Rate Of ReturnApple's Q1 2025 (Apple's fiscal year Q2 2025) earnings report interpretation—Service engine growth slows down, hardware differentiation and the 'low-growth dilemma' under the shadow of tariffs
Recently, $AAPL.US released its quarterly earnings report. Overall, the financial data remains solid, with a net profit of $24.8 billion for the quarter. However, there are no real highlights. Apple is still the Apple that makes money easily, but it's also the Apple with slightly lackluster growth.
Key financial data is shown below:
Let me get straight to my personal take:
1. The core iPhone business has dropped to second place globally but has fallen to fifth place in the Chinese market. As previously mentioned, while Apple's ecosystem is unbeatable, it's under siege from Android. Government subsidies, foldable screens, the rise of high-end Android phones, and global macroeconomic factors have all contributed to iPhone's sluggish growth. The ranking in China this quarter is the best evidence of this.
2. Apple hasn't changed much in recent years. Its moat is deep, making money is easy, and it has ample cash reserves for R&D investments. Combined with massive buybacks and the bull market in U.S. stocks, Apple's stock price has remained strong despite growth rates below 10% or even negative for over ten consecutive quarters. However, Apple has yet to find its second growth curve, and its AI journey is still exploratory. Apple has tried many approaches—VR/MR was initially seen as the hoped-for second growth curve, but it's still too early, with revenue far from meeting expectations. The car project has been abandoned, leaving only AI as the remaining hope, given the consensus that AI is the future. But until Apple's AI ambitions succeed, high growth is unlikely. How Apple seizes opportunities in the AI era will be a critical factor for its future.
3. Regarding Apple's stock price, given its current growth rate and the lack of significant growth potential in new businesses for the next few years, I believe Apple's valuation won't be too high. Last quarter, I thought a P/E of 40 was too high; this quarter, it's dropped to 31. The iPhone is already at the top or near the top globally, making further major growth unlikely. VR and AI show no signs of becoming the second growth curve anytime soon. Investing is about the future, and by 2026, Apple's growth will likely remain lackluster. Of course, investment and whether a company is good are two separate issues. As a company, Apple is undoubtedly one of the best in the world, but when buying Apple stock, we must consider the price! From an investment perspective, Apple is a company with relatively high odds of success but not high potential returns.
Apple's business is straightforward, and I assume most of you are familiar with it. My view on Apple remains unchanged; you can refer to my previous earnings reports for more details.
I. Overall Financial Data
Apple's main business is divided into five segments: four hardware categories (iPhone, Mac, iPad, wearables & other hardware) and software services.
1. Revenue: This quarter, Apple's total revenue was $95.4 billion, up 5% YoY. Wearables declined, while other segments grew. Software services hit another record high, but growth slowed to 11.6%.
The chart below clearly shows that over the past few years, Apple's revenue growth exceeded 20% in only four quarters, while growth was below 10% or even negative in the rest. Yet Apple's stock has risen about 5x over the past five years. This proves that Apple's lack of high growth isn't a recent issue—it's been consistent. Without a new second growth curve, Apple has never been a high-growth company. There's virtually no company in the world with quarterly revenue of $100 billion, net profit of $30+ billion, and 20%+ growth every quarter. Apple's core investment value lies in its ecosystem, which makes its business model easy and profitable.
iPhone revenue was $46.8 billion, down 0.8% YoY, accounting for 49.1% of total revenue. This was mainly due to lower average selling prices and a significant drop in sales in Greater China.
2.Net Profit: Apple's net profit this quarter was $24.8 billion, up 4.8% YoY. This was largely driven by high-margin software services.
3.Gross Margin: Apple's gross profit was $583.8 billion , up 6.3% YoY, with a gross margin of 47.1%, showing both YoY and QoQ improvements.
II. iPhone Business Performance—Ranking Drops to Fifth in China
In terms of smartphone sales, the chart below shows Canalys' Q1 global smartphone shipments ranking, where Apple had the highest growth and ranked second.
But Apple's performance in China was disappointing, with shipments down 8%. Last quarter, it ranked first; this quarter, it dropped to fifth. This is likely due to government subsidies, which will continue in Q2, though the impact may lessen. Apple's domestic sales in Q2 will still face significant pressure.
Looking at iPhone revenue data, this quarter, iPhone revenue was $69.138 billion, down 0.8% YoY, with an 11% drop in China..
Apple's quarterly iPhone revenue:
III. iPad, Mac, and Wearables Revenue
1. iPad: iPad revenue this quarter was $6.4 billion, up 15.5% YoY, showing strong recent recovery.
2. Mac: Mac revenue was $7.9 billion, up 6.7% YoY, performing modestly.
3. Wearables: Wearables and other hardware revenue was $7.5 billion, down 4.5% YoY. This segment was once seen as Apple's new growth curve, especially VR/MR products. But VR/MR hasn't taken off, and Apple still hasn't found its new growth driver.
IV. Software Services: Revenue Hits Another Record High
Software services revenue this quarter was $26.6 billion, up 11.6% YoY, another all-time high. This is the most critical part of Apple's ecosystem and its deepest moat. However, growth slowed this quarter.
For historical earnings reports and data, check out my previous analyses below:
Apple Q2 2024 (Fiscal Q3 2024) Earnings Report—Growth Falls Short, but Margins Pick Up the Slack
Apple Q1 2024 (Fiscal Q2 2024) Earnings Report—Apple Needs to Embrace AI Too
Apple Q4 2023 (Fiscal Q1 2024) Earnings Report—Even Great Companies Need the Right Valuation
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