Why a Partnership Would Be a Huge Catalyst for Apple and China Mobile
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On July 31, Reuters reported that Tim Cook, Chief Executive Officer of Apple (NASDAQ: AAPL), recently met with executives at China Mobile (NYSE: CHL). Rumor has it the two sides discussed a potential partnership, which has been speculated in the financial media for months now. At long last, it appears that there is finally progress being made on a possible agreement, and if it materializes, represents a gold mine for both companies.
Strength in numbers
Put simply, China Mobile represents a huge opportunity for Apple. The numbers at play here are truly staggering, and are enough to convince any Foolish investor that this is exactly the catalyst Apple needs.
China Mobile is the world’s largest mobile telecommunications carrier by subscribers, serving more than 700 million customers. To date, China Mobile does not offer the iPhone, making it the only Chinese carrier to not yet provide Apple devices.
China is clearly a priority market for Apple, whose penetration there would receive a significant boost from a partnership with China Mobile. Greater China already accounts for 13% of Apple’s revenue, and that percentage should only increase going forward.
China is a member of the BRIC nations, a term signifying the emerging market nations that will lead global economic growth going forward. The expanding middle class in China is largely why the country continually posts strong GDP growth, as opposed to the United States, which is a much more mature economy with a relatively saturated telecommunications market.
Each company stands to benefit
China Mobile reported stagnant first-quarter 2013 profits, despite strong subscriber growth. That’s because high-quality 3G subscribers have been few and far between for the telecommunications giant. The carrier added approximately 26 million 3G subscribers in the first quarter, but wireless data traffic dropped nearly 8%, and China Mobile’s average revenue per user declined as well.
Apple, meanwhile, needs something to move the needle, too. A new iPhone is months away if not longer, and it’s clear the market is taking a wait-and-see approach to the stock during this lull in product cycle.
Apple has rallied strongly over the past month, but its valuation multiple is still depressingly low. Apple trades for just 10 times trailing earnings, and even less if you deduct its massive $145 billion cash pile. Obviously, the market is not willing to award Apple with a market multiple unless the company can prove it has a clear, upward growth trajectory ahead of it.
China Mobile, for its part, trades for just 10 times trailing earnings as well, according to Yahoo! Finance. The stock carries a $212 billion market capitalization, so, like Apple, a company this size needs something big to really move the needle.
Consider the big picture
Clearly, Apple needs a catalyst. The company is still under heavy pressure in the post-Steve Jobs era, suffering from a pronounced product cycle lull.
At the same time, the rapid pace of economic growth and favorable demographic shifts in China make it a high priority for any company looking for new avenues for growth.
Don’t kid yourself: it’s in both Apple’s and China Mobile’s best interests to see this partnership materialize and you can bet each side is seeing dollar signs in the wake of their meeting.
As the saying goes, numbers don’t lie. There are 700 million reasons for Apple (and, for that matter, China Mobile) shareholders to want to see this partnership come to fruition, and if it does, it represent a huge opportunity.
Even if the partnership doesn’t happen right away, shareholders of each stock will receive strong dividends in the interim. Apple and China Mobile yield 2.7% and 3.8%, respectively, so investors are being paid well to wait for this catalyst to materialize. And, if it does, shareholders will likely enjoy the capital gains that have been so hard to come by over the past year.
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Robert Ciura owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and China Mobile. 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!