Apple Inc.: AAPL’s Honeymoon With China Is Just Getting Started


Do you remember the infamous trading day back on Aug. 24, 2015, when the global markets were in free fall?

Apple Inc.: AAPL's Honeymoon With China Is Just Getting Started

Source: Apple

And more importantly, do you remember who was credited with “saving” the markets from further losses?

It was none other than Apple Inc. (AAPL) CEO Tim Cook.

Global markets, especially Apple’s stock, were in disarray following troubling headlines out of China. Specifically, investors were reacting to reports that China’s fragile economy might be slowing down at a faster rate than economists had expected.

The Dow Jones quickly shed more than 1,000 points after the opening bell. U.S. markets changed direction and staged an epic rebound following a reassuring e-mail from Apple’s Cook to CNBC’s Jim Cramer that the company’s operations in China are doing just fine.

“I get updates on our performance in China every day, including this morning, and I can tell you that we have continued to experience strong growth for our business in China through July and August,” Cook said in his e-mail. “Growth in iPhone activations has actually accelerated over the past few weeks, and we have had the best performance of the year for the App Store in China during the last 2 weeks.”

Apple’s stock rebounded from its intraday and new 52-week low of $92 and returned above the $100 mark.

Investors received a rare reassurance that Apple’s business is doing great in China but investors were looking for further reassurance in the Apple earnings report.

Overall, Apple earnings were roughly in line with expectations. Apple earned $3.28 per share in the first quarter on revenue of $75.9 billion. Wall Street analysts were expecting Apple’s earnings per share to be $3.23 and its revenue to come in about $76.5 billion.

Apple’s stock was volatile after the quarterly results. The morning following Apple’s earnings, the stock was trading lower by nearly 4% in the premarket session.

‘Best Ever’ Quarter for AAPL in Greater China

Apple’s management hosted a conference call to further discuss the company’s first-quarter performance.

Right off the bat, Cook pointed out that the company’s quarterly performance in Greater China was its “best ever” as revenue rose 14% over the same quarter a year ago, rose 47% sequentially, and rose 17% year-over-year in a constant-currency basis.

Cook added that while China has been a “source of concern” for the overall market, especially technology companies, Apple was “seeing just the opposite, with incredible momentum for iPhone, Mac and the App Store, in particular.”

However, Cook continued that management is beginning to “see some signs of economic softness in Greater China earlier this month, most notably in Hong Kong.”

Apple’s Greater China Game Plan: Patience & Execution

During the Q&A segment of the conference call, Brian White, an analyst at Drexel Hamilton asked Cook what Apple’s game plan is for China moving forward.

Cook pointed out that the middle class in China numbered less than 50 million people in 2010, and by 2020, the projected middle class will consist of around half a billion people. Naturally, this is an enormous market that Apple faces and indicates that Apple’s game plan doesn’t rely on one quarter’s performance.

Cook’s longer-term vision isn’t a wait-and-see approach. The executive stated that the company continues to invest in retail stores and plans to end 2016 with 40 stores in Greater China, up from its current 28.

“And so we’re continuing on distribution,” Cook further explained. “Obviously, we’ve got product things in mind and are crafting our products and services with China heavily in mind. We remain very bullish on China and don’t subscribe to the doom and gloom kind of predictions frankly.”

Bottom Line for AAPL Stock

Investors should remain confident that Apple will continue generating strong demand from its products and services — especially in China, which remains the company’s largest opportunity.

As Cook said during the conference call, he is playing a patient game in China with a longer-term vision, while improving demographics work in the company’s favor. As such, the company can withstand some short-term volatility in China.

Apple’s stock has surged over the past few years as the company continued to expand its global footprint.

Longer-term investors could benefit from Apple’s stock, given the continued strong growth prospects in China.

On the other hand, shorter-term investors hoping for a quick gain may want to sit this one out.

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

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