Apple(NASDAQ: AAPL) shares fell following last week’s release of the numbers for its fiscal second quarter (which ended March 29) — and understandably so. Although the iPhone maker topped analysts’ revenue and earnings estimates, CEO Tim Cook confirmed that newly imposed import tariffs will take their toll. In the current quarter alone, they’ll cost the company on the order of $900 million: nearly 4% of last quarter’s reported net income of $24.8 billion.
Tariffs are arguably the least of Apple’s problems right now, though, if you dig deeper into its historical results. A lack of meaningful growth from its flagship profit center and continued struggles with artificial intelligence (AI) are far greater challenges, and could linger a lot longer than the impact of tariffs.
Here’s why those are legitimate concerns for shareholders.
Image source: Getty Images.
For the three-month stretch ending in March, Apple turned $95.4 billion in revenue into earnings of $1.65 per share. Both were better than the year-ago comparisons of $90.8 billion and $1.53 (respectively), and both topped analysts’ expectations of $94.6 billion and $1.62 per share. As usual, the iPhone accounted for roughly half of Apple’s business, with sales of $46.8 billion. The company’s services arm continues to shine as well.
What prompted the pullback, then? As noted above, worries about tariffs. They’ll cost the company roughly $900 billion during fiscal Q3 alone, with no relief on the horizon. Although Apple can theoretically dial back its dependence on Chinese-made iPhones by ramping up production in other countries where tariffs aren’t so steep, doing so isn’t easy, quick, or cheap to set up.
The thing is, tariffs arguably aren’t this company’s top problem right now. There are two greater concerns that should be weighing on investors’ minds.
The first of these worries is iPhone-related.
While several members of the analyst community — as well as many in the financial media — touted the fact that Apple saw measurable growth in iPhone revenue last quarter, this growth was far from earth-shattering.
Take a look at the chart below. As numbers from IDC tell us, unit sales of the iPhone improved 10% year over year, but that’s a 10% improvement on a figure that fell by nearly as much in the comparable quarter a year earlier. In other words, the bar was set relatively low this time around. Meanwhile, actual iPhone revenue remains more or less in line with where it peaked in 2022, only growing on the order of 2% last quarter:
Data sources: Revenue data (in millions) from Apple. Unit data (in millions) from IDC.
Making these anemic iPhone numbers even more troubling is the fact that many consumers — at least allegedly — rushed to purchase a new smartphone before tariffs took hold. Without this push, it’s conceivable that last quarter’s iPhone business might have actually fallen. And either way, overall demand remains stagnant … at best.
It’s a bigger-picture concern because the iPhone accounts for half of Apple’s sales, and presumably, a comparable percentage of its profits.
The other chief worry here, as noted, is Apple’s progress (or lack thereof) on the artificial intelligence front.
Few would deny that this company was a bit late to the AI party. Although the early versions of its virtual assistant Siri certainly looked and performed similarly to more recently launched platforms like Google’s (Alphabet‘s) Gemini, Microsoft‘s Copilot, and ChatGPT, Apple didn’t embrace this next generation of AI chatbots in earnest until last year. By then, though, its rivals already enjoyed a commanding share of this young business.
What’s surprising — and alarming — is how little progress this company has made with even the most basic of AI tools in the meantime. The debut of Apple Intelligence in October, for instance, was un-Apple-like in that it wasn’t even close to including all the features and capabilities the company ultimately intends for the technology to offer.
And Siri’s proving particularly problematic, if the March removal of Apple’s AI chief as head of Siri’s ongoing development is any indication. Indeed, Tim Cook was forced to concede during the recent earnings call that the implementation of a new-and-improved Siri is “just taking a bit longer than we thought.” That wording sounds like CEO-speak intended to gloss over fairly serious developmental challenges.
The kicker: Alphabet CEO Sundar Pichai recently suggested his company and Apple are close to striking a deal that would allow Apple Intelligence users to choose Google’s Gemini as their underlying AI model. Apple is usually isolationist, and such a decision confirms just how far behind it is in its AI research and development (R&D) efforts.
This is a worry for current and would-be Apple investors because AI is expected to be such an important growth market. Industry research outfit Market.Us believes the worldwide business of AI-powered virtual assistants is set to grow at an annualized pace of 31% through 2034 — yet Apple is steering customers to its competitors on this front.
Does this spell doom? Hardly. If nothing else, Apple remains the world’s most profitable company. It can acquire whatever new revenue-bearing tech it needs, or use its reliable cash flow or the $133 billion worth of relatively liquid assets sitting on its balance sheet to repurchase its stock. Its higher-margin services arm is also still doing particularly well.
Even so, services only make up a little more than one-fourth of the company’s revenue, and less than half of its gross profits. Apple is still predominantly an iPhone-first company.
It would also be naive to ignore that Apple’s sales of services and devices go hand in hand, with the latter largely driving the former. While iPhone owners can and do spend more and more on apps and subscriptions, there is a limit to how much they’re willing to spend. We’re getting closer to that limit every day.
The bottom line? Apple isn’t necessarily a sell here. There’s even a wobbly case for stepping into the stock while it’s down more than 20% from its December peak, particularly if you think tariffs will ease rather than becoming a permanent problem. Apple’s services business also remains impressive, even if it’s not its flagship business.
There’s no denying, however, that Apple isn’t the must-have investment many people were prioritizing just a couple of years ago. It’s been giving up too much ground on the AI front to competitors equipped to keep their newly-won market share. Meanwhile, its iPhone business continues to move sideways, with no end in sight.
At this time, you can certainly find more promising prospects than Apple.
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