China Will Drive Apple's Growth This Quarter

| About: Apple Inc. (AAPL)


Over the past few years, Apple's growth in China is soaring.

Until new products are released, growth in mature markets such as the U.S. will stay flat.

Strong growth in China is likely thanks to the partnership with China Mobile.

By now, almost everyone knows that Apple (NASDAQ:AAPL) is on the cusp of some major product announcements. Several news outlets recently reported that Apple will host an iPhone event on September 9, presumably to reveal the iPhone 6. In addition, other major product releases are likely on the horizon. These could include the much-anticipated iWatch, or an Apple television.

But until these products actually hit store shelves and begin contributing to sales and profits, Apple will have to make do with its existing lineup. This might make it seem difficult for Apple to put up satisfactory results this quarter, since it stands to reason most consumers would likely put off purchasing Apple devices until the newest ones are released.

That doesn't mean Apple can't continue to grow, however, even in this muddle-through period. In order for Apple to produce an earnings beat as it did last quarter, it will have to continue penetration into new markets. Specifically, Apple will be counting on growth in China as a major contributor this year, which is entirely possible thanks to its budding partnership with China Mobile (NYSE:CHL).

China region quickly growing in importance

Over the past few years, China has grown rapidly among Apple's core geographic areas. This can be seen in Apple's most recent 10-K report. Consider that in fiscal 2011, Apple generated just 11% of its total revenue from China. In all, China generated $12.6 billion in sales that year.

In just two years, Apple's revenue from China has more than doubled. In fiscal 2013, Apple generated $25.4 billion in revenue from China. Its contribution to Apple grew to 15% of total revenue. In those two years, China has surpassed Apple's massive retail business to become the company's third-largest operating segment by revenue, behind only the United States and Europe.

This trend should only continue going forward. Apple's recently formed partnership with China Mobile is gaining traction. China Mobile is the largest telecommunications carrier in the world, with 767 million subscribers. When Apple finally gained the ability to sell its devices on China Mobile's network, Apple Chief Executive Officer Tim Cook called the partnership a "watershed moment." It's not hard to see why.

China was the major contributing factor behind Apple's growth last quarter. Apple produced just 1% revenue growth in the Americas, its largest geographic segment. By comparison, sales in China jumped 28%, which was a far better performance than any other region. No other operating segment grew sales by more than 6%.

If Apple is going to beat earnings estimates again this quarter, without the benefit of new product releases in any of its key markets, China is going to have to carry the load once again.

Apple shares have rallied considerably over the past year, so future expectations are fairly high. Still, China should continue to keep Apple growing until its new product releases.

4G roll-out a promising catalyst

This is likely, based on the fact that China Mobile's 4G rollout is still in its infancy. China Mobile only received its 4G license at the end of last year, but management vows it will quickly and broadly expand its network. China Mobile states that it has taken 4G into 16 cities and has 29 LTE networks. In addition, the company intends to expand 4G service to all major cities and key villages in China by the end of 2014.

Cheaper competitors don't have staying power

A lot of attention gets paid to Apple's lower-end competitors in China, such as Xiaomi. Xiaomi is a copy-cat of Apple that essentially mimics Apple's devices and sells them for lower price points. The company has even been dubbed the "Apple of China" in the financial media.

But of course, there's only one Apple. Xiaomi has been successful in carving out a slice of the pie, but Apple and Xiaomi are going after different customers. Apple is at the high-end and always will be. This is why CEO Tim Cook has repeatedly stated his mission is to sell the best products, not the most products.

Once users are adopted into Apple's ecosystem, they don't leave. There's a reason for this, and it's for that reason that Xiaomi presents a much bigger threat to lower-end players like Lenovo (OTCPK:LNVGY) than it does to Apple.

As the saying goes, imitation is the sincerest form of flattery. Apple's astounding growth rate in China right out of the gate of its partnership with China Mobile is evidence enough that it is a premier brand.

As China Mobile's huge and developing customer base continues to adopt Apple products, Apple will reap huge benefits from its vast ecosystem. Growth is likely to be restrained again this quarter in the United States and Europe. These markets generated only slight growth last quarter. In China, however, Apple is hitting it out of the park.

Because of China, investors should have confidence that Apple will put up good performance when it reports fiscal fourth quarter earnings in October.

Disclosure: The author is long AAPL. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.