Apple's Cautiously Navigating Through No Man's Land Amid A Maturing Smartphone Market And Upcoming AI Innovations

Together with Amazon.com Inc AMZN, Apple Inc AAPL reported its fiscal third quarter earnings on Thursday. Although it topped both sales and earnings expectations like Amazon, shares fell 2% upon the report during extended trading as Apple did not provide any guidance due to uncertainty after a third consecutive quarter of declining sales. On the other hand, Amazon shares surged more than 7% after hours and continued to so in premarket trading on Friday, but Amazon did not only squash estimates but also provided a strong outlook fueled by its biggest yet Prime Day event that took place in July. 

Apple's Fiscal Third Quarter Highlights

For the quarter ended on July 1st, sales still fell 1% YoY despite service revenue growing 8% YoY. Total revenue amounted to $81.8 billion, beating Refinitiv’s estimate of $81.69 billion. Earnings per share rose 5% to $1.26, topping analyst expectations of $1.19 per share, according to IBES data from Refinitiv. Gross margin of 44.5% topped Refinitiv’s 44.2% estimate.

iPhones brought in $39.67 billion to the revenue table, below Refinitiv’s consensus estimate of $39.91 billion as iPhone sales contracted 2%.

Mac revenue was down 7% as it amounted to $6.84 billion, surpassing Refinitiv’s consensus estimate of $6.62 billion.

iPad revenue contracted as much as 20% as it amounted to $5.79 billion, far below Refinitiv’s $6.41 billion consensus estimate.

Other Products revenue that includes wearables such as Apple Watch and AirPods rose 2% as it brought in $8.28 billion, but coming in below the estimated $8.39 billion.

Last but certainly not least, service revenue that was also the highlight of the report, rose 8% YoY to $21.21 billion, topping the estimated $20.76 billion. Apple is said to now have 1 billion subscribers on its platform, which includes both Apple services and third-party apps, rising from 975 million subscribers it reported for the previous quarter.

Like its Big Tech peers, Apple ramped up its AI spending, with research and development costs coming up to $22.61 billion for the fiscal year so far, which is $3.12 billion higher compared to last year’s comparable period. But, AI is still not showing any visible gains, but this is even the case for Amazon and its AWS unit as both companies continue experimenting with ways in which this developing technology can enhance their products and consumer experiences.

Beating The Odds In China

Apple’s sales in China grew 8% YoY and what is interesting is that Apple seems to have outperformed what has been the weakest smartphone market in the country in almost a decade. Counterpoint Research reported that overall smartphone sales in the country contracted 8% but Apple CEO Tim Cook informed investors that iPhone sales in China grew by "double digits” with other segments also reporting high sales. Apple got $15.76 billion in revenue from the greater China region with sales expanding from $14.60 billion recorded during last year’s comparable quarter, it generated. Besides new iPhone owners, Cook also revealed the company set quarterly records wearables, home and accessories, and services in the world's greatest market.

Official Outlook Was Absent

Although an official guidance was not given due to macroeconomic uncertainty, the tech giant reflected on its views for the undergoing quarter with only the gross margin being said to be expected between 44 and 45% with OpEx in the range from $13.5 and $13.7 billion.

 CFO Luca Maestri said the September quarter revenue is expected to decline with performance anticipated to be similar to the June quarter. This implies that the sales forecast falls below analyst expectations of roughly flat fiscal fourth-quarter sales of $90.19 billion that Refinitiv’s survey of analysts were expecting. iPads and Macs revenue is expected to drop by double-digit percentages but iPhone sales are expected to do better and the already strong growth rate of Apple’s Services unit is expected to rise further. Therefore, the unofficial outlook can be summed up as similar to the latest reported quarter, but hopefully slightly better.

Apple Finds Itself In A Delicate Position

Apple will continue facing the struggling smartphone market with iPhone having to fight for market share against its Android rivals, while its next big product that is expected to push the boundaries of its existing business model, Vision Pro mixed-reality headset, still hasn’t reached consumers. Therefore, the world is waiting to see Apple’s new way of ‘enriching’ the lives of its consumers while Big Tech enters a new chapter, one that will undoubtedly be powered by generative AI.

DISCLAIMER: This content is for informational purposes only. It is not intended as investing advice.