Apple Inc. (AAPL, Financial) reported first-quarter 2024 results on Feb. 1. According to the press release, the company posted revenue of $119.6 billion, up 2% year over year, and earnings of $2.18 per share, up 16%. The company highlighted that its services revenue reached a new all-time record and earnings reached a new all-time high as well. The installed base of Apple's active devices surpassed 2.2 billion, reaching an all-time high across all product and geographic segments. Overall, first-quarter earnings were in line with expectations. However, the stock was down a little bit the next day.
Revenue by sales category
The company's services revenue grew 11.3% year over year. This is encouraging because it shows the growing power of Apple's iOS ecosystem. On the hardware side, both iPad and Wearables, Home and Accessories saw sales decline during the quarter. IPad sales declined 25.3%. CEO Tim Cook's explanation for this year-over-year decline during the earnings call was “a difficult compare with the launch of the M2 iPad Pro and the 10th generation iPad during the December quarter last year and one less week of sales.” Wearables, Home and Accessories revenue declined 11.3%. Again, the decline was also “due to a difficult compare with the launch timing of several products in this category and the impact of the 14th week last year.” Macbook sales were up 1% year over year. Cook remarked that this increase was “driven by the strength of Apple's latest M3-powered MacBook Pro models in spite of having one less week of sales.”
Apple's most important business is obviously the iPhone, which accounted for 58.3% of revenue for the quarter. IPhone revenue grew 6% year over year, which was slower than the overall growth of the global smartphone market but faster than its biggest competitor Samsung (XKRX:005930, Financial).
According to preliminary data from the International Data Corp. Worldwide Quarterly Mobile Phone Tracker, “global smartphone shipments declined 3.2% year over year to 1.17 billion units in 2023. The fourth quarter (4Q23) saw 8.5% year-over-year growth and 326.1 million shipments, higher than the forecast of 7.3% growth.”
The iPhone's market share reached an all-time high and Apple surpassed Samsung to become the top player for the first time.
Trouble in China
The iPhone obviously had a great quarter, but there is one big ominous sign – Apple's revenue in China declined by double digits during the quarter.
During the earnings call, the weaker performance in China was asked about a few times by various Wall Street analysts. Cook sounded optimistic about China in the long term, but it is almost guaranteed the iPhone will lose market share in China going forward because Huawei is back.
Huawei's smartphone business was basically decimated after the U.S. sanctioned Huawai in 2019. According to Counterpoint Research Global Smartphone Tracker and Forecast, the company's market share declined from more than 30% to less than 6% in 2022.
When the U.S. sanctioned Huawei, it looked like it was game over as the company could not get the high-end chips it needed to produce its smartphones. However, after more than four years of sanctions, Huawei miraculously came back and announced its high-end 5G Mate 60 and Mate 60 Pro smartphones at the end of August. The two devices immediately became best-sellers in China after launch. This had an immediate impact on the iPhone's market share in China.
According to Counterpoint's latest report on the Chinese market, Huawei's "shipments soared 41% year over year in the third quarter of 2023 as its newly launched Mate 60 series with Kirin SoC gained momentum immediately after the launch. Apple also experienced a slight year over year uptick in shipments driven by the newly launched iPhone 15 series, but the initial supply constraints impacted its overall performance.“ For the fourth quarter of 2023, Apple's iPhone shipments in China dropped 2%, while Huawei's shipments increased by 36.20%.
Clearly, Huawei is taking market share from Apple in China since the launch of Mate 60 and Mate 60 Pro. The challenge for Apple with Huawei's comeback is at least twofold. First of all, Huawei is very likely to continue to take market share from Apple in China in the foreseeable future. Second, Huawei might be able to take market share from Apple outside of China if its momentum can expand overseas. With Huawei's track record, I would not bet on Apple to maintain its worldwide market share going forward. If Apple cannot maintain its worldwide market share, then obviously Apple's fundamentals are likely to be impacted.
Summary
Apple's overall first-quarter earnings were very satisfactory. However, its business declined in China, which is its third-largest geographic market, mostly due to Huawei's launch of new high-end products. If Huawei is successful in its future product launches, Apple's China and global businesses may be adversely impacted. Investors should keep an eye on Huawei.
