Apple (AAPL) is the single largest company in the world, so finding ways to grow isn’t as easy as it used to be. Sure, it’s expanding into different lines of business — Apple Pay, Apple TV, Apple Music, etc. — but the easiest route for growth in the short-term is simple: China.
Although the Chinese stock market is going through what you could charitably call some hiccups right now, the fact is that the world’s second-largest economy has a burgeoning middle class that’s too big for companies like Apple to ignore. If AAPL stock is going to keep crushing the market, it desperately needs growth in China.
To Apple’s credit, the company is doing quite well in China, with iPhone shipments up 85% in Greater China last quarter. Meanwhile, revenue shot up 112% year-over-year. Quarter-over-quarter revenue from Greater China, however, was down 21%.
So what’s threatening to slow down Apple’s breakneck growth? And is the situation really as dire as it sounds?
Xiaomi, Huawei Push AAPL to 3rd Place
In the first quarter, AAPL was tops in smartphone market share in China. But in the second quarter, it fell to third place, lagging the quickly growing Xiaomi and another native Chinese tech giant, Huawei.
That’s according to new research from independent research firm Canalys, which pegs Xiaomi as China’s top smartphone supplier with 15.9% of the market; Huawei is a close second with 15.7% of the market, while Apple plunged from first to third in a single quarter.
Apple’s market share numbers weren’t released, but other top smartphone makers in the country were rounded out by Samsung (SSNLF) and another native Chinese company, Vivo.
Why That Doesn’t Matter
Is Apple’s slipping Chinese market share something AAPL stock investors should be losing sleep over? Not really. At least, not yet. That’s because it’s still so far ahead of all of its rivals — both foreign and domestic — in the one area that really counts: profits.
AAPL took home 92% of all smartphone profits in the world in the first three months of 2015. As long as that trend continues, you won’t see the AAPL stock price falling off a cliff anytime soon. Who’s going to swoop in and start gobbling up Apple’s profit share is the real question.
It won’t be Microsoft (MSFT), which just took a $7.6 billion writeoff on its failed Nokia acquisition. It won’t be HTC Corp, which just announced a quarterly loss. And, even if you count revenue from its pervasive Android operating system, AAPL won’t cede profits to Google (GOOG, GOOGL), which can’t monetize its sprawling userbase as effectively as Apple can.
The only other company close to AAPL in global smartphone profits is Samsung, which earned 15% of global profits to Apple’s 92%. If you’re wondering why the figures add up to 107%, that’s because so many others actually lose money on their smartphone operations.
While investors should always keep an eye on the biggest competitors to the companies in their portfolio, Xiaomi isn’t an anywhere close to being an existential threat to Apple or AAPL stock. Its razor-thin margins and cheap phones target a part of the market Apple’s never been much interested in: The low end.
So, remember to take market share figures with a grain of salt. Apple may not be No. 1 in China anymore, but that’s almost irrelevant if it’s raking in all the profits.
As of this writing, John Divine owned AAPL stock. You can follow him on Twitter at @divinebizkid or email him at email@example.com.