Apple Inc. (AAPL) is clearly at an inflection point. While AAPL stock remains up strongly in the long-term and is a core part of many investors’ portfolios, shares are off about 15% in the last three months as we approach a crucial Apple earnings report.
The big reason for trouble in AAPL stock is China. As I wrote recently, iPhone 6S sales have been decent, but there are serious concerns that Apple China sales will fall short. Investors have already been selling off Apple stock in anticipation of trouble for iPhone sales in the region, and amid concerns that a broader China slowdown will make things tough for the next few quarters as well.
But, it’s not just consumer weakness in China that’s the trouble — it’s also the competition.
In August, there was word from tech research firm Canalys that Apple iPhone sales had slipped in market share, sending AAPL stock to No. 3 in this crucial market; Xiaomi was tops with 15.9% share, Huawei was close behind with 15.7% share after a surge in growth, and Apple had impressive 48% quarter-on-quarter growth. Canalys coyly failed to mention Apple’s current position, but we can assume it’s not far behind, given that collectively the two other manufacturers represent less than one-third of the Chinese market.
A big reason for the increased market share of Xiaomi and Huawei, of course, is reliance on the Android operating system from Google — or, should I say, the newly rebranded Alphabet Inc. (GOOG, GOOGL) — and subsequently a much lower price point.
Apple Is About More Than Just the iPhone
If you think the Apple iPhone is the only gadget in the sights of competitors, you need to take a hard look at the rest of the AAPL product portfolio.
Take the Apple Watch, undoubtedly a luxury product and way too upscale for the typical Chinese consumer. There are plenty of downmarket smart watch peers, and increasingly it is becoming a race to the bottom on price. Take Swatch Group AG (SWGAY) and its approach:
“The Swiss watchmaker launched its answer to the smartwatch in China on Wednesday, with a 580 yuan (US$91) analog timepiece called the Swatch Bellamy, which will start selling in January next year. While the new watch doesn’t connect to the Internet, it includes a built-in chip that allows consumers to pay for purchases while shopping, Swatch Chief Executive Nick Hayek said in a news briefing.”
Think about that. The largest watchmaker in the world is going analog, with no internet connectivity, just to get in on mobile payments and entry-level smart watches in China.
Admittedly, sales won’t be big enough to sink AAPL stock. After all, Apple makes about two-thirds of total revenue from the iPhone, and everything else is largely a rounding error.
But, the strategy is representative of a big push in consumer tech to cede the high end of the market to Apple and go after everything else. Especially in China, where the typical non-farming resident makes less than $4,000, this approach is a powerful one.
It’s weird to think that Swatch is the real competition for AAPL stock in 2015… but given the market dynamics, it’s as good a representative of any company at how other players in consumer electronics are fighting back against the Apple brand.
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.
