Apple Inc. (AAPL) stock is trading near its 52-week lows. Apple shares traded above $112 as recently as April 15th, but today AAPL trades closer to $92. Around April 15, the Chinese government shut down Apple’s iBooks and iTunes Movies, surprising observers. On April 26, Apple’s earnings call disappointed, as AAPL’s profits declined for the first time in over a decade. This was in part due to a decline in sales in China.
AAPL stock declined for eight days in a row, which was the first time this happened since 1998. If that wasn’t bad enough, billionaire investor Carl Icahn announced that he had sold the rest of his AAPL stock over concerns in China. Given that China is Apple’s second-largest market, accounting for 25% of Apple’s revenue, problems in China could mean big trouble for Apple.
Apple CEO Tim Cook remains optimistic and thinks that concerns over Apple in China are overdone, asserting that Apple “had an incredible quarter by absolute standards”.
How bad are Apple’s troubles in China? Are these temporary setbacks or the start of something more serious for AAPL stock?
AAPL Stock Concern #1: Weaker Sales in China
The first fundamental problem facing AAPL stock is simply a slowdown in China.
Apple’s sales in Greater China, including mainland China, Hong Kong and Taiwan, slipped 26% in the most recent quarter, with sales in mainland China down 11%. This is due to several reasons, some of them perhaps only temporary, others perhaps longer-lasting.
First, smartphone makers such as AAPL are facing market saturation in China. There are now over 660 million internet users in China, with most of them using their phones. According to Strategy Analytics, 104.9 million smartphones were shipped in China in the first quarter of 2016, down 5% from 109.8 million in the first quarter of 2015. This isn’t unique to China; global smartphone shipments were down 3%.
Second, this is coming after a year of unusually strong sales growth; Apple’s revenue in China rose a staggering 99% year-over-year in the fourth quarter of 2015. AAPL stock owners can’t expect that momentum to keep up forever.
Third, the iPhone 6s was seen as not much of an improvement over the iPhone 6. Sales of the iPhone 6s were disappointing, and the hope is that consumers in China are waiting for the iPhone 7.
Fourth, China’s economy is slowing. Although GDP grew 6.9% in 2015, this was the slowest growth in 25 years, and it doesn’t look like the worst is over. Debt could be anywhere from 240% to 346% of GDP. Problem loans are rising, and debt sales are being cancelled as $571 billion in debt matures this year.
Translation: Counting on China as the catalyst for AAPL stock is a mistake.
The iPhone is a premium brand, and during boom times consumers will be willing to spend more on top-of-the-line brands. When sentiment turns negative, consumers will become more price-sensitive. Some are turning to local brands such as Huawei and Xiaomi, which sell quality devices at lower prices. This may not be easy to correct, since producing more expensive, high end products is the core of Apple’s strategy. Apple accounted for 91% of global smartphone profits in 2015.
AAPL Stock Worry #2: Problems with the Chinese Government
Apple also is facing increased difficulty with the Chinese government, and that probably won’t go away anytime soon. As noted, last month the government shut down Apple’s iTunes Movies and iBooks in China.
China has for a long time blocked foreign internet firms such as Facebook Inc (FB), Alphabet Inc (GOOG, GOOGL) and Twitter Inc (TWTR). China is, after all, still ruled by the Communist Party, which doesn’t want foreign content and ideas coming into China uncensored.
There are further signs that AAPL faces problems with the Chinese government. On March 31, the Beijing Municipal High People’s Court ruled against Apple in a case against a Chinese firm. Xintong Tiandi Technology will henceforth have the right to brand leather items such as handbags and passport cases with “IPHONE”.
Apple: The Takeaway
Markets tend to overreact; they were perhaps too exuberant last year and are perhaps too bearish on AAPL stock right now. Apple retains a strong brand loyalty, the envy of other smartphone makers. Buying Apple stock is probably no longer a no-brainer like it was when Carl Icahn added it to his portfolio, but as long as the market leader doesn’t rest on its laurels, Apple’s future remains bright.
As of writing, Lucas Hahn did not hold a position in any of the aforementioned securities.
