Apple earnings are more crucial to the stock market than Nvidia

While Apple is losing some of its mega-cap luster, it's still the market's most important stock.

May 2, 2024 - 22:30

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Apple earnings are more crucial to the stock market than Nvidia

Updated at 11:05 AM EDT

Apple shares moved higher in early trading on May 2, but remain one of the year's worst-performing Magnificent 7 tech stocks ahead of its latest quarterly earnings report after the closing bell.

Apple (AAPL) lost its title as the world's most valuable company to Microsoft and its place as the top smartphone seller to Samsung this year. The tech giant has faced stiff demand headwinds, an uninspired upgrade cycle, and a lack of a clear AI strategy.

The group may have also ceded its ephemeral status as the market's most important stock to AI-chip maker Nvidia (NVDA) , which has added nearly $1 trillion to its market value this year as demand for the world's hottest technology has exploded.

However, while Nvidia gathers the bulk of its sales from just a handful of companies, including Microsoft (MSFT) , Meta Platforms (META) , Alphabet (GOOG) and Tesla (TSLA) , Apple's broader reach into the consumer space, its global services business footprint, and its bellwether status in stock indexes and investment portfolios make it as relevant to Wall Street as it ever was.

Apple shares comprise around 5.7% of the S&P 500's index weight, around 7.7% of the Nasdaq and, along with Amazon (AMZN ) and Microsoft, is the only Mag 7 stock that sits in both major indices as well as the Dow Jones Industrial Average.

The stock is also the single-largest holding in Warren Buffett's Berkshire Hathaway's investment portfolio and carries a market value of $2.65 trillion.

Investors are looking Apple CEO Tim Cook to map out the iPhone giant's AI strategy ahead of its worldwide developers' event in June.
Justin Sullivan/Getty Images

Samsung sees AI driving sales

The iPhone giant hopes to revive that status, and its year-to-date slump, by addressing perhaps the most important component of the current investor zeitgeist at its annual developers' conference later this spring. But its slow-footed embrace of the world's hottest technology has been costly.

Samsung, its main smartphone rival, said the AI functions in its high-end Galaxy S24 have been a key sales driver, while its overall unit shipments held steady at 60 million over the first three months of the year despite slumping global demand.

Apple CEO Tim Cook has said generative AI technologies remain a "huge opportunity" for the group, and in February, he promised investors "some things that we are incredibly excited about that we'll be talking about later this year."

First, however, the group has to power through its March quarter earnings report, which is expected to include the biggest slide in iPhone sales in at least three years.

Apple is expected to post a 1.3% drop in its bottom line from the year-earlier period to $1.250 a share, with revenue down 5.1% to just over $90 billion.

iPhone sales, meanwhile, are forecast to have fallen more than 10.4% to $46 billion amid fading China demand. March quarter sales last year were boosted by the late delivery of post-holiday orders that had been hit by Covid supply-chain snarls.

Morgan Stanley: 'Tricky setup' for earnings

Morgan Stanley analyst Erik Woodring, who clipped his Apple price target by $10 to $210 a share on April 22, calls the current market backdrop a "tricky setup" for the tech giant before its earnings update and ahead of the June developers' conference.

Woodring, who carries a buy rating on the stock, sees Apple topping March-quarter revenue estimates but guiding for overall June-quarter sales in the region of $80 billion compared with the current Wall Street consensus of around $83.5 billion.

"That said, with Apple's biggest [Worldwide Developers Conference] ever on June 10, we'd buy post-earnings weakness," Woodring said.

Wedbush analyst Dan Ives, who carries a $250 price target and outperform rating on Apple stock, is also braced for what he sees as a "brutal March quarter", but eyes a second-half turnaround helped in part by Apple's AI plans.

"The good news is help is on the way as we believe a pent-up demand cycle with an AI-driven iPhone 16 model on the horizon should enable Cook & Co. to return to growth again in China with tailwinds into 2025," he said.

"We expect to hear more breadcrumbs around the broader AI strategy on the conference call as we believe AI will be a game changer for the Apple story over the coming years," he added.

OpenAI talks in focus

One early development could be reports that Apple is in talks with OpenAI, the Microsoft-backed creator of the ChatGPT chatbot, to integrate some of its technologies into the Apple ecosystem.

Bloomberg, which reported the talks on April 26, said the aim could be to bring OpenAI features into Apple's upcoming iOS 18 operating system, likely to enhance demand for the autumn iPhone 16 launch.

Morgan Stanley's Woodring also sees Apple's China struggles as another key focus for Cook when he speaks to analysts following the March quarter update.

China recovery concerns

Data from Counterpoint Research last month suggested that Apple has also lost its place as the top smartphone seller in China, the world's biggest market, with first-quarter sales falling nearly 20% from a year earlier.

China remains one of the most important markets for Apple, accounting for around 20% of its global sales, which were pegged last year at around $386 billion. But, that share has fallen steadily since 2015 and has largely plateaued since the 2020 pandemic.

LSEG data suggest Apple's greater China sales likely fell 14.4% from a year earlier to 15.25 billion.

Cook took a five-day visit to China in March, during which he opened the company's newest flagship Apple Store in Shanghai and met with key suppliers and government officials including Commerce Minister Wang Wentao.

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Alliance Bernstein analyst Toni Sacconaghi, however, sees Apple's China issues as "more cyclical than structural." He argues in a note published on April 29 that the stock has "derated significantly amid a weak iPhone 15 cycle and fears that Apple’s China business is structurally impaired.

"Historically Apple’s China business has exhibited much higher volatility than Apple overall, given its very feature-sensitive installed base," Sacconaghi wrote. He lifted his rating on the group to outperform from market perform — effectively to buy from neutral — while keeping his $195 price target in place.

"We further believe that replacement-cycle tailwinds and incremental generative-AI features set up Apple well for a strong iPhone 16 cycle,” he added.

Apple shares were last marked 1.3% higher on May 2 and changing hands at $171.53 each, a move that would still leave the stock down more than 7.5% for the year.

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