Apple Faces Big Drop in Sales as Buyers Wait for AI in iPhones

TLDR: Apple expects the largest sales drop in over a year due to slow iPhone sales. Plans to add AI features to boost demand and compete with rivals.

Apple (AAPL.O) is set to report its biggest fall in sales in over a year on Thursday. The tech giant’s plan to add generative AI to its iPhones and bring back sales in China will be the main focus.

Apple shares have done worse than other Big Tech firms lately. They have fallen more than 10% this year due to fears about its slow roll-out of AI services and as Huawei (HWT.UL) takes back market share in China.

iPhone Sales to Fall Sharply

Experts see iPhone sales, which make up about half of Apple’s money, falling 10.4% in the first three months of 2024, according to LSEG. That would be the biggest drop in more than three years.

The big drop in iPhone sales is measured against an unusually high year-ago number. Apple met pent-up demand after COVID at that time, company leaders have said before.

At least $5 billion of the $51.3 billion in iPhone sales a year ago was basically catching up from problems in the December 2022 quarter. COVID lockdowns in China had slowed down iPhone making then.

Even with that factored in, Wall Street expects a small drop in iPhone sales. Experts think Apple’s total money earned fell 5% in its fiscal second quarter ended in March. That would be Apple’s biggest fall since the December 2022 quarter, when money earned fell 5.5%.

Apple Loses Top Spot

Earlier this year, Apple lost its place as the world’s most valuable company to Microsoft (MSFT.O). Its market value is now $2.68 trillion after the share price fell 11.24% so far this year.

Low sales and falling shares have pushed Apple to improve its main device after years without big upgrades.

The company is talking with OpenAI and Google to add genAI features for the iPhone. These could be shown off at what is expected to be its biggest-ever yearly developer conference in June, Bloomberg News has reported.

Experts believe adding AI features could drive demand for the next iPhone series, expected to be announced in the fall.

While leaders at Microsoft, Alphabet (GOOGL.O), Meta Platforms (META.O), and other major tech firms have talked a lot about their AI plans on recent calls, Apple CEO Tim Cook has discussed his plans for the new tech much less.

Putting AI features in iPhones could also help Apple compete better with Huawei and Samsung Electronics (005930. KS). Samsung took back the title of the world’s top smartphone seller from Apple this year, driven by demand for the AI features in its Galaxy S24 smartphones.

Strong iPhone 16 Cycle Expected

“Replacement cycle tailwinds and extra generative AI features set up Apple well for a strong iPhone 16 cycle,” Bernstein analyst Toni Sacconaghi said this week as he upgraded the company’s shares to “outperform” from “market perform.”

“We believe current weakness in China is more cyclical than structural. Historically, Apple’s China business has shown much higher ups and downs than Apple overall, given its very feature-sensitive installed base.”

Eyes on Stock Buyback and Vision Pro

Thursday’s earnings will also be watched closely for updates on the company’s stock buyback plan and the Vision Pro, Apple’s first major product in years that hit the shelves in February.

After early excitement, there have been signs that demand slowed for the $3,500 device. An analyst said this month that Apple has pulled back its production estimates for the mixed-reality headset.

The rest of the company’s hardware business is also hurting from soft demand. iPad and Mac sales are expected to fall 11.4% and 4.3%, respectively, in the March quarter.

Apple has signaled it is sharpening its focus on the devices, which have also been held back by a lack of major upgrades.

At an Apple event this month, a revamped iPad line-up is expected to be unveiled. Media reports have said that it plans to update every Mac model with faster, AI-focused M4 processors.

Services Remain Bright Spot

The services business, which includes the App Store and subscription services such as Apple TV, is expected to remain a bright spot with sales growth of 7.7%.

Apple shares closed down 0.6% at $169.30 on Wednesday.