Apple Anticipates iPhone Sales Drop Before AI Gets Into New Models

Apple's plan to add generative AI to its iPhones and revive sagging sales in the crucial Chinese market will be in focus on Thursday, when the tech giant is expected to report its biggest quarterly revenue decline in more than a year.

Long considered a must-own stock on Wall Street, Apple shares have underperformed other Big Tech companies in recent months, falling more than 10 percent year-to-date as fears mount about its slow rollout of AI services and as a resurgent Huawei takes market share in China.

Analysts on average see iPhone sales, which account for about half of Apple's revenue, falling 10.4 percent in the first three months of 2024, according to LSEG. That drop would be the steepest in more than three years.

Analysts estimate Apple's total revenue declined 5 percent in its second quarter, which included January through March. That would be Apple's biggest revenue decline since the December-quarter of 2022, when revenue fell 5.5 percent.

The company is in talks with OpenAI and Alphabet-owned Google to add genAI features for the iPhone that could be unveiled at what is expected to be its biggest-ever annual developer conference in June, Bloomberg News has reported.

While executives at Microsoft, Alphabet, Meta Platforms and other major technology firms have talked up their AI strategies on quarterly conference calls in recent months, Apple CEO Tim Cook has discussed his plans for the emerging technology much less.

Adding AI features to iPhones could also help Apple to compete better with Huawei and Samsung Electronics, which reclaimed the title of the world's top smartphone vendor from Apple earlier this year, driven by demand for the AI features in its Galaxy S24 smartphones.

"Replacement cycle tailwinds and incremental generative AI features set up Apple well for a strong iPhone 16 cycle," Bernstein analyst Toni Sacconaghi said this week, upgrading his rating on the company's shares to "outperform" from "market-perform".

"We believe prevailing weakness in China is more cyclical than structural, and note historically Apple's China business has exhibited much higher volatility than Apple overall, given its very feature-sensitive installed base."

After initial enthusiasm, there have been signs that demand slowed for the $3,500 device, with an analyst saying this month that Apple has pulled back its production estimates for the mixed-reality headset.

The company is hosting an event later this month where a revamped iPad line-up is expected to be unveiled and media reports have said that it plans to update every Mac model with faster, AI-focused M4 processors.