As the investment community awaits the results of Apple, Inc. (AAPL), which are due out after the bell on Thursday, one of the key catalysts to consider will be the impact of China on the company's earnings. In the last five years, the iPhone's global market share has risen from virtually 0.0% at the start of 2007 to roughly 5.5% in 2011. Although that may be considered an impressive number, it demonstrates that fact that Apple will need to ramp up its global efforts if it wants to strive outside of the already saturated US smart phone market. One the largest and heavily untapped markets for Apple, Inc. would clearly be China.
By the end of 2012, China will account for 26.5% of all smartphone shipments, according to data from International Data Corp., which is well ahead of the U.S. market that accounts for 17.8% of all smartphone shipments. IDC says China's markets are driven by "strong end-user demand and an appetite for lower-priced smartphones." China has already played a vital role in the global revenues Apple generates. During the July quarter, revenues generated from China (which include Hong Kong and Taiwan) accounted for more than 16% of Apple's overall revenues. These revenues were also up 48% on a year-over-year basis.
In terms of the company's full year revenue generation from China FY 2012 has already surpassed FY 2011 by a fairly wide margin. Through the first three quarters of FY 2012 Apple has already generated $18.10 billion in revenue from the region, a 36% increase over the FY 2011 results of $13.30 billion. By examining the numbers a bit closer we'll notice that Apple is not only on pace to generate $24 billion in revenue, but is also on pace to surpass last year's revenue by nearly 80%.
Do I expect China to have impact not only on revenues for the fourth quarter but on iPhone and iPad sales as well? According to Ian Sherr of WSJ.com, "In the second quarter, the world's biggest market for mobile phones bolstered Apple's results, but failed to in the third period. The slowing growth was dramatic: iPhone sales in China doubled in the third quarter, but grew more than five-fold in the preceding one." If Chinese-based iPhone sales don't at least double in the fourth quarter shareholders could in fact see those contribute heavily to a short-term sell-off in the stock.
As Tim Cook has previously noted, China is the company's "fastest growing region" and I strongly believe that Chinese-based sales are going to be vital to the brand's existence in the region. Many investors believe that the record set by Apple in terms of iPad sales back in June could very well be broken. The Trefis Team, which contributes to both Seeking Alpha and Forbes.com, had this to say in terms of iPad sales expectations: "The launch of the new iPad 3 in China last quarter will have helped iPad sales along and mitigated the impact of seasonality to an extent. iPad sales in the June quarter had set an all-time record on the back of a successful launch of the new iPad. China's addition and the nascent stage of the tablet market may help Apple beat that record this quarter." If China can continue to be a strong positive catalyst for Apple in the Asia-Pacific region, by substantially contributing to the company's overall international growth, I see no reason why investors shouldn't be long on Apple.
Partnering In China
One of the things we need to examine a bit closer, are some of Apple's current and potential partnerships in the region. Apple is currently partnered with both China Unicom (CHU) (since August 2009) and China Telecom (CHA) (since March 2012) to sell the iPhone 4 and 4S. Rumors have been swirling about a possible partnership with China Mobile (CHL), and the company's chairman has recently hinted at the possibility of such a partnership, "China Mobile is actively talking to Apple about a partnership."
According to an article written by Adam Levine-Weinberg, "There have been longstanding rumors that Apple will add China Mobile as a partner for the iPhone 5, in order to tap this enormous market opportunity. On the other hand, there are significant obstacles preventing this from happening, particularly that China Mobile uses a proprietary 3G standard that is not compatible with other 3G networks worldwide." If the two companies could forge a partnership that allows for Apple, on one hand, to tap CHL's subscriber base and on the other hand allows for those users to unlock the capabilities of the iPhone 4 over its proprietary network, this could virtually be a match made in revenue heaven.
Potentially Negative Catalysts
Are there any negative concerns investors should have when it comes to Apple? Yes, one of the negative catalysts surrounding Apple has to do with both the US-based smartphone and tablet markets, and their current state of over-saturation. In my opinion, the US smartphone market is over saturated with products that may or may not necessarily be as good as Apple but they're cheaper and if such market behavior continues Apple could lose market share. If companies such as Nokia (NOK), Amazon (AMZN), Google (GOOG) and Microsoft (MSFT) continue to introduce products on the tablet side under $329 (the starter price point for the iPad mini) and on the smartphone side under $199 (w/a 2-year contract by most wireless service providers), Apple would really need to step its game up in many of the untapped regions such as China.
Disclosure: I am long AAPL.