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Is China A Cause To Worry For Apple's Future?

|Includes: Apple Inc. (AAPL)

China is the fastest growing regional market for Apple today. In the latest quarterly earnings release, China's net sales grew by 112% for the last quarter against a year ago, and 81% YOY growth for the 9 month period. China now contributes to 25.3% of Apple's net sales, while in FY2013 the year when the iPhone 5 was released, China was 14.8% of Apple's total net sales. This is a big contrast in terms of the importance of China as a market to Apple from FY2013 versus the situation today.

Would China's slowdown lead to a change in preference of the Chinese consumers to use more affordable alternative? Only time could tell. However, since the release of iPhone 6, Apple has demonstrated that it is gaining market share from Samsung, and it could be a matter of time before it becomes far ahead in terms of market share against Samsung. And there is still a big opportunity for Apple to grow, and it lies in converting smartphone users of other platform to iOS.

Source: Statista

In my view, Apple's biggest challenge is its ability to continue to bring innovation to its product categories, while China's concerns should be less of a worry. The more crucial questions are how it can stay abreast of the competition and how can it continue to make its products so good, that will continue to keep its users loyal and make them evangelists to convert others into the Apple ecosystem.

Fundamentals and Valuation

Apple's EV is 663.67B as of August 28's closing. Its EBIT TTM is $69.5B. And its EV/EBIT TTM is 9.54.

Historically, for the past 10 years the EV/EBIT is 16.78, and for the past 5 years the EV/EBIT is 10.97. So we are seeing a situation in which the EV/EBIT is lower than the historical average.

 

2015(NYSE:TTM)

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

iPhone

iPhone 6

iPhone 5S

iPhone 5

iPhone 4s

iPhone 4

iPhone 3GS

iPhone 3G

iPhone 1st Gen

     

EV

663.67

647.06

476.99

459.88

351.57

270.11

166.19

50.35

155.59

62.79

52.33

EBIT

69.54

53.87

50.29

55.76

33.79

18.38

11.74

8.33

4.41

2.45

1.64

EV/EBIT

9.54

12.01

9.48

8.25

10.40

14.70

14.16

6.05

35.29

25.60

31.85

Average EV/EBIT (10y)

16.78

                   

Average EV/EBIT (5y)

10.97

                   

Assuming the EV/EBIT ratio stays the same at 9.54, and that the EBIT for FY2016 decreases to $65B due to market turbulence, and that the market value of preferred equity, debt and minority interest remains constant, the market cap of Apple has to increase to 663.36B.

 

2016 Forecasted

2015 TTM

iPhone

iPhone 6S

iPhone 6

Market Cap

663.36

646.69

Market Value of preferred equity, Market Value of debt, Minority interest

219.28

219.28

Cash and Investment

262.30

202.30

EV

620.34

663.67

EBIT

65.00

69.54

EV/EBIT

9.54

9.54

Certainly, the market could turn bearish against Apple, and the EV/EBIT ratio goes even lower than 9, however, as time has shown this is a company that one could have faith in holding.

Disclosure: I am/we are long AAPL.