI development since 2023, causing it to fall behind other tech peers. The company has recognized the need to catch up with its vision amidst the intensifying AI race. Apple has been in discussions with OpenAI and Google about potential deals to integrate Chatbot into its iOS 18, though there has been no firm confirmation of either agreement.
Apple is expected to unveil progress in AI at the Apple Worldwide Developers Conference on 10 June. However, any indications of such advancement in discussions may ignite investors’ optimism ahead of the upcoming earnings report.
A review of the Q1 FY24 earnings
Apple reported its first revenue growth of 2% after three consecutive quarterly declines, thanks to a 3% year-on-year growth in iPhone sales. Its earnings per share were recorded at $2.18 on revenue of $119.58 billion, surpassing estimates of $2.10 and $117.91 billion, respectively. On a yearly basis, Mac sales rose by a modest 0.6%, iPad sales declined by 26%, sales in wearables, home & accessories fell by 11%, and services revenue rose by 10%.
Despite beating earnings expectations, Apple’s shares declined by 4% on that day due to weak guidance for the March quarter. Apple expected the iPhone sales revenue to remain flat compared to the same quarter last year, with a sequential decline of 27%. Services revenue may grow 11% year over year, at a similar pace to the last quarter.
Forecast of the Q2 fiscal year 2024
Apple's fiscal year differs from the calendar year; its earnings report for the second quarter of the fiscal year 2024 is set to be released on 2 May this week. Analysts forecast that earnings per share will be at $1.51 on revenue of $89.99 billion, representing a decrease of 0.7% and 5.1% year over year, respectively.
