With all the rumors and worries that are surrounding Apple at the moment, it is hard to miss the real facts that are out there.
One of the most important and missed pieces of information, that has not been properly analyzed is Tim Cook's statement two weeks ago that China will soon become Apple's largest market.
So, what does this mean? As Goldman Sachs (GS) pointed out on Seeking Alpha last week, re-iterating its buy rating on AAPL and price target of $760, they added "the company's opportunity in emerging markets is far greater than what investors give it credit for. A survey of Chinese owners of an iDevice finds 9 out of 10 at least "likely" to stick with an Apple product for their next purchase."
Let's put China's growth for Apple into perspective. First, heading back some 15 months, Cook said in the October 2011 earnings call: "For China - the sky's the limit there. I've never seen so many people rise into the middle class who aspire to buy Apple products. It's quickly become #2 on our list of top revenue countries." He continued "China was very key to our results," announcing that the country accounted for $3.8 billion in revenue this quarter.
Apple's retail stores in China have more than 40,000 visitors per day - four times the average traffic in their U.S. stores. Apple Chief Financial Officer Peter Oppenheimer said in 2011 that the company's existing China stores had both the highest traffic and the highest revenue on average of any Apple stores in the world. Apple plan to increase their stores in China from 12 to 36 during 2013. Still a fraction of the 260 stores that exist in the US.
Next, moving forwards a further 6 months to April 24th 2012. This was the time when angry mobs were pelting Apple Stores with eggs because they could not get their hands on an iPhone 4. Apple's iPhone has reported sales of 500% YOY, and revenue had increased from Q1/2011 to Q1/2012 by three-fold to $7.9bn. "It is mind-boggling that we can do this well," said Cook on the April 2012 earnings call. So let us jump forward 9 months to January 2013. What facts do we have today about iPhone growth in China? I will leave discussion about the huge growth in all Apple products, especially iPads, for a later article.
1) We have Tim Cook's comment this month that China will become Apple's biggest market. Let's be honest - he should know.
First let us break down what Tim Cook's statement means in real numbers. Apple's Q2/2012 revenue was $39.3bn, of which $7.9bn was from China. The Asia Pacific region as a whole accounted fro 29.2% ($11.44bn) of Apple's $39.3bn. Therefore China accounted for 69% of the Asia Pacific regions revenue. The Americas count for 37.9% of Apple's revenue, or $14.89bn. Therefore for Tim Cook's statement to become a reality China's revenues will have to more than double, adding over $40bn in new sales during the next 12 month. Apple's current sales are circa $190bn, and the Americas at roughly 38% is about $72.2bn. Therefore China would have to add on over $40bn of new additional annual sales to become the largest market for Apple.
That means with just China's growth and the imagine the rest of the world posting zero growth that would still add 21% to Apple's growth alone. As the rest of the world is still growing strongly for Apple we can assume that the rate for the company will far exceed 21%.
2) We have the fact that Apple has signed another of the countries carriers (now 2 of the 3) for its iPhone and iPad products. So they have China Unicom and China Telecom.
Apple said it sold over 2m iPhone 5 units at China Unicom and China Telecom at the launch weekend. This is just a 1.5% penetration of a 130mil 3G subscriber base of these two companies. Clearly there is many years of growth for Apple here.
China Unicom in December 2012 had 163m 2G subscribers, 76.5m 3G subscribers and 91m Local Access subscribers.
3) We know Apple are continuing to speak to China Mobile, they are China's largest carrier in terms of total subscriptions (600m), being about 20% larger than China Unicom and China Telecom combined (500m). I have no doubt that Apple will sign China Mobile as large numbers of subscribers are flocking to China Unicom and China Telecom which China Mobile will wish to stop. It is not a FACT they will sign them up, only a high probability. We are aware Tim Cook met again with senior execs earlier this month. What matters here though is the size of the 3G subscriber base needed for Apple's iPhone. By November, China Mobile had 82.43 million 3G users, followed by China Unicom's 73.32 million and China Telecom's 65.85 million.
That means that Apple's current two partners have 73.32m + 65.85m (nearly 140m) 3G subscribers as of November 2012, and growing at over 5m new subscribers per month. Apple therefore already has access to 58% of China's rapidly expanding 3G subscriber base, putting any fears about not having yet signed China Mobile in perspective. In fact China had 1.1 billion mobile users by November and less than 20 percent of them were 3G users, according to figures from the Ministry of Industry and Information Technology.
So it is important not to forget that Apple has been growing by more than 100% a year over the last three years in China, without China Mobile. This growth is set to continue as in 2012 they signed the countries second biggest carrier. They have only scratched the surface of the 3G subscriber base in China, and any future partnership with China Mobile will only add even further growth.
It is clear that Apple is going to enjoy huge success and growth in China for many years to come. It is currently experiencing 100%+ growth rates in revenue, and that growth is likely to add 20% to Apple's total growth. Any further news such as a lower cost iPhone (the subject of a later article), or signing up China Mobile will only increase worldwide growth (in the case of the lower cost iPhone), or Chinese growth in the case of signing China Mobile from already rocket-propelled growth rates, to even more growth still.
My recommendation would be to buy Apple shares ahead of the Jan 23rd after-the-close earnings call. Long term, the shares are extremely safe, and there is every possibility the shares could take off after the earnings.
Disclosure: I am long AAPL.