Tim Cook Keeps Apple Off the Hook

Alexander is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Tim Cook met with the CEO of China Mobile on Tuesday. The meeting will hopefully result in a major phone deal that helps Apple (NASDAQ: AAPL) to clear the last major hurdle slowing its growth in China.

What it takes to succeed in China

Source: Seeking Alpha

If Xi Guohua (CEO of China Mobile) adopts the iPhone, the company may be able to stem some of the market share it has lost to China Unicom and China Telecom (both of which currently carry the iPhone.) The 3G coverage in China is improving, and with greater retail distribution in the country the Apple iPhone should be able to regain some of the global market share it has lost to Android.

In the second quarter, Apple reported a 14% year-over-year decline in its greater China segment. A deal with China Mobile will give iPhone distribution across every mobile carrier in China.

Apple’s release of a low-end iPhone, television, and a wristwatch could be the catalyst needed to boost the value of the stock. Apple’s upcoming third quarter product refresh of the iPhone and iPad are also keeping investors optimistic.

Analysts are anticipating Apple to report an 11.5% year-over-year decline in net income for 2013. Analysts also anticipate the company to grow its net income by 8.4% in 2014, though the expectations are set extremely low this time around. A reasonable beat on earnings could push the stock closer to its 52-week high.

Chinese competitors

Samsung (NASDAQOTH: SSNLF) continues to pull ahead in the smartphone space. The downside is that Samsung’s rate of growth has stalled in recent quarters.

The company reported around $8.3 billion in operating income in the quarter, which fell short of expectations that were set at around $8.9 billion. The miss on operating income indicates that a lack of innovation paired with rapid product cycles is not enough to sustain really high rates of earnings growth.

On the upside, the demand for phones is expected to grow at fairly high rates. Gartner currently estimates that smartphone shipments will grow to 1.7 billion (representing 20% compound annual growth.) Assuming that Samsung is able to maintain its success in other product categories and is able to reinvest profits at a reasonable return on investment, the company should be able to sustain pretty high rates of growth.

Source: Statista

In 2012, Samsung was the dominant smartphone vendor in China. This isn’t very surprising as Samsung has a knack for launching creative advertising campaigns in Chinese markets. To Samsung, China is the good old back woods, while to Apple it is like the search for lost treasure in the Caribbean.

Google continues its march

Google (NASDAQ: GOOG) took on a bit of criticism in the past quarter. With eMarketer projecting digital advertising to double between 2013 and 2016, however, there may be still green shoots left for Google.

Source: eMarketer

Facebook will soon be launching a 15-second advertising strategy down its newsfeed. I estimate that the strategy will generate $16 billion in sales. The strategy is company-specific and exclusive to Facebook, but if Facebook can come up with a practical advertising strategy I am sure Google can too.

Mobile payment solutions are improving, and if given enough time then e-commerce via mobile may proliferate. This will give advertisers added incentives to advertise to mobile users.

Even if Google doesn’t have the strongest mobile advertising solution, I think that the company’s exposure to the mobile market will be enough to carry it along. The size of the application market is expected to reach $25 billion in 2013, according to Gartner. So with applications and digital ad sales on the rise, Google is still being given the benefit of the doubt (even though it missed expectation by 4.3% this past quarter).

Conclusion

Apple may be able to catch up to Samsung’s market share in China eventually, especially since there’s no denying the quality of an Apple experience. I think that investors should give Apple the benefit of the doubt as the company has a high chance of surprising analysts in the third quarter because of its product refresh.

Investors bought on the dip when Google missed expectations over the past quarter. Growth in mobile advertising and applications will continue, meaning that the weakness in earnings will be temporary as the company manages its costs better.

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Alexander Cho has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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