After 13 years of consecutive growth, Apple (AAPL) disappointed after reporting revenue had fallen 13% in the second quarter due to weak iPhone sales—sending shares into a downward spiral in premarket trading Wednesday.
One of the major points that came through in Wednesday’s earnings call was that Apple can no longer rely on China. While the smartphone maker had derived big chunks of its growth from the rise of China’s consumer class, demand there shrank in the quarter as consumers opted for cheaper alternatives to the iPhone and iPad. Sales in China fell by a more than quarter, to $12.5 billion.
Now investors and analysts are waiting to see if the iPhone 7’s launch will help sales pick back up.
Following Apple’s results, Oppenheimer analyst Andrew Uerkwitz downgraded the stock from outperform to perform, noting that lower iPhone sales in the first quarter suggest weaker performance until 2017’s iPhone launch.
Goldman Sachs also took its rating down a notch, from conviction buy to buy, saying that despite flagging sales in China, there were still significant levels of pent up demand in for the iPhone 7 in the U.S.
But not everyone is convinced that the yet-to-be-revealed iPhone 7 will do what bullish investors and analysts hope.
“If iPhone 7 doesn’t surprise with meaningful new useful features, we worry that consumers won’t upgrade,” wrote Macquarie Research analyst Ben Schachter in a Wednesday note. “And unfortunately, nothing that we’ve seen about iPhone 7 thus far strikes us as particularly innovative.”
Instead, Schachter said, look inward at something Apple is already showing results for: Services.
According to Apple, services, a category that includes the App Store, Apple Music, and Apple Pay, has shot up to become its second-biggest revenue maker behind the iPhone, and the tech giant’s management has increasingly homed in on these services as a future growth driver.
But even in the services space, there’s a lot of uncertainty. Apple is facing an uphill battle with rivals including Google (GOOGL), Microsoft (MSFT), and Spotify—raising questions as to whether Apple can capture market share from its fellow giants.
“The bottom line is that Apple needs new innovation either in its current categories or in entirely new products (car?) in order to drive consumer and investor excitement,” Schachter wrote.
That leaves quite a bit of uncertainty on the table—and investors hate uncertainty.
Macquarie affirmed its outperform rating on the stock, and lowered the company’s price target from $117 to $112.
