Apple Inc. (AAPL) stock has suffered through an uncharacteristically bad year. Shares are down 2% in 2015, essentially in line with the broader market’s bleak returns. That’s a far cry from the 38% rally we saw in 2014.
It seems AAPL is no longer Wall Street’s favorite tech stock. 2015 was the year of the FANGs: Facebook (FB), Amazon (AMZN), Netflix (NFLX), and Google (GOOG). An equally-weighted portfolio of those four stocks would be up a staggering 84% this year.
2015 returns aside, Apple remains the most profitable company in the world, so investors can’t ignore it forever. That said, they may have reason to be skeptical about its future growth plans, which at least in the short-term hinge largely on China.
Apple Pay Coming to China in 2016
Yesterday, Apple announced that it would be bringing its mobile wallet, Apple Pay, to China in early 2016. AAPL will be teaming with 15 leading Chinese banks, as well as China UnionPay, which is the country’s only provider of bank cards and boasts 4.5 billion cards worldwide.
Chinese consumers will now be able to upload their credit and debit cards to a mobile wallet on their iPhone, Apple Watch or iPad. They’ll seamlessly be able to pay for purchases at retailers with NFC-enabled point-of-sale systems, and AAPL will take a tiny cut of each transaction. After taking a tiny cut of billions of transactions, it can add up.
On the face of it, this sounds great. In the fiscal fourth quarter, Apple revenue in Greater China soared 99% year over year, and there’s still plenty of room to grow. But please, don’t buy AAPL stock on the heels of these headlines. The fact that Apple Pay is debuting in China is almost entirely irrelevant to the company as a whole.
First of all, Apple Pay’s financials, as they stand now, are basically a rounding error for AAPL. The company actually deemed them too insignificant to break out on their own, and lumped them into a product category called “Services,” which includes revenue from Internet services, Apple Care, and other licensing endeavors.
Services accounted for $5.1 billion, or less than 10%, of total AAPL revenue last quarter. While overall company revenue jumped 22% year over year, revenue from Services was up just 10%.
Considering Apple Pay didn’t even exist in Q4 of fiscal 2014, the fact that its presence was only able to move the needle 10% is a testament to its irrelevance. Why should China be any different?
Additionally, AAPL is facing stiff competition in the Chinese mobile payments market. Alibaba (BABA) and Tencent (TCEHY) both have established mobile payments services there already, with market share of 45% and 19%, respectively.
At the end of the day, AAPL stock simply has a crippling reliance on the success of the iPhone, which accounted for $155 billion in sales last year — more than two-thirds of Apple’s total revenue.
With smartphone sales growth inevitably slowing worldwide as the device market matures, any gains attributable to Apple Pay in China will be minuscule and not meaningful enough to offset the iPhone segment.
If you believe the iPhone can continue to power growth going forward, or simply think AAPL stock is a bargain in the long term, by all means, buy the stock. But, if you’re planning on Apple transforming the payment landscape in Asia, well, you may want to rethink your investment.
As of this writing, John Divine was long AAPL stock and AMZN stock. You can follow him on Twitter at @divinebizkid or email him at email@example.com.
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