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  • Is Apple Still Worth It's Market Capitalization? 0 comments
    Apr 16, 2014 9:55 AM | about stocks: CHL, AAPL

    Apple's (NASDAQ:AAPL) market cap is too high for the lack of growth it is exhibiting in the Asian markets. To quote a motley fool Apple bull "People want the iphone in China, it's just a matter of affording it". What a sentence! It's just a matter of affording an 850 dollar phone!

    Yes, affording it is a tremendously huge matter, especially when the per capital GDP in China is less than USD 7,000 a year. For the layperson, that means that on average, people only make USD 7,000 every year. Sure there are rich people in China; sure there is an emerging middle class. But when you talk 'growth-oriented' figures - which is what Apple trades off of and what it needs to expand its stock price and market share, you aren't going to get that from an average Chinese person.

    So, is Apple's market capitalization justified based on the "China growth story" argument? Is it a stock to own given its market cap is nearly two year highs? I would say no, it isn't justified. But for arguments sake, I have other explanations

    · China's market is now saturated with smart phones (unlike 6 years ago). Most middle- or upper-class people from China's highly urbanized cities: Shanghai, Guangzhou, Shenzhen and Beijing have already made their selections, and aren't really in the market for a new phone very often. The growth in China for upper-end smart phones was about 4 years ago.

    In addition, Apple enthusiasts shouldn't start blinding finger pointing at the Chinese consumer to save them, when only 33 percent of China's GDP comes from consumer spending. The Apple growth story is now relying on people who make an annual income of USD 7,000 per year. Asking these people to spend roughly 1/7th of that on a phone is asking for a lot. There are just too many cheaper phones with similar functionality, from the likes of Xiaomi, Samsung, Huawei, and Lenovo.

    · The main driver of all stock performance is expected future growth, and/or drivers of expected future revenue growth. How many professional investors are actually enthused by the new pipeline of innovative Apple products? What innovation you ask? The larger-bodied, higher 'retinal display iphones, or the smaller-bodied and 'more convenient' ipads? These devices are getting closer and closer to approaching the area of product cannibalization; soon a consumer will be indifferent between purchasing a 'hand computer' known as an Apple iphone, or purchasing a 'handbag computer' known as an Apple ipad. Apple has not innovated since the advent of the ipad, and this is one of the big reasons not to be buying (and perhaps short selling) this stock.

    · Hedge funds are very long into Apple through the fourth quarter of 2013. Any disappointment with global shipments/orders, or with future revenue guidance could cause these funds to flip the stock as they were flipping it through 2013. (Apple was the stock that had the largest hedge fund decreases in ownership through Q1,Q2 and Q3 of 2013).

    · Have a look at the overall market right now, is it going up? In my experience when markets get top-heavy like this, it is the last gasp to get out before volatility spikes. And when markets have a violent pullback, the large cap growth stocks like Apple will get hammered first. Which usually triggers more churn sell orders from the institutions and hedge funds.

    Apple and Samsung remain the only vendors out there with double-digit market share for smart phones in China's market, but the combined market share for the two behemoths fell in 2013. The fall in market share is precisely what I have been talking about above, with China's newest consumers of smart phones being value phone buyers, and not going for glitz and glamour of a market leader. Given the real growth market for smart phones are the more blue-collar second and third tier cities, citied in China's National New Urbanization Plan (2014-2020), I would expect Samsung and Apple to continue to lose market share to local, cheaper competitors.

    Finally, I have heard a ton of hype about this 'China Mobile' (NYSE:CHL) option. But this ties back to consumer affordability. China mobile won't really make a difference with new sales if you ask yourself why most of Chinese (760 million) use China mobile when China Unicom has the far and away best service and quality. People in China use China mobile because it is the cheapest option (I pay 15 dollars a month on my china mobile top-up card; my service is always terrible but it's like using a phone for free). Most Chinese use it because it is what they can afford. Chinese consumers aren't exactly going to be the target market for a phone that costs nearly USD 1,000 dollars, and investors should temper their expectations about Apple; it is far too expensive for most of the 1.4 billion Chinese.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Business relationship disclosure: Business relationship disclosure: The article has been written by ActiveVest’s, Co-Founder and Chief Investment Officer. ActiveVest is not receiving compensation for it (other than from Seeking Alpha). ActiveVest has no business relationship with any company whose stock is mentioned in this article.

    Stocks: CHL, AAPL
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