Shares of Apple (AAPL - Free Report) plunged almost 8% after the company cut its first-quarter fiscal 2019 guidance. Apple also warned that iPhone sales will decline on a year-over-year basis, primarily due to weak demand in Greater China and fewer upgrades to its flagship device.
The company’s previous revenue estimate between $89 billion and $93 billion was reduced to $84 billion for first-quarter fiscal 2019. Moreover, the company revised its guidance for gross margin, which is now expected to be 38% compared with the earlier guided range of 38 - 38.5%. Further, operating expenses are now expected to be $8.7 billion compared with the previous guidance range of $8.7 - $8.8 billion.
Notably, beginning first-quarter fiscal 2019, Apple will no longer provide unit sales data for iPhone, iPad and Mac.
Slowdown in China to Hurt Apple
China is an important market for Apple, given the growing number of middle-class customers. Notably, in fourth-quarter fiscal 2018, Greater China accounted for 18.1% of total sales, which increased 16% year over year to $11.41 billion.
Apple assembles iPhone in China primarily to take advantage of the country’s abundant low-cost labor. While the company buys components from suppliers based in Japan, Korea, Taiwan and the United States, the final assembling is done by contract manufacturers like Foxconn at a significantly low labor cost.
Per reports, China also boasts more than 2 million highly skilled application developers, who develop apps for the App Store. Moreover, the country also has a flexible labor force, which benefits Apple when demand for products is hard to predict. Evidently, China is a driving force behind Apple’s growth.
However, a slowing Chinese economy is expected to hurt sales of iPhone, Mac and iPad on a year-over-year basis. Apple’s management attributed the sluggishness to the U.S.-China trade war.
Moreover, intensifying competition does not bode well for Apple in China. The steep pricing of new iPhones is also making it difficult for the company to gain market share. Notably, Apple’s rival Huawei is gaining traction in the Chinese market and is just behind Samsung as the largest smartphone maker in the world. Per reports, Huawei witnessed a 13% increase in sales in China in the third-quarter.
Apple Inc. Price and Consensus