For a little while it looked like Apple (AAPL) shares were stuck. We didn't see a ton of movement and bulls were getting bored. In early August that all changed as it began to work its way up through the lower $600 level. On Thursday, August 16th, Apple closed at $630. Two trading sessions later it was at an all-time high yet again, closing at $650. It's been a busy trading month for Apple who has seen multiple new all-time highs, became the most valuable company ever traded, and as of August 24, won their dispute against Samsung, bringing in over $1 billion. This pushed the stock up to $675 in after hours trading, likely causing a lot of pain to those who planned on letting their "worthless" short weekly calls expire on Friday. An article regarding this lawsuit by fellow Seeking Alpha contributor Stephen Rosenman can be found here.
But hasn't all the talk been about Apple getting to $1,000? A rare downgrade from Oracle Investment Research noted that Apple's hype has become a concern, something Laurence Balter, an analyst for the firm, relayed to clients. And popular options trader, Andrew Keene, once the biggest independent options trader for Apple, doesn't think it will even hit $900 by next year. But amidst the growing concern for Apple's eventual date with $1,000, there is one main catalyst that can get it there: China.
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Six-month chart of Apple, courtesy of Stockcharts.com
As we can see on the chart above, Apple has been on a tear in August, up 62% year-to-date. But for the most part, China, the world's largest country by population, hasn't participated as much as some may think. In my eyes, this is a good thing. I feel this way because when looking at how Apple has performed so far, I can only imagine the future potential it has, once it taps into China on a much larger scale. Some will argue that Apple already has a presence in China, using the wireless carriers China Unicom and China Telecom. Together, these wireless carriers have over 330 million subscribers. There are over 1.3 billion people living in China, with nearly 1 billion mobile subscribers. So if Apple has two deals inked with Chinese carriers, what more could be done? Two things actually.
China Mobile (CHL) is the biggest wireless carrier, not only in China, but in the world. China Mobile represents over 665 million mobile subscribers. That's more than double what Apple's current Chinese wireless providers have in subscriptions. If, and when, Apple gets a deal done with China Mobile, the stock will rally, and rally hard. Having the potential to sell another 220+ million iPhones (only one-third of China Mobile's subscribers) would be huge for the company.
It's also worth mentioning that the pending deal between China Mobile and Apple isn't so much of a personnel difference, as it is a technological difference. The main issue, and reason why there has been no deal, is that China Mobile's 3G network does not work with the iPhone, but a new chip from Qualcomm (QCOM) is in the works to bring the two companies together. This chip, which is still under trial, will be what would finally unite the largest company in the world, with the largest wireless provider in the world, spurring a huge, untapped growth potential. China Mobile has even seen 15 million iPhones purchased and activated, at full subsidized cost (usually around $600), just to be used on its Wi-Fi network, (2G). The deal is estimated to be completed in late 2012 or early 2013. The good news is that it would coincide with a date close to that of the "New iPhone," give or take a few months. It's also encouraging to see both sides working together and wanting a deal to be completed, in a "not if, but when," type of scenario.
Apple is already quite popular amongst the Chinese population. Though Apple only has six of its planned 25 retail stores open, they have been quite popular thus far. "Our four stores in China were, on average, our highest traffic and our highest revenue stores in the world," Noted Peter Oppenheimer, Apple's CFO. Knowing the iPhone has a high chance for success, Apple should do very well if a deal gets done with China Mobile. With 665 million subscribers, China Mobile is approximately triple the size of Verizon (VZ) and AT&T (T) combined. This leaves a tremendous amount of growth still available for Apple to capture in the coming years.
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Apple's Revenue by region, courtesy of TheNextWeb.com
Regardless of what the new iPhone will be called, Apple will certainly find multiple purposes for it. For one, it will get a new product out there that die-hard Apple fanatics will sleep outside for. The worry is that it will not live up to the hype and stir it has been causing when it will likely be debuted September 12, when Apple is expected to hold a special media event. Aside from creating a new product however, Apple will likely lower the prices of its current iPhone 4 and iPhone 4S, while keeping the new iPhone fully priced. Cheaper phones will drive more sales, especially if one such as the iPhone 4 were offered for free with a 2-year plan.
Cheaper iPhones aren't just a domestic boost to sales but internationally as well. Many users in emerging market opt for smartphone makers such Nokia (NOK) or Samsung and while Apple only has approximately 10% of the market share, Gene Munster thinks they will gain traction. Munster, an analyst for Piper Jaffray, thinks that a lower priced phone for China and other emerging markets will drive sales and increase revenue, despite the lower prices. He states, "Overall we believe iPhone global smartphone share will increase from 20 percent in calendar year 2012 to 32 percent in calendar year 2015."
But what about the lower margins from a cheaper phone? Despite the cheaper iPhone, I don't think margins will be compressed due to the increase in sales. A cheaper phone will allow consumers to be more enticed to sign up for them. Just because the iPhone is free to consumers, does not mean wireless carriers don't pay for them. With the addition of China Mobile, Apple will see a huge boost in sales and will likely report more record earnings to shareholders. In a previous article, I noted that most iPhone users are very satisfied, with little or no intention to switching brands, while many more Android users were looking to the iPhone as their next purchase.
There are some headwinds going forward, however. Apple, though beating its earnings estimates, had a rare miss by analysts expectations. Though the share price quickly ran back up from $570, the initial drop from the results, it might be something to pay attention too. Also, the market share in emerging markets may prove tougher to crack than most think, which would indeed put a damper on Apple's growth rate and earnings power. The overall market also has the potential for a sizable decline in the coming months, and this is another thing shareholders should pay attention too. Apple is clearly a buy, trading at such low multiples with such a high growth rate.
Macro conditions have been tough. With global growth slowing considerably, Apple has done well for the current situation. If global growth continues to weaken, I would be leery of equities in general. As Keene would say about Apple, "there's never a 'sell Apple' in my mind. I'm either flat the stock or long it." I would however, have to recommend waiting for the share price to retreat, as it been ripping higher and higher for much of this month.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AAPL over the next 72 hours.