Saturated Chinese Smartphone Market Could Hurt AAPL Stock

In a report released earlier this week, IDC noted that — for the first time in six years — the size of the Chinese smartphone market has contracted.

Apple iPhone Sales China

Source: Apple

The total number of units shipped during the first quarter of 2015 came in at 98.8 million, which is a 4.3% year-over-year decrease and an 8% quarter-over-quarter decrease.

For years, the world’s top smartphone vendors fought to gain entry into the Chinese market, as the nation’s billion-plus consumers represented the ideal untapped population. However, with so many vendors having focused their advertising efforts on China, the vast majority of consumers in the market for a smartphone have already purchased one.

So, in a way, you could say that the smartphone vendors’ efforts were already successful.

China is no longer an “emerging” smartphone market, but rather a mature market similar to that of the U.S., Europe, and Japan. This status change will require an overhaul of marketing efforts if smartphone vendors are to remain profitable in the region. Hopes — and projections — can no longer rest on assumptions or estimations of first-time smartphone sales.

Is Chinese Smartphone Saturation Bad for AAPL Stock?

After Apple’s fiscal second-quarter earnings results last month, CEO Tim Cook stated that iPhone sales in China are the second-highest of all regions. AAPL announced total second-quarter revenue of $58 billion, of which $13.6 billion was profit. Revenue from China increased 71% year-over-year to $16.8 billion as iPhone 6 sales reached record highs.

To put this into perspective, Forbes explained that “Chinese shoppers spent more on iPhones (and other Apple gadgets) than the entire world did on recorded music last year.” So, while a number of musicians are squabbling over streaming music revenue, AAPL has been able to sock away nearly $200 billion in cash.

Going forward, however, Apple will find it difficult to maintain similar levels of growth and profitability. Since, essentially, everyone who wanted a smartphone has already purchased one, the challenge now becomes convincing consumers to switch brands — a much more daunting task than wooing consumers who have never owned a smartphone before.

IDC predicts that the bulk of gains for Chinese smartphone sales will result from the purchase of devices with price tags below $150. This does not bode well for AAPL stock, considering that the average price of an iPhone 6 in Beijing is 6,000 yuan ($1,230 USD), or “roughly equivalent to the average monthly wage.”

Bottom Line for AAPL Stock

While investors have yet to really react to the news (AAPL stock is down slightly more than 1% since the release of the IDC report), the company will likely face similar challenges to those experienced in the U.S. and Europe with respect to iPhone sales, upgrades and conversions from Android smartphones.

The biggest problem for AAPL in China will be the price of the iPhone 6. The surge of fascinated consumers willing to wait in endless lines has subsided, and the rose-colored glasses have come off. The likelihood of Chinese consumers spending one month’s salary on an iPhone is drastically less than what it was six months ago when the device was first released.

AAPL could, theoretically, offer a less expensive version of the iPhone 6, but that’s not going to happen. Management learned its lesson with the iPhone 5c. So, the only thing left to do is push other AAPL products such as the iPad and Apple Watch.

As of this writing, Greg Gambone did not hold a position in any of the aforementioned securities.

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