So much for starting off 2019 on a high note. Apple (NASDAQ:AAPL) released a letter to investors Wednesday evening, revising the company’s first-quarter guidance for 2019. Apple is now projecting revenue will be as much as $9 billion less than originally expected, primarily due to slowing iPhone sales — especially in China.
A note released by Jefferies called it Apple’s “biggest miss in years.” The shock warning hammered AAPL in after-hours and pre-market trading, with shares of Apple plunging by 7.5% and wiping out nearly $60 billion in market value.
Apple Releases Letter to Investors
Yesterday evening, Apple posted a rare letter to investors from CEO Tim Cook, revising the company’s revenue guidance for Q1 2019. The company says it is now expecting revenue of approximately $84 billion instead of the $89 billion to $93 billion originally projected.
The company cited numerous factors for the revenue hit, but the primary causes boiled down to iPhone sales and China.
“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.”
In an interview yesterday evening with CNBC, Tim Cook said he feels the trade war between the U.S. and China added to the issues in that country:
“It’s clear that the economy began to slow there for the second half and what I believe to be the case is the trade tensions between the United States and China put additional pressure on their economy.”
Market Reaction: Apple Stock Tanks in After-Hours Trading
The market reaction to Apple’s announcement was swift, and it was not pretty. AAPL has been pummelled in trading, swiftly dropping 7.5% and erasing $56 billion from the company’s market value.
The rout extended beyond Apple stock to hit other FAANG stocks as well.
The heart of Apple’s current predicament boils down to the fact that the iPhone absolutely dominates the company’s revenue. Apple’s second-highest performing division — Services — generated just under $10 billion last quarter, compared to the over $37 billion brought in by iPhone sales.
When people couldn’t snap up iPhones fast enough, that was rocket fuel for Apple stock. Now that we’re officially in a period where smartphone sales are slumping, investors are concerned. China and emerging markets were looked at as the key to maintaining growth, but that’s not working out as planned.
In yesterday’s letter, APPL pointed out a few other challenges it’s seen with iPhone sales. The staggered release of new iPhones, a strong U.S. dollar increasing prices in emerging markets and 2018’s reduced price iPhone battery replacement program were all noted as factors.
One statement in Cook’s letter which was meant to reassure investors, also serves as damning evidence of the company’s reliance on the iPhone:
“In fact, categories outside of iPhone (Services, Mac, iPad, Wearables/Home/Accessories) combined to grow almost 19 percent year-over-year. ”
In other words, despite the fact that revenue from AAPL’s other products grew 19% YoY, a slump in iPhone sales was still enough to erase as much as $9 billion from the company’s estimated revenue for the quarter. That statement could be nerve-wracking for investors who have been looking for other products to reduce the reliance on iPhone sales and provide ongoing Apple stock growth.
Not a Good Way to Start Off 2019
In our 2018 wrap of AAPL’s year, the bad outweighed the good. Several of those prominent negatives — slowing iPhone demand, challenges in the Chinese market, and an escalating trade war with China — appear to have combined to create a perfect storm.
As a result, the company is starting off 2019 by erasing the record gain Apple stock posted as the year closed out. Unfortunately for Apple stock investors, 2019’s rocky start doesn’t appear to have an easy fix.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.