Apple (AAPL) lives and dies by its iPhone sales — something that all investors should be painfully aware of. As of the latest Apple earnings, the iPhone moved 47.5 million units last quarter for $31.4 billion in revenue, accounting for about 63% of total sales.
AAPL stock, then, is incredibly sensitive to disruptions in iPhone sales trends. This explains why investors responded so negatively to an ostensibly strong Apple earnings report where both revenue and earnings beat expectations — iPhone sales for Q3, while still growing robustly, came in under expectations, and weaker-than-expected guidance have some worried that AAPL can’t keep up its iPhone momentum.
These fears could be well placed. In fact, one of the biggest risks to Apple has long been its ability to grow iPhone sales internationally, and the recent turmoil in China’s economy could mean that it is nigh impossible for AAPL to see significant growth in the region.
That’s because no matter how hot the iPhone is, it’s hard to sell a premium piece of mobile hardware in an economy that’s stalling.
Apple Stock and China’s Slump
Apple CEO Tim Cook was quick to dismiss the threat China poses to AAPL stock in the earnings call on Tuesday, simply calling the overseas environment “challenging” particularly in regards to currency exchange headwinds, and highlighting upward movement in spite of these factors.
Cook also focused on long-term growth in China, where revenue growth in the region surged 112% year-over-year.
But strong-dollar headwinds are true for every multinational, and those excuses won’t get AAPL stock very far. And furthermore, while raw China sales are impressive on a year-over-year basis, there is still plenty of room for improvement considering only 26% of total revenue is coming from the region — even as China is undergoing a mobile revolution that will shape consumer tastes and habits for years to come.
Things aren’t all bad, of course, with a spring market share report from Kantar Worldpanel ComTech reporting a big increase in urban China penetration for the Apple iPhone, from 18.1% to 27.6% as of Q1. Those kind of increases are undoubtedly a good thing for AAPL stock holders and the long-term prospects of Apple’s flagship smartphone.
But the fact remains that China is in deep trouble, with GDP slowing and the stock market crashing. And this has sparked serious doubts about Apple’s growth plans in its most fertile market right now. After all, the same Kantar report showed AAPL actually losing share in developed Europe and stagnating in the U.S. in the early months of the year … so without China, growth will be incredibly hard to come by.
There are some who insist that the big-picture troubles of China don’t reflect a fundamental flaw with the economy there, and that consumer spending in China should still remain strong as the standard of living continues to improve across this massive nation.
However, not everyone is convinced. For instance, analysts at Cowen recently downgraded AAPL stock to “market perform” to “outperform” on China fears, including “evidence of a widespread demand reset from China is mounting” across everything from autos to smartphones to home goods.
Time will tell whether the China fears are overblown, or whether AAPL stock indeed faces serious headwinds. There’s a chance that the reset on expectations for Apple have now put shares more appropriately on track, and that any bumps are now reflected in the lower share price.
But for those worried about a breakdown in China, it’s worth considering companies like Apple Inc. that are heavily reliant on the region for growth. Because if things sour, it won’t just be Chinese A-shares that take a tumble, but also American tech titans like AAPL stock.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP.
