As one of the world’s largest companies in terms of both market cap and revenues, Apple (AAPL) possesses many moving parts and its core business of selling smartphones is exposed to numerous existential risks. Those risks have attracted a fair number of short sellers over the years.
What makes things even trickier for Apple is that it has become too reliant on Apple iPhone sales. Apple iPhone sales currently account for close to 70% the company’s revenue, up significantly from around 50% a few years back.
Apple bears are well aware of these facts and are constantly waiting to pounce at the first signs of trouble. One of the favorite pet themes for Apple bears has been the smartphone commoditization theory, as well as the much harped about China factor.
But by the current look of things, the bears are not in luck this time around.
Apple iPhone Earns Record Profits
The smartphone commoditization theory goes something like this: Smartphone penetration rates around the world are quickly approaching saturation point, which will severely curtail growth runways. Once penetration rates hit a peak, prices will plunge, thus badly cutting into the bottom lines of large players such as Apple.
In the case of Apple iPhone, the situation is even more dire due to the company’s heavy reliance on China to drive top-line growth. Apple makes 22% of its revenue in the Chinese market. However, the Chinese are known to be notoriously in love with home-grown products, and Xiaomi has often been touted as the company that will give Apple a run for its money in Greater China — “the Apple of China.’’
But, the Apple iPhone has been defying the odds and even going against classic supply economic theories. While all other major smartphone vendors have been recording falling Average Selling Prices, or ASPs, as expected, Apple iPhone ASPs have been on an upward trajectory.
This fact was apparent during Apple’s last quarter results when the company’s smartphone ASPs surged 14% to a record $687. What was not readily apparent, however, was how Apple iPhones stacked up against other vendors.
Cannacord Genuity has revealed that Apple’s smartphones helped the company grab a whopping 92% of operating profits by the world’s top eight smartphone companies during the first quarter, up from 65% a year ago. Samsung was a distant second with 15% (the two grabbed more than 100% of profits due to losses booked by some vendors). Apple’s Mac line also did well and accounted for half of profits by the PC industry despite only commanding 6% of sales volumes.
How Apple Does It
The strong results by Apple iPhone sales were driven by robust sales of iPhone 6, especially in China. Apple sales in China grew a blistering 70% year-over-year during the first quarter. Apple iPhones have managed to maintain strong ASPs primarily because they are well-differentiated from competitors’s products. Consumers have been scooping up the large screened 4.7-inch iPhone 6 as well as the 5.5-inch 6 Plus in record numbers.
Apple iPhone numbers are simply mind-boggling: Apple sold an average of 34,000 iPhones every hour, every day of the week during the first quarter. The company has been using the $100 premium for the popular iPhone 6 Plus as well as the higher capacity of the 64- and 128-gigabyte models to upsell its smartphones and this appears to be working like a charm.
And curiously, Apple has been eating Xiaomi’s lunch by stealing away its share of the market in its home turf, proving that American products are well capable of competing with local Chinese products in a liberalized market devoid of Government interference.
Other Apple Short Targets
So the biggest theory for Apple bears has been put to rest, at least for the time being. But that doesn’t mean shorts are just going to give up on Apple stock. Apple’s new music service has had a less-than-stellar reception, and the jury is still out if the new Apple Watch and wearable products are going to do as well as its flagship smartphones. And, of course, all hope for an iPad comeback seems lost.
The good thing is that these factors don’t carry as much downside risk as the Apple iPhone theory. I believe with short interest in Apple stock close to an all-time low, the downside risk when investing in Apple stock is much reduced. On the flip side, we cannot expect very strong price movements from news that sends the shorts running to cover.
But, considering how improbable Apple’s success has been so far, investors in Apple stock should be happy with the current state of affairs.
As of this writing, Brian Wu did not own any of the aforementioned securities.
