That was the big question at Apple’s quarterly results on Thursday. By the time the call concluded, Apple’s stock price had risen more than 6%, and CEO Tim Cook had repeatedly touted his “great view” on Apple’s business in China.
But despite Wall Street’s positive reaction to Apple’s results (helped by a massive share buyback announcement), questions about the iPhone’s position in China may have only become more complicated in the wake of its latest earnings results. The company’s surprisingly better-than-expected results in China, and the difference from what several leading independent research firms had predicted, show that there is a gap between one of the key pillars of the company’s business, which has a value of $2.8 trillion.
Greater China, which includes mainland China, Hong Kong and Taiwan, is Apple’s third-largest region by revenue, accounting for 19% of Apple’s total revenue in fiscal 2023.
As tensions between the US and China have increased over the past year, demand for US technology products, including iPhones, has fallen among Chinese consumers. Meanwhile, Chinese tech companies like Huawei are making strides in new smartphones and eating up the market share that Apple is losing. The Chinese government has supported this shift to domestic technology and last year ordered state officials to stop using non-Chinese phones for their work.
Apple’s revenue in the region has fallen year-over-year in five of the six most recent quarters, and all signs pointed to more pain in the first three months of 2024.
According to Ming-Chi Kuo, a renowned TF International Securities analyst known for his close insights into Apple’s business, Apple’s weekly shipments to China fell 30% to 40% year over year at the start of the year.
“This downward trend is expected to continue,” he wrote in a January blog post. “Apple may see the biggest decline among major global mobile phone brands in 2024,” he said.
For the quarter, market research firm Counterpoint estimates that Apple’s iPhone sales in China fell 19% from the same period last year.
It turns out that Apple’s sales in Greater China are indeed down in the first three months of the year and are 8% below year-ago levels. But that decline was much less severe than Wall Street had prepared for: Compared to the 13% drop in the fourth quarter of 2023, it was actually an improvement. iPhone sales actually increased in mainland China during the quarter, according to Apple (although it did not specify whether the increase was from the previous quarter or the previous year).
The surprise was enough to prompt several questions from analysts during their call with Apple executives. As one analyst put it bluntly on the call: “What are we missing?”
CEO Tim Cook did not want to answer that, saying he could not comment on figures that Apple had not produced. “I can only comment on our results,” Cook said. “I can’t build a bridge to figures that we haven’t come up with.”
Cook said the iPhone 15 and 15 Pro Max were the two best-selling phones in “urban China” during the quarter, and he talked about the “warm and energetic” reception he received from consumers in Shanghai when he opened a new store in March visited and opened. .
What’s really going on in China
It is not immediately clear why Apple’s figures are not more in line with the independent research.
Between quarterly earnings reports, Wall Street analysts rely on independently collected data to gauge how a company’s business is doing. These investigative reports can include everything from supply chain information to store inventory levels, coming from both official sources and leaks from insider contacts. While this data can’t tell the full story, it does give analysts a strong sense of what’s going on.
But the disparity between the third-party research reports and Apple’s first-quarter report left many investors and observers scratching their heads.
Apple reports revenue for China while many industry analysts are looking at deliveries, leaving some room for divergence as prices change. Cook’s comments about the newer iPhone 15 models, including the 15 Pro Max, which are top sellers in urban China, suggest the company may have benefited from higher prices even if total unit counts had fallen more sharply.
Will Wong, an analyst at IDC who had expected a 10% drop in iPhone sales in China, told Bloomberg that different methods of measuring prices may have caused some of the confusion.
“IDC counted street prices (i.e. the prices consumers paid), while Apple’s financial report likely uses a different price level, such as factory price,” Wong said.
After the earnings call with Apple executives, many stock analysts on Wall Street appear to have sided with Apple’s version of the story. Analysts have largely revised their models to reflect a more favorable Chinese business, according to their research notes published Friday. Analysts at Bank of America called concerns about China “unfounded,” while analysts at investment firm Wedbush said they expect Chinese sales to turn a corner in June and show growth in September.
“The worst is now behind Apple in China,” Wedbush analysts wrote.
Apple’s total revenue fell 4.3% to $90.8 billion during the quarter, better than analysts expected. Apple also exceeded earnings per share forecasts, coming in at $1.53 last year. Executives announced the largest stock buyback of $110 billion, up from the $80 billion to $90 billion buyback Apple has offered in recent years.
But some analysts remain cautious. While the independent research reports may not be in line with Apple’s results in China, UBS analysts noted that the iPhone appears to have clearly lost market share in China.
“The Chinese unit peak of 50 million in FY22 is also unlikely to be repeated, given the figures of 300 to 500 million. [basis points] of stock losses in that region,” UBS analyst David Vogt wrote in a note to investors on Friday, stressing that Apple “is not yet clear.”
UBS, which has a neutral rating on Apple, does not expect the company to sell many more iPhone 16 devices, expected to premiere in September, than iPhone 15s. This sentiment is partly due to lost market share in China, the company said.
And even as Cook talked about China on Thursday’s call, the company also appeared to be laying the groundwork for a future in which China is less important to its business. CFO Luca Maestri noted that other “emerging markets” such as India, Saudi Arabia, Mexico, Turkey and Indonesia were growing in size, totaling almost the size of China.
“The gap with China is closing, and hopefully that trajectory will continue for a long time,” Maestri said.