All in all, the recently ended fiscal fourth quarter wasn't a terrible one for Apple (AAPL 0.02%). While year-over-year revenue fell (albeit slightly) for a fourth straight quarter, sales of $89.5 billion still topped estimates of $89.3 billion. Per-share earnings of $1.46 beat consensus estimates of $1.39, improving on the year-earlier comparison of $1.29.
It was the forecast for the quarter now underway that sent the stock lower. Although no specific numbers were offered, CFO Luca Maestri painted a clear enough picture by cautioning "We expect our December quarter total company revenue to be similar to last year." Wall Street was calling for sales growth of 5%. Apparently, headwinds in China further fanned the bearish flames.
Before presuming the worst about Apple for the foreseeable future, however, you might want to look past the narrative and dig into the data -- all of it. If not in the final calendar quarter of 2023, there are three reasons 2024 could be -- and should be -- a major turnaround year for the world's biggest company.
China's not the liability it's being made out to be
There's no denying China's dealing with the economic fallout of prolonged pandemic lockdowns. But this fallout is being shaken off more than most observers might realize. The country's retail sales grew 5.5% year over year in September, accelerating from August's pace of 4.6%. Industrial output was up 4.5%. China's GDP grew 4.9% in the third quarter of 2023.
Bear in mind these numbers are a bit inflated because they're compared to last year's suppressed spending and economic output; these figures will be lower next year. They'll still be pretty good though, setting the stage for more growth. The World Bank expects China's 2024 GDP growth to roll in at a respectable 4.4%. That's enough to continue spurring consumers' spending on goods like smartphones.
Besides, Apple is holding up better in this market than most investors may realize. Last quarter's Greater China sales were only down 2.5% year over year, more or less mirroring the full year's revenue contraction for the country. Moreover, market research outfit IDC estimates that while Apple sold slightly fewer iPhones in China during the calendar third quarter of this year, it technically gained market share as consumers steered clear of lower-cost brands like Oppo and Vivo. The country's consumers are still seemingly seeking out and paying for premium discretionary products, an idea seconded by analysts with Global X Funds.
The kicker: It's not that Apple can afford to simply dismiss any headwinds blowing in China, but it's not a giant piece of the company's business. Greater China accounts for less than one-fifth of Apple's total revenue, and its sales there are holding up reasonably well.
Apple's second-biggest profit center is resilient
Devices (iPads, iPhones, Macs, watches, etc.) are the company's single biggest source of revenue, accounting for more than three-fourths of Apple's sales; the iPhone makes up a little more than half of that amount. Digital services (apps, content, etc.), meanwhile, account for less than 25% of the company's top line.
But these proportions change dramatically in terms of gross profits. Thanks to their higher profit margins, services actually make up a consistent 40% of Apple's bottom line.
Data source: Apple Inc. Chart by author. Figures are in millions.
This matters. The services arm's profitability is consistent -- and consistently growing -- from one quarter and one year to the next, and this is income that can be counted on should the company want or need cash for a particular purpose.
This degree of engagement with Apple's digital ecosystem also makes it more likely a consumer will buy another Apple device when it's time for an upgrade or replacement. To this end, Consumer Intelligence Research Partners reports that 94% of current iOS users plan on sticking with an Apple device when that time comes. A great deal of future revenue is already lined up.
On that note...
An upgrade cycle is looming
Last but not least, a wave of iPhone upgrades awaits in 2024.
For the first several years of the iPhone's existence it was pretty clear when investors could expect to see a surge in sales -- the device's fans kept their phones for two to three years, and then upgraded. This upgrade cycle has lengthened since then, with owners willing and able to keep their increasingly expensive iPhones for longer periods of time. That's why we've only seen measurable swells in demand in 2012, 2016, and the surprisingly healthy bump in 2020.
Data source: IDC. Chart by author. Figures are in millions. (Note that iPhone sales typically surge in the fourth calendar quarter of the year due to holiday gift-giving spending.)
Connect the dots. It's been nearly four years since the last wave of upgrades, and Morgan Stanley's analysts estimate the iPhone's replacement cycle has been stretched to an all-time high of 4.4 years, pointing to "pent-up demand from consumers deferring their iPhone purchase from FY23." We're due, if not overdue.
And the stage is set for such a cyclical sales surge in 2024 after a lackluster response to this year's debut of the iPhone 15.
See, many hardcore iPhone fans made a point of not buying this year's release, holding out for the iPhone 16 that's apt to be unveiled next year. The next version of the smartphone is expected to boast more memory, a better camera, a bigger screen, and a more powerful processor. The technological leap between the most common iPhones in use right now and the iPhone 16 will be measurably greater than the distance between them and the iPhone 15.
Given that the iPhone is still the company's biggest revenue driver, Apple may end up dishing out some pleasant revenue surprises next year.
