Apple’s stock price opened down more than 7% Wednesday after the company posted its first revenue decline in 13 years.
Everybody knew that revenue drop was upon us — Apple itself warned investors that this quarter wouldn’t be a rosy one. So why the stock dip? Here are three explanations.
1. iPhone sales are down 16%. That’s the product’s first-ever year-over-year drop. The Cupertino, Calif. company makes about 65% of its revenue from selling iPhones. So any falloff in those sales is a problem.
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There are two clear reasons for declining iPhone sales. First, wireless carriers are killing off their hardware subsidies. That means many people are feeling the full cost of their smartphones for the first time, leading some to keep their devices for longer periods of time without upgrading. Apple is trying to fight this effect with a kind of leasing program, but how successful that effort has been is unclear. (This problem is affecting all smartphone makers, not just Apple.)
Second, the iPhone 6 and 6 Plus set a high bar for iPhone sales — shoppers simply went nuts for their larger-than-ever form factors. But making iPhones a little bigger is a trick Apple can only pull off once. (The iPhone 6s and 6s Plus, which feature more minor upgrades, have had trouble matching their predecessors’ success.) Whether Apple’s next iPhone can match the magic of the 6 remains to be seen.
2. Apple’s predictions about its business are weaker than expected. Every quarter, companies like Apple make a public prediction about how their next few months are going to look. Apple’s guess of revenue between $41 billion and $43 billion for the upcoming quarter is way below what Wall Street analysts were expecting. Their consensus estimate was in the $47 billion range, per CNBC. That gap is wide enough to scare away some investors.
3. Growth in China is slowing down big time. China is Apple’s second-largest market and a source of massive potential growth. The company’s revenue there grew 14% in the quarter before this one, and a staggering 99% in the quarter before that. This time around, however, Apple’s growth in China was negative, dropping 26%.
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There are multiple potential reasons for this, some of which are outside Apple’s control. A slowing Chinese economy means consumers aren’t as willing or able to pay Apple’s steep costs. A strong dollar makes Apple’s devices more expensive abroad. And Apple is facing pushback from the Chinese government, which recently banned some of the company’s services in the country.
So are there reasons to be optimistic about Apple? Absolutely. Let’s remember that the company still pulled in $50.6 billion in revenues for the quarter, which is, well, a lot of money. There’s also 20% growth in the all-important “Services” category, which includes revenue from offerings like movie rentals and data storage. If Apple can continue to grow that side of its business, it could help make up for falling iPhone sales. (Though software doesn’t provide the huge margins that Apple’s hardware business does.) Expect company executives to make that case in the coming days.