Apple Warns of December Quarter Revenue Shortfall, Blames China, Stock Drops After Hours – Here’s What You Need to Know

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| Analysis

Upside Down $AAPLApple issued a rare revenue warning on Wednesday after the markets closed. In a long letter, CEO Tim Cook told investors and Wall Street that blah blah blah, China, blah blah blah, we expected some of this, blah blah blah.

You can read the blah blah blahs yourself in Apple’s full letter to investors. I laid out the things you probably want to know below.

What You Need to Know

So here’s the deal. Apple said “headwinds” in Greater China were greater than the company anticipated. Because of that, Apple lowered its guidance for the already completed quarter—the company’s fiscal 1st quarter—from a bit more than US$90 billion in revenue to $84 billion. Wall Street consensus estimates were  for revenues of $91.3 billion.

This is a rare miss for Apple under CEO Tim Cook. While the company’s revenue growth has slowed in recent years, the company nails its guidance quarter after quarter. Not surprisingly, $AAPL took it in the kisser in after-hours trading, dropping some $11.88 (-7.52%) to $146.04. After-hours trading tends to be more exaggerated than regular session trading, but it’s a safe bet traders will punish the stock Thursday morning.

Apple’s stock woes are exacerbated by the company’s decision to stop reporting iPhone unit sales. Wall Street was already spooked by that decision, sending $AAPL down many tens of dollars fearing Apple was doing so due to flat or falling iPhone unit sales. As I’ve noted on a few podcasts, this is a self-inflicted wound on Apple’s part. To a certain extent, that wound may now be festering.

In addition, while Apple is plagued by year-round supply chain tea leaf reports that iPhone-is-finally-a-failure, this guidance reduction will be seen as proof that iPhone XR is a flop. And while Tim Cook’s letter offers up a lot of excuses and “look at these things we did right,” investors aren’t likely to have it.

In short, Apple and broader political and economic factors have concocted a perfect storm to pummel the stock, despite the reality the company still makes more money than a significant chunk of the Fortune 500 combined.

On the other hand, Apple makes more money than a significant chunk of the Fortune 500 combined. That does serve as a floor for the stock. Wall Street will be watching Apple’s Q2 guidance like a hawk looking for weakness or strength, and that will be the major influence on Apple’s stock.

Bryan’s Unasked for Advice

So yeah, China. Sure. I get it. But how about this? Make more Macs. Stop ratcheting up iPhone prices to compensate for declining unit sales. Stop pulling features out of macOS. Stop making upgrade pricing insultingly high, especially on Macs. Stop exiting businesses like displays and AirPort/Wi-Fi and make a nice, modern Apple mesh system.

In short, make more stuff that fits within the ecosystem, and Apple might be surprised at how that adds up to more revenue.

What I’m hoping is that this December quarter revenue miss will light another fire under Apple’s corporate butt. Apple is at its best when its hungry, and the company hasn’t been hungry in a long, long time.

*In the interest of full disclosure, the author holds a tiny, almost insignificant share in AAPL stock that was not an influence in the creation of this article.

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wab95
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wab95

Bryan: I finally got around to reading this. You appear to believe that Apple’s reference to ‘headwinds’ is a bit too much bull in the China shop. Regarding your comment, So yeah, China. Sure. I get it. But how about this? Make more Macs. Stop ratcheting up iPhone prices to compensate for declining unit sales. Stop pulling features out of macOS. Stop making upgrade pricing insultingly high, especially on Macs. Stop exiting businesses like displays and AirPort/Wi-Fi and make a nice, modern Apple mesh system. In short, make more stuff that fits within the ecosystem, and Apple might be surprised… Read more »

skipaq
Member
skipaq

This sort of shortfall has been coming for some time. The iPhone is still primarily a phone. Apple has been upping the features while raising the prices even faster. Since iPhone sales make up the largest portion of their business; it just gives one the sense that they are overly greedy. I am not convinced that better cameras, processors, ID login features justify their prices. Many people have come to the same conclusion. China is in a slowdown that Apple will have to adjust to as will many other companies. I love my iMac (2017), 4 year old iPad Pro,… Read more »

cubefan
Member
cubefan

Bryan – your unasked for advice, is, IMHO, spot on – only half an ecosystem is exactly that – half a system. Homepod and no charging facility built in, but I don’t own a Homepod, I don’t need Siri, but I would like an up to date Airport. My iPhone 6+ is four years old and still just about OK, I’ve put off upgrading my 7+ for six months – the 6+ will cascade out the door when the 7+ becomes my work device – when things are ‘good enough’ there’s no urgency to replace.. The mac mini Bigger isn’t… Read more »

Lee Dronick
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Lee Dronick

It isn’t just AAPL that is down, most all of the market is down for a number of reasons. Maybe Apple lost the most, I only took a cursory look so perhaps other businesses did worse.

China wants back doors in gadgets sold in the country, Apple doesn’t want to do that. Perhaps Tim’s forecast is based on backroom talks with Chinese officials.

In regards to my second point. China wants to sell homegrown devices, that is understandable in any country. But to that end if the product is of Chinese design and manufacture then a back door can built in.

Buy AAPL

Lee Dronick
Member
Lee Dronick

The U.S. State Department on Thursday renewed its warning for U.S. citizens traveling in China to exercise increased caution due to “arbitrary enforcement of local laws” amid heightened diplomatic tensions over the arrest in Canada of a Chinese technology company executive.

https://www.rawstory.com/2019/01/us-issues-china-travel-advisory-amid-increased-tensions/

geoduck
Member
geoduck

So yeah, China. Sure. I get it. But how about this? Make more Macs. Stop ratcheting up iPhone prices to compensate for declining unit sales. Stop pulling features out of macOS. Stop making upgrade pricing insultingly high, especially on Macs. Stop exiting businesses like displays and AirPort/Wi-Fi and make a nice, modern Apple mesh system. Nailed it. Yes China and Mush-For-Brains are making things hard for Apple and a lot of companies, but that’s only part of the story. Apple has a nice product mix for when times are good. Expensive phones, expensive computers, expensive watches, and expensive tablets. That’s… Read more »

John Kheit
Member
John Kheit

Great analysis Bryan.

the best thing Scully…erm Cook could do is:
a) announce layoffs of huge fat. company has too many useless people not producing. 20% cut would be a good start
b) streamline the product line to be more sensible, like jobs did when he came back
c) make an SVP of every product so they can produce independently and update things on time
d) announce US and south american factories so they dont have production tied to just one hostile country (China)
e) note that all products will be %@$%ing updated annually

jhayden
Member
jhayden

Let’s see now – China really, really, really wants the highest level chip making technology. Right? Could China just steal x86 stuff from Intel? That’s in the too hard bag. All chips, particularly Intel’s are too complicated and with billions of transistors. But then there’s an even better possibility of acquiring cutting edge chip capability only 1300 miles off the China coast. You know, TSMC. They make Apple’s A series chips – at 7nm; and they’re heading to 5 and possible 3 nm. Notice that lately the large China amoeba really wants to absorb Taiwan lately. Lots of tech on… Read more »

archimedes
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archimedes

Beleaguered Apple is Doomed™.