Will China be All That and a Bag of Rice for Apple?
Jonathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Despite declining economic growth in China, Apple Inc. (NASDAQ: AAPL) is counting on rising sales in the People's Republic to take its share price much higher. It will not be smooth sailing for the iPhone fleet.
Earlier this year in April, Brian White, an analyst with Topeka Capital Markets, issued a "Buy" recommendation for Apple with a target price of $1001 a share. A dominant factor in that was greater sales for the company in China. Since that time, Apple has fallen from almost $650 to under $600 a share.
The bullish case for Apple increasing sales in China is easy to make. The world's largest middle class is in China. The People's Republic is also the biggest market in the world for mobile phones with more than 1 billion subscribers. The Chinese love Western products and engaging in conspicuous consumption. That is certainly the iPhones from Apple, which are at the high end of the market. When the iPhone 4S made it to the shelves in China, there were crowd control problems at the Apple stores. It also appears to be only a matter of time before the agreement with China Mobile (NYSE: CHL), the company with more cell phone subscribers than any other in the world at over 650 million, is enacted with Apple.
But there are obstacles that make a doubling in the share price of Apple unlikely if sales in China are to provide the needed profits. The bearish case is also easy to make, and even more compelling. The first issue is the overall demand for smart phones. Some analysts feel that the great majority of Chinese who want a high end smart phone have already converted to China Unicom or China Telecom, which is easier to do with the more forgiving service contracts in the People's Republic.
There is also the matter of competition from Samsung (SSNLF), Nokia Corporation (NYSE: NOK), Microsoft (NASDAQ: MSFT), Google (NASDAQ: GOOG) and Research-in-Motion. While Nokia Corporation might not be around much more, its Windows Phone from Microsoft is certainly in the market for the long haul. The new Windows 8 makes Microsoft even more formidable. Google is Google with $50 billion in cash and a profit margin of more than 27%. In addition, a recent research report from International Data Corporation projects an increase in the numbers utilizing the Windows Phone with a decrease in iPhone usage by 2016.
While that is in the future, Apple is facing severe competition from South Korea's Samsung today. Samsung is not only the world's biggest technology company, it sells more mobile phones than anyone else. It displaced Nokia Corporation earlier this year, which is still a force in China and other emerging market nations due to its partnership with Microsoft.
Gartner Inc, a technology research firm, reported that Samsung now has a significant edge over Apple in Chinese smart phone sales. Its Android constitutes 24.3% of the 137 million smart phones in use in the People's Republic. Apple has just a 7.5% share. According to the International Data Corporation report, there is little growth expected for the iPhone. The increase in usage will be from the wide offerings of Windows Phones, which are much cheaper.
Unlike Sprint-Nextel and others in the United States, companies do not subsidize the cost of the iPhone in China. For that reason, Windows Phones are expected to sell more. As a result, when the iPhone 5 is released later this year, it will be the status symbol for those in the high end of the Chinese market. However, these buyers are already priced into the share price of Apple with many already owning a functional smart phone. With this market force dynamic at play in China, it is difficult to see sales in the People's Republic taking Apple to over $1000 a share over the next year.
jonathanyates13 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, China Mobile, Google, and Microsoft. Motley Fool newsletter services recommend Apple, China Mobile, Google, Microsoft, and Nokia. 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.If you have questions about this post or the Fool’s blog network, click here for information.