Apple (NASDAQ:AAPL) is scheduled to announce its second-quarter 2014 results on Wednesday. In the past quarter, Apple sold a record number of iPhones and iPads, but still shares slid as analyst expectations were higher. Hopes remain high for this quarter too, so it will be interesting to see how close the Cupertino-based giant can get.
But market dynamics have changed over time and the tech major is facing increased competition from fellow players who are solidifying their market penetration. In addition, growth in the matured markets is also slowing. So let’s find an answer to what’s going to drive Apple’s second quarter results.
Maturing Tablet Market
According to market research firm Gartner, sales of tablets grew 68% last year. However, researcher IDC predicts tablet sales growth of only 19.3% in 2014. But Apple still rules the tablet world with 36% market share, followed by Samsung (SSNLF) with 19.1% share.
- Warning! GuruFocus has detected 4 Warning Signs with AAPL. Click here to check it out.
- AAPL 15-Year Financial Data
- The intrinsic value of AAPL
- Peter Lynch Chart of AAPL
Apple sold 26 million iPads during the first-quarter, up 14% year over year — 1 million above analysts' estimate. The improvement was mainly due to the launch of iPad Air and iPad Mini (low-end model with Retina display).
No new versions of iPads were announced during the quarter, but the company’s planning for an ungraded iPad Air and iPad Retina by this year-end. Chances are good that several iPad buyers would hold their purchase for the upgraded version, which may have an impact on the second quarter sales. Another thing that could concern Apple is the pricing of iPad Mini Retina. Although reviews for iPad Mini retina are good, low-cost options like Amazon’s Kindle Fire, Samsung’s Galaxy Tab and Google (NASDAQ:GOOG)'s Nexus 7 are attracting many buyers.
Another thing that could pressurize Apple’s sales is the increasing usage of the Android operating system. According to Gartner, Android OS is leading the tablet market with a more than 60% share. The continuous growth of Android is a big challenge for the iPhone maker.
iPhone Sales Could Be a Drag
Apple generates roughly 56% of its revenue from iPhones. During the first quarter, it sold 51 million iPhones, up 7% year over year but below Street expectations of 56 million to 57 million units. The improvement was mainly due to the launch of iPhone 5s and 5c. The holiday season was another factor that bolstered iPhone sales in the first quarter. Apple typically launches a new iPhone sometime in September or October to monetize on “holiday” season shopping.
But there’s no assurance that iPhone sales would reach the same level this quarter. The main reason is the lack of new product launches and the end of the holiday season.
Apart from seasonality, there is another important factor that could put pressure on Apple — stiff competition from Samsung. The South-Korean conglomerate has just launched the latest version of its flagship smartphone — Galaxy S5. Galaxy S5 has a longer battery life than iPhone, bigger display, and most importantly is water-proof. Apple’s much-awaited iPhone 6, expected this fall, is rumored to have a bigger screen, the benefit of which wouldn’t be felt before 2015.
China, which accounted for nearly 15.4% of Apple’s total revenue in the last quarter (up from 12.4% in the first quarter of 2013), is becoming a key growth market . The tech major saw highest growth of 29% in the Chinese market in the first quarter — thanks to the product launch of iPhone, iPad and Mac that drove better-than-expected sales.
The momentum in the mainland, the biggest smartphone market, is expected to continue as the tech giant eyes expanding its exposure to the region. This January, Apple signed a deal with China Mobile (NYSE:CHL), which is China’s largest telecom carrier. Per the deal, Apple will sell its iPhones through China Mobile. There is no doubting the fact that this deal will provide enough support in the upcoming quarters.
Mac Sales Could Grow Up
Last quarter, Apple sold 4.8 million Macs, up 19% year over year. The improvement was mainly due to higher MacBook Air sales and the introduction of upgraded iMac.
Given the recent turning around phase of PC market and positive forecasts from the market experts, Apple could see further upside in its Mac sales. During the fourth quarter of 2013, sales of the Mac grew 28.5%, while the worldwide PC market declined 6.9%. This indicates that Apple could outperform the overall PC market, going forward. Its new Mac Pro (released last December) featuring Intel (NASDAQ:INTC)'s latest Xeon chips could be the key driver.
Witnessing growth in iPhones and iPads could be somewhat dubious, but growth in China and possible increase in Mac sales are catalysts. Apple is fundamentally strong and has enough potential to make things good with its innovative skills. Although the near-term scenario is a bit bleak, the tech giants’ long-term story remains intact.