Apple’s $1T dreams are on hold as it misses on iPhone sales in the holiday quarter

Apple’s dream of becoming a $1 trillion company will have to wait — at least for a little while.

But while iPhone sales this year were about flat (down about 1% to be exact), revenue from the iPhone rose 13% year-over-year. That means Apple is finding ways to get more revenue out of the same number of units, so it may indeed be finding demand for higher-priced phones amid the usual consumer appetite for new iPhones. That higher average selling price means that Apple may have indeed succeeded in unlocking a new tier of consumer demand for higher-priced products, and its three-pronged approach may end up paying off in the end — though it still has to figure out how to ignite that massive upgrade cycle among the rest of its consumer base.

Despite the release of the iPhone X, which was accompanied by a wave of positive reviews and seen as Apple’s interpretation of what a next-generation smartphone looks like, Apple wasn’t able to create the so-called “supercycle” that would prompt a massive wave of new iPhone upgrades — leading to a bit of a collective shrug from Wall Street as everything else about hit on target. Despite looking to unlock a new, higher-priced tier to tap potential demand for early-adopters, Apple wasn’t able to see the kind of massive wave that a new size of phones brought. Apple’s guidance for the second quarter also fell lighter than what Wall Street expected.

Update: With the call ongoing, Apple’s stock is now up around 3% after starting off with a slight decline. The company on the call offered some additional guidance on the iPhone, and the company offered some optimistic growth for the iPhone — which, while Apple has an array of other products, is its key driver. While Apple offered weaker-than-expected guidance, it looks like investors may be shrugging this off with some positive signals on the iPhone.

Apple’s executives still had to do a little bit of explaining as to what was going on during hte earnings call. Still, Apple needed a very big quarter to make that final push to $1 trillion, and it didn’t quite get there. By Apple standards, this adds more than $10 billion to its market cap, but its market cap still stands at around $860 billion. By contrast, Apple’s last report — which was a blowout by even Apple standards — sent the stock skyrocketing and its market cap over $900 billion.

Here’s the scorecard:

• Revenue: $88.3 billion, compared to $87.1 billion analyst estimates.
• Active install base: 1.3 billion devices
• Earnings: $3.89 per share, compared to Wall Street’s expectations of $3.83 per share.
• iPhone sales: 77.3 million, compared to 80.2 million iPhones sold expected by Wall Street.
• iPad sales: 13.2 million
• Net cash: $163 billion (including debt calculations)
• Mac sales: 5.1 million
• ASP: $796 (this is a big one)
• Services revenue: $8.5 billion, up 18% year-over-year
• Other products: $5.5 billion, up 36% year-over-year
• Guidance: between $60 billion and $62 billion, compared to $65.7 billion expected from Wall Street.

One thing to note here is that this quarter had 13 weeks, compared to 14 weeks reported in the same quarter a year ago. So the numbers will be a little wonky here, but at the same time, most of this was baked into expectations going in and still didn’t quite hit the crazy mark that Wall Street sought. Both that iPhone sales number and the guidance number came in lighter than expectations, keeping the company from contninuing that run that it went on at the back end of 2017.

Over the past several weeks, reports of weaker demand for the iPhone have come in from a number of different directions — and while it wasn’t clear exactly how it was going to play out until Apple delivered the numbers today, it did serve as somewhat of a signal that Apple wasn’t able to hit that crazy ramp with the iPhone X for any number of reasons. Apple’s guidance also fell a little on the weaker side, which means that the company might not be getting that huge lift from the iPhone X that Wall Street had initially sought.

Here’s what the revenue looks like:

“In those geographies that had in the early days of the smartphone had very traditional subsidies where you paid $199 out the door, $99, or whatever, I think it’s accurate to say those type of markets, the replacement cycle is likely longer,” CEO Tim Cook said on the earnings call. “Where that isn’t the case, I’m not nearly as sure on that. I would point out that happened some time ago, so it’s very difficult currently to ever get a real-time handle on replacement rate. You don’t know the replacement rate for the products you’re currently selling. You only know that in a historical sense. It’s not something we overly fixate on.”

Services continued to be a bit of a bright spot for Apple, once again rising around 18%. In addition to building a new iPhone to re-ignite its growth engine, services — which includes things like Apple Pay and Apple Music — is an increasingly important part of that puzzle. Consistent, methodical growth from its services business translates to just added-on incremental value for Apple, which can offset the peaks and troughs that come with iPhone update cycles. Apple CEO Tim Cook has said a few times that he expects Apple’s services business to be the size of a Fortune 100 company.

For Apple to get to that insane (largely symbolic) $1 trillion market cap, it had to show Wall Street it could deliver on multiple fronts: build that huge services revenue business, come out with new products like the AirPods (and theoretically HomePod) that were successful, and of course come out with a new blockbuster iPhone. Signs were pointing in the right direction on its last earnings call, which pushed the company to a $900 billion market cap, but the reality of fickle consumer demand is settling in as Apple continues to try to find a way to spark that huge upgrade cycle.

Those reports brought a massive run from Apple to a halt after it looked like it was primed to become a company with a $1 trillion market cap with a new generation of iPhones. The iPhone X had a staggeringly big price tag, but the bet that there would be a bracket of consumers that would pay extra for a newer phone was one that made sense in theory. So, that run to $1 trillion is probably on hold until Apple is able to really create that “super-cycle” that it wants.