This column originally appeared in Forbes.
Apple's (AAPL) stock price recently passed $500, making its $487 billion market capitalization larger than Google's (GOOG) and Microsoft's (MSFT) combined. Many analysts argue that such a heady valuation means a price drop is imminent. Others argue that Apple could double to $1,000 a share. Few have considered how China, Apple's second largest market globally, should contribute to the valuation.
Apple CEO Tim Cook, whose pay package totaled $378 million in 2011, says he finds the demand for Apple products in China "surprising." He said this after the iPhone 4S launch in January was cancelled because of mass crowds and rioting. Only Apple, it seems, is surprised.
I believe that China should be Apple's biggest market, and the company is underperforming there, even though its sales there quadrupled from $3 billion to $12 billion in 2011. If Apple ever gets it China strategy right and begins to realize the true potential of a billion-mobile-phone-user, Apple-crazed market, its stock price could surge north of $1,000 a share. The real question is will Apple ever understand the true demand for its products in that country and execute properly?
People in China appear to be as passionate for and loyal to Apple products as anyone anywhere. They brave scalpers and multi-hour waits in the freezing cold when Apple releases new products. The latest crowd control problem shouldn't have taken Cook by surprise. Every launch goes wild. Last year at the release of the white iPhone 4 an American retail employee came out swinging a metal pipe at an unruly crowd of scalpers.
Apple has solved most of the major problems that slowed its initial iPhone push into China. It now waits only a few months, not years, to introduce new products; the iPhone launch was years behind America's. Most consumers are patient enough to wait for the real things rather than rush to Hong Kong or other markets to buy phones to bring back to China. Also Apple has made it easier for consumers to use pay as you go cards with China Mobile (CHL) rather than having to sign up for monthly plans with China Unicom (CHU).
The real problem is that Apple is far behind on its plan, announced in early 2011, to open 25 stores on the mainland, out of about 300 worldwide. There still are only five, but according to the company they're the most profitable in the world in sales per square foot. My firm believes the market could easily sustain a hundred stores. The proof lies in the number of fake Apple stores that have popped up throughout the country, even in the relatively poor city Kunming. Those stores sell real Apple products, indicating strong demand even in relatively impoverished places.
Apple[/entity] needs to hurry up and start opening stores before it gets squeezed out of the market. Despite its massive sales in 2011, Apple's market share of smart phones actually dropped from 10.4% to 7.5%, according to data from Gartner Group.
Google's Android platform is taking off for both budget phones made by ZTE and Huawei and higher-end ones like Samsung's Galaxy line. Why? The Android phones have far better distribution and supply chain management than Apple. As one Shanghai resident told me, "I bought a Samsung Galaxy 2 because I had to wait too long to get an iPhone 4."
It is surprising that Apple has been so slow to take full advantage of China's potential market. Under Steve Jobs the company was far too focused on the United States. Let's hope Tim Cook will help focus more on international markets. If he manages the shift, Apple's shares could very well top $1,000.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.