Apple's largest division is struggling. The fact that investors are finally warming up to the idea could be beneficial to the corporation as it prepares to enter the AI party.
So far, Apple has had a disappointing year. The federal government is attempting to disrupt the company's closed-ecosystem for its App Store and, in a separate action, to dispute the hefty fees Apple receives from Google each year to make the popular search engine the default on mobile devices, including the iPhone.
Apple is also losing momentum in China, which has typically accounted for roughly 19% of its annual revenue. Three third-party market research organizations recently released findings indicating that Apple's iPhone unit sales in mainland China have dropped sharply, owing primarily to a resurgent Huawei Technologies. According to Counterpoint, Huawei's smartphone unit sales rose 70% year on year in the March quarter, while Apple's fell 19%. IDC predicted a more modest 7% loss for Apple, but it also predicted that Huawei's unit sales would more than treble during the same period.
Such a bad run of news would ordinarily be a bad sign for Apple's shares ahead of its fiscal-second-quarter release on Thursday afternoon. Still, the stock is already in a slump, having fallen almost 12% this year. This is by far the worst result among megacap techs valued at more than $1 trillion. Microsoft, Amazon, Nvidia, Meta Platforms, and Google parent Alphabet have all seen year-to-date gains of 23%. Further, the dip has reduced Apple's multiple to about 25 times forward profits, which is in line with its five-year average and down more than 16% from last summer, when optimism over the company's Vision Pro mixed-reality headset pushed the stock beyond 30 times.
At its developer’s conference in June, Apple is widely expected to unveil further details about its AI ambition. Other major tech companies are focused more on generative AI services, but Apple's hardware-centric business model suggests on-device AI may have a greater impact on sales. "If Apple saw a 15% increase in revenues, as with the OLED iPhone 10, this would be a $30 billion increase," Bernstein analyst Toni Sacconaghi wrote in a recent note to investors.
The iPhone could use assistance. Apple has traditionally led the premium segment, but smartphones are a mature market, with people sticking onto their devices for longer periods. According to Visible Alpha's consensus predictions, the current iPhone 15 family is leading the third consecutive cycle of lacking sales; analysts predict a 1% reduction in worldwide iPhone unit sales for the current fiscal year, following a 4% decline last year and a 1% gain in Fiscal 2022.
An AI iPhone could or might not reverse that trend. Fortunately, Apple's market worth is no longer dependent on its new gadgets becoming instant hits.
