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Last week, Apple CEO Tim Cook's letter warning of lower guidance for the fiscal first quarter shook markets to the core, and sent the tech giant's stock plummeting. As it happens, the news wasn't all bad.
Lost in all of the sound and fury of Cook's bleak warning was that the company also expects "a new all-time record for Apple's earnings per share." That happened last year, too, when Apple reported its fiscal first-quarter 2018 results with an all-time record earnings per share (EPS) of $3.89, up 16 percent from the same quarter a year earlier.
There are several reasons why Apple is probably able to report record profits, even as Wall Street rings the warning bell and China emerges as a headache for the company.
First, Apple is charging more than ever for its iPhones, which means even if it sells fewer iPhones, it's still making more off of each unit sold. This happened last February, when Apple said that the average selling price (ASP) of the iPhone increased by $100 from Q1 2017 to $796, a change driven by the $999 iPhone X.
ASP remained relatively flat last quarter when Apple reported it at $793, but it could pop in Q1 if Apple sold a lot of its expensive iPhone XS Max over the holidays. The iPhone XS Max starts at $1,100 and costs as much as $1,449 if you upgrade the storage. But we won't have that information directly from Apple, since it will stop revealing its quarterly iPhones sales and ASP.
Cook, in his letter, outlined other areas that will contribute to a record EPS.
"Revenue outside of our iPhone business grew by almost 19 percent year-over-year, including all-time record revenue from services, wearables and Mac," Cook said. "Services generated over $10.8 billion in revenue during the quarter, growing to a new quarterly record in every geographic segment, and we are on track to achieve our goal of doubling the size of this business from 2016 to 2020."
That includes China — one area where Wall Street is particularly worried about iPhone sales. So, even though Apple may not be selling as many iPhones in markets like China, where it has stiff competition from the likes of Huawei and Samsung, it's still making more than ever from the services that run on the devices people already own.
He cited four main factors for the guidance downgrade: Timing of its iPhone launches, a strong U.S. dollar, constrained sales of the iPad Pro, Apple Watch Series 4, AirPods and MacBook Air, and economic weakness in emerging markets such as China.
But he also pointed to record revenue.
"We also expect to set all-time revenue records in several developed countries, including the United States, Canada, Germany, Italy, Spain, the Netherlands and Korea," Cook said, noting that some developing markets including Mexico, Poland, Malaysia and Vietnam also set all-time revenue records.Wall Street isn't convinced this is enough for Apple, though.
Most major analysts sounded off on the letter and are worried about long-term prospects outside of Q1. Jefferies and Macquarie downgraded the stock to neutral from buy and Oppenheimer said the letter "raises more questions than answers."