By Jeremy C. Owens, MarketWatch
Fears of weakness at Apple Inc. proved true Wednesday.
The tech giant, which became the only public U.S. company to reach a $1 trillion valuation last year before a fourth-quarter collapse for its shares, confirmed the fears that led to the stock decline by lowering its forecast Wednesday afternoon. In a letter to shareholders, Chief Executive Tim Cook said that Apple will report much lower sales than previously expected, largely due to slowing iPhone sales and pressure in China.
“While we anticipated some challenges in key emerging markets, we did not foresee the magnitude of the economic deceleration, particularly in Greater China,” Cook wrote. “In fact, most of our revenue shortfall to our guidance, and over 100% of our year-over-year world-wide revenue decline, occurred in Greater China across iPhone, Mac and iPad.”
Apple’s /zigman2/quotes/202934861/composite AAPL -3.17% stock was halted in after-hours trading ahead of the announcement, then fell 7.6% in extended trading on volume of more than 6 million shares, the highest after-hours volume for an S&P 500 index stock Wednesday. The stock has dropped 31.1% in the past three months, as the S&P 500 /zigman2/quotes/210599714/realtime SPX -1.12% has declined 14.3%.
Other tech stocks fell in late trading after the Apple news hit. Apple suppliers were especially targeted, with Skyworks Solutions Inc. /zigman2/quotes/201417573/composite SWKS -1.70% and Qorvo Inc. /zigman2/quotes/209919828/composite QRVO -1.75% more than 5% and Broadcom Inc. /zigman2/quotes/200646538/composite AVGO -1.69% dropping 4.7%. Other members of the so-called “FAANG” grouping of tech stocks also declined: Amazon.com Inc. /zigman2/quotes/210331248/composite AMZN -1.79% dropped 2.8%, Facebook Inc. /zigman2/quotes/205064656/composite FB -0.90% was down 1.6%, Alphabet Inc. /zigman2/quotes/205453964/composite GOOG -2.38% /zigman2/quotes/202490156/composite GOOGL -2.42% declined 2.1%, and Netflix Inc. /zigman2/quotes/202353025/composite NFLX -0.05% declined 2.5%. Microsoft Corp. /zigman2/quotes/207732364/composite MSFT -1.24% , which took the title as most valuable public company in the U.S. from Apple late last year, fell 2.1%, while PC manufacturer HP Inc. /zigman2/quotes/203461582/composite HPQ -0.99% dropped 4.5%. Chip makers Nvidia Corp. /zigman2/quotes/200467500/composite NVDA -2.20% and Micron Technology Inc. /zigman2/quotes/205710729/composite MU -0.47% saw shares decline more than 3%. The selloff affected U.S. stock futures as well, with Dow, S&P 500 and Nasdaq futures all sinking more than 1% late Wednesday.
Cook said that Apple now expects fiscal first-quarter revenue of about $84 billion, after previously stating expectations for sales of $89 billion to $93 billion. Apple shares have been pressured since the company originally gave its revenue forecast for the holiday season, as suppliers have reined in forecasts, causing doubts about the company’s iPhone sales.
“Lower than anticipated iPhone revenue, primarily in Greater China, accounts for all of our revenue shortfall to our guidance and for much more than our entire year-over-year revenue decline,” Cook said Wednesday in his letter.
China is not the only issue with iPhone sales, however, as Cook admitted later in his letter.
“While macroeconomic challenges in some markets were a key contributor to this trend, we believe there are other factors broadly impacting our iPhone performance, including consumers adapting to a world with fewer carrier subsidies, U.S. dollar strength-related price increases, and some customers taking advantage of significantly reduced pricing for iPhone battery replacements.”
See also: These are the top stock picks for 2019 among Wall Street analysts
Apple is driven by its iPhone business. Apple recorded sales of $88.5 billion in the 2017 holiday quarter, with $61.6 billion in iPhone sales. Analysts on average were expecting Apple to report revenue of $91.3 billion for the 2018 holiday quarter, with $61.6 billion in iPhone sales, according to FactSet.
Cook stressed that other aspects of Apple’s business were not subject to the same concerns as the iPhone, though. He noted that sales of other products were constrained by demand instead of supply, specifically the Apple Watch Series 4, iPad Pro, AirPods and new MacBook Air. He also revealed that Apple’s non-iPhone businesses grew 19% year-over-year, led by the Services segment, which tracks money spent through the App Store and on other Apple offerings.
“Services generated over $10.8 billion in revenue during the quarter, growing to a new quarterly record in every geographic segment, and we are on track to achieve our goal of doubling the size of this business from 2016 to 2020,” Cook wrote. “Wearables grew by almost 50 percent year-over-year, as Apple Watch and AirPods were wildly popular among holiday shoppers; launches of MacBook Air and Mac mini powered the Mac to year-over-year revenue growth and the launch of the new iPad Pro drove iPad to year-over-year double-digit revenue growth.”
Opinion: Most of the dire predictions about the stock market don’t make sense — but some do
Cook also noted that Apple still expects to report record earnings per share for the quarter. That figure will be helped by Apple’s record share buybacks, though: The company said in Wednesday’s letter that it expects to report a share count of about 4.77 billion when it reveals fiscal first-quarter earnings on Jan. 29, about 70 million fewer shares than it had when it last reported earnings on Nov. 1, 2018.
“Our new estimates imply 4% EPS growth in fiscal 2019 despite an expected 5% decline in net income, thanks to the share repurchase program,” BITG analyst Walter Piecyk wrote in a note late Wednesday. The analyst cut his price target on Apple to $197 from $235 in response to the announcement.
Apple also brought down its forecast for gross margin, from a range of 38% to 38.5% to guidance of “approximately” 38%; raised its expectations for other interest or expense, from about $300 million to about $550 million; and said operating expenses would come in around $8.7 billion, the lower end of the previous stated range of $8.7 billion to $8.8 billion.