Apple Inc. (AAPL) is deepening its descent as CEO Tim Cook's New Year pre-announcement of weakened guidance is sending the share price spiraling.
The announcement, which was anticipated by Jim Cramer in December, lowered the smartphone leader's fiscal first-quarter 2019 revenue guidance to $84 billion, down from the $89 billion-$93 billion range guided for on the previous earnings release and meaningfully below the analyst consensus of $91.49 billion.
The tempered guidance also lowered company margin expectations, with gross margins now forecast at 38% compared to the 38% to 38.5% range previously expected.
"Based on these estimates, our revenue will be lower than our original guidance for the quarter, with other items remaining broadly in line with our guidance," Cook explained in a letter to shareholders.
He cited challenges in China, weaker iPhone sales, and foreign exchange headwinds as key culprits for the depressed 2019 outlook.
The shares have fallen more than 8% in pre-market trading Thursday, dropping the Cupertino, California company's market cap below $700 billion if morning losses hold. The drop would mark a nearly $400 billion loss in market cap from its peak of about $1.1 trillion in mid-2018.
Big Trouble in Little China
Chief among the issues that Cook pointed to was weakness in the Chinese market.
"While we anticipated some challenges in key emerging markets, we did not foresee the magnitude of the economic deceleration, particularly in Greater China," he explained. "In fact, most of our revenue shortfall to our guidance, and over 100 percent of our year-over-year worldwide revenue decline, occurred in Greater China across iPhone, Mac and iPad."
Cook added in an interview with CNBC that the trade tensions are a major contributing factor to the slowing demand for Apple products based upon its impact on Chinese consumers.
Analysts were skeptical on this explanation, noting that Apple has encountered trouble in the nation before.
"There have been previous quarters with strong reversals of growth in China," Oppenheimer analyst Andrew Uerkwitz wrote on Thursday. "We would make the argument design and price may be the biggest issues at play, not macro."
Interesting that on 12/20 Nike CFO said: "We have not seen any impact" on the business from US China trade fight and uncertainty in relations and company reported 26% sales growth there last q $nke $aapl https://t.co/OVXmW9jKUM— Sara Eisen (@SaraEisen) January 3, 2019
Considering the company's push to raise ASPs, pricing models may come into question moving forward, especially in emerging markets that have many lower price alternatives and longer-term economic issues.
"We have been flagging China demand issues since late September and Apple's guidance cut confirms our view," Goldman Sachs analyst Rod Hall wrote on Thursday. "We do not expect the situation to get better in March and would remain cautious on the region."
Services Aren't a Savior
On Apple's fiscal fourth-quarter earnings call, much was discussed in terms of moving the company away from its image as solely a hardware company as it touts its services segment.
"Starting with the December quarter, we will no longer be providing unit sales data for iPhone, iPad and Mac," Cook said on the call. "As we have stated many times, our objective is to make great products and services that enrich people's lives, and to provide an unparalleled customer experience so that our users are highly satisfied, loyal and engaged."
The disappointing announcement on Wednesday did not do much to convince analysts this is the correct move.
"Our focus remains on Services, and while AAPL noted that Services revs of $10.8 billion in Dec (up 27.5% y/y) showed strength in every geography, we are quite concerned that Services growth is going to slow meaningfully beginning in the March quarter," Macquarie Group senior analyst Benjamin Schachter wrote on Thursday. "In other words, just as investors hang on to Services as AAPL's life preserver in the choppy seas, it is going to float away."
Schachter downgraded the stock to "Neutral" from "Buy" and cut his price target to $149 per share from $188, joining a chorus of Apple analysts reining in estimates.
"We can no longer recommend AAPL," he concluded. "Fears about iPhone have been confirmed, uncertainty about the severity and duration of iPhone troubles will linger, and the other shoe is about to drop on Services growth, particularly for its highest margin drivers."
Hold the Phone
To be sure, longer-term investors may not need to bail on the stock just yet as silver linings did poke through the disappointing release.
Revenues excluding the iPhone were seen up 19% in the December quarter, with wearables that include the popular new AirPods providing some positivity. The problem that remains is that these small wins do little to combat the overwhelmingly negative sentiment still surrounding the stock.
"There is no sugar coating this announcement. It's a clear-cut setback for Apple and because of the company's size, it represents another indication of a weakening global economy," said Jim Cramer and the Action Alerts PLUS team, which holds Apple in Cramer's charitable trust. "We will continue to work on the stock and we do not make light of the gravity of the situation, but our initial reaction is that longer term, despite the cut, we still believe that Apple is doing the right thing regarding its efforts to switch the narrative from one based on hardware sales to one based primarily on recurring Services revenues."
Cook concurred and went a step further, calling the stock "an incredible value" at its current stock price and paltry forward-looking price-to-earnings ratio.
"You can bet we'll be buying stock," Cook told CNBC.
For the moment, Cook is one of the few in the market signaling that intention, as many await a stronger entry support point for the stock.
"Historically, the stock troughed around early-2013 period at ~9-10x P/E that would imply the support would be closer to $120," RBC analyst Amit Daryanani explained. "Though we would note AAPL did not have a strong capital allocation program at that point, which should provide a better valuation support."