Apple Inc on Wednesday took the rare step of cutting its quarterly sales forecast, with Chief Executive Officer (CEO) Tim Cook blaming slowing iPhone sales in China, whose economy has been dragged down by uncertainty around United States (US) -China trade relations.
The news sent Apple shares tumbling in after-hours trade and triggered a broader selloff in the stock market.
The revenue cut for the quarter, that recently came to an end, raises questions about whether Apple is being punished by Chinese officials or consumers in favor of local rivals such as Huawei Technology Cos Ltd. Huawei’s smart phones compete with the iPhone and which has been under discussion by the Trump administration for a possible sales ban over suggestions that its telecommunications equipment could be used to spy on Americans.
Cook told the media that Apple products have not been targeted by the Chinese government, though some consumers may have elected not to buy an iPhone or other Apple device because it is an American company.
The main issue is the slowing of the (Chinese) economy, and then the trade tension that has further pressured it, Cook said.
Some analysts, however, questioned the impact of Apple's own actions, such as its unyielding pursuit of high selling prices for its products.
Apple on Wednesday lowered its forecast to $84 billion in revenue for its fiscal first quarter ended December 29, below analysts' estimate of $91.5 billion, according to IBES data from Refinitiv. Apple originally forecast revenue of between $89 billion and $93 billion.
“While we anticipated some challenges in key emerging markets, we did not foresee the magnitude of the economic deceleration, particularly in Greater China,” Cook said in a letter to investors. “In fact, most of our revenue shortfall to our guidance, and over 100 per cent of our year-over-year worldwide revenue decline, occurred in Greater China across iPhone, Mac and iPad.”
Wednesday was the first time that Apple issued a warning on its revenue guidance ahead of releasing quarterly results since the iPhone was launched in 2007.
Apple shares skidded 7.7 per cent in after-hours trade, dragging the company's market value below $700 billion. In the broader market, the S&P 500 futures fell 1.5 per cent. In the US government bond market, a typical safe-haven, the yield on the benchmark 10- year, which moves inversely to the bond's price, sank to an 11-month low.
Precursors to a warning
Apple's move was not entirely a surprise. In November, the Cupertino, California-based company said it would quit disclosing unit sales data for iPhones and other hardware items, leading many analysts to worry that a drop in iPhone sales was coming. And after several component makers in November forecast weaker-than-expected sales, some market watchers called the peak for iPhones in several key markets.
In November, Cook cited slowing growth in emerging markets such as Brazil, India and Russia for a lower-than-anticipated sales estimates for the company's fiscal first quarter. But Cook specifically said he would not put China in that category of countries with troubled growth.
That came before the damage to the Chinese economy from trade tensions with the US and long-simmering structural issues became evident.
Apple is now the highest-profile multinational corporation to warn that the economic slowdown in China could hurt its business. Automakers like Ford Motor Co, Hyundai Motor Co and Nissan Motor Co previously said they planned to cut production in the country.
But Apple has held firm on its premium pricing strategy in China despite the risk of a slower economy.
“The question for investors will be the extent to which Apples aggressive pricing has exacerbated this situation and what this means for the company’s longer-term pricing power within its iPhone franchise,” James Cordwell, an analyst at Atlantic Equities, said.
In the latest fiscal year, ended September 29, unit sales of the iPhone were essentially flat from the prior year, while iPhone revenue expanded 18 percent to $166.7 billion. That growth came entirely from higher prices.
Hal Eddins, chief economist at Apple shareholder Capital Investment Counsel, said, “Cook's comments on the impact of the US trade tensions with China might be a dig at US President Donald Trump, but mostly he may be using the trade turmoil as an excuse for some missteps they’ve made over the last year.”
But some investors were heartened by Apple's plans on using its cash pile.
In his letter, Cook said Apple has $130 billion in net cash and that it intends to continue its efforts to reduce that cash balance to net zero, which the company has so far accomplished through dividend increases and share buybacks.
“We would anticipate the company increasing share buybacks on the weakness to return capital to shareholders at discount prices,” said Trip Miller, managing partner at Apple shareholder Gullane Capital Partners.
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