Apple is heading for a major drop in sales as investors await AI in iPhones

Apple’s plan to add generative AI to its iPhones and revive slumping sales in the crucial Chinese market will take center stage on Thursday, when the tech giant is expected to post its biggest single-quarter sales decline in more than will report one year.

Shares of Apple, long considered a must-own stock on Wall Street, have underperformed other Big Tech companies in recent months and are down more than 10% this year as fears over the slow rollout of artificial intelligence is increasing and a resurgent Huawei is gaining market share in China.

On average, analysts expect sales of iPhones, which account for about half of Apple’s revenue, to fall 10.4% in the first three months of 2024, according to LSEG. That would be the sharpest decline in more than three years.

Last year’s iPhone revenue against a 10.4% decline in iPhone sales was unusually high as Apple met pent-up demand following the COVID pandemic, company executives previously noted.

At least $5 billion of the $51.3 billion in iPhone sales from a year ago essentially made up for disruptions in the December 2022 quarter, when COVID lockdowns in China hampered iPhone production, executives said.

Even taking that into account, Wall Street expects a slight decline in iPhone sales, and analysts estimate that Apple’s overall revenue fell 5% in its fiscal second quarter, which ended in March. That would be Apple’s biggest revenue decline since the December 2022 quarter, when sales fell 5.5%.

Apple lost the crown of world’s most valuable company to Microsoft earlier this year. Its market value stands at $2.68 trillion after the share price fell 11.24% so far this year.

Weak earnings and falling shares have put pressure on Apple to revamp its flagship after years without major upgrades.

The company is in talks with OpenAI and Alphabet-owned Google to add genAI features for the iPhone that could be unveiled at what is expected to be the largest annual developer conference ever in June, Bloomberg News reports.

Analysts believe such AI integration could boost demand for the next iPhone series, expected to be announced in the fall.

While executives at Microsoft, Alphabet, Meta Platforms and other major tech companies have discussed their AI strategies during quarterly conference calls in recent months, Apple CEO Tim Cook has discussed his plans for the emerging technology much less.

Adding AI features to iPhones could also help Apple better compete with Huawei and Samsung Electronics, which this year reclaimed the title of world’s top smartphone seller from Apple thanks to demand for the AI ​​features in its Galaxy S24 -smartphones.

“Replacement cycle tailwinds and incremental generative AI features set Apple up for a strong iPhone 16 cycle,” Bernstein analyst Toni Sacconaghi said this week as he upgraded the company’s stock from “market-perform” to “outperform.”

“We believe the prevailing weakness in China is more cyclical than structural, and note that Apple’s Chinese business has historically been much more volatile than Apple overall given its highly feature-sensitive installed base.”

Thursday’s results will also be closely watched for updates on the company’s stock buyback plan and the Vision Pro, Apple’s first major product in years, which hit store shelves in February.

After the initial enthusiasm, there are signs that demand for the $3,500 device has waned. An analyst said this month that Apple has scaled back its production estimates for the mixed-reality headset.

The rest of the company’s hardware business is also suffering from weak demand, with sales of iPads and Macs expected to fall 11.4% and 4.3% respectively in the March quarter.

Apple has indicated that it will focus more on the devices, which are also hampered by a lack of major upgrades.

A refreshed iPad lineup is expected to be unveiled at an Apple event this month, with media reporting that Apple plans to update every Mac model with faster, AI-focused M4 processors.

The services sector, which includes App Store and subscription services such as Apple TV, is expected to remain a bright spot with revenue growth of 7.7%.