Apple Inc. (NASDAQ:AAPL) investors are celebrating third-quarter earnings that pushed AAPL stock to new highs. Despite good news including better-than-expected iPhone sales, an apparent iPad turnaround and the iPhone 8 to look forward to, there is an iceberg on the horizon in the form of Chinese smartphone makers.
In particular, Huawei is worrisome. After gaining a foothold in North America by expanding into the Canadian market, Huawei is rapidly gaining on iPhone sales and threatening AAPL’s long-held position as the world’s second largest smartphone vendor.
Could Huawei be the unseen hazard that sinks AAPL stock?
iPhone Sales Underperformed the Global Smartphone Market
Apple’s Q3 earnings report included good news in the form of better-than-expected iPhone sales. The company sold roughly 41 million iPhones last quarter, compared to 40.4 million the same quarter last year, for 1.5% growth. Throw in iPad sales that finally increased after 13 straight quarters of declines, and the continued growth of Services revenue and the results have been enough to propel AAPL stock to new record highs.
However, beneath the surface of the apparent iPhone sales success is a worrying sign. AAPL increased its smartphone sales 1.5% on the year. But Strategy Analytics just released its quarterly report on world smartphone sales for Q3, and global smartphone sales posted 5.5% growth.
So yes, AAPL iPhone sales did do better than expected, but the company was outperformed by everyone else on the top five smartphone vendor list.
Chinese Smartphone Companies Continue Growth, Huawei Closes on Apple
First place Samsung Electronic KRW5000 (OTCMKTS:SSNLF) continued its recovery. Although it also failed to hit the global average, bolstered by the Galaxy S8, Samsung’s smartphone sales were up 2.4% on the quarter.
The real problem is Chinese smartphone makers, and the one that has iPhone sales in its crosshairs is Huawei.
OPPO and Xiaomi (fourth and fifth place respectively) both notched impressive numbers. But third-place Huawei is becoming worrisome (or should be) to AAPL. The company posted 20% growth this quarter and its 38.4 million units sold are just 2.6 million shy of Apple’s iPhone sales. Huawei is on pace to soon overtake AAPL.
While it’s easy to write off Huawei as dominating the Chinese market with cheap smartphones, the company has begun a North American push and it’s releasing premium smartphones that compete directly against the iPhone. American wireless companies don’t offer Huawei yet, but in June the company launched its P10 and P10 Plus smartphones in Canada.
Rogers Communications Inc. (USA) (NYSE:RCI) features the Huawei P10 right beside the iPhone 7, charging $649 (Canadian) for the P10 versus $919 for the iPhone. The P10 looks anything but cheap even in comparison to AAPL’s flagship and includes a dual-camera system that Apple offers only on the more expensive iPhone 7 Plus.
Canada is considered to be a stepping stone to pushing into the U.S. market, where the real trouble would begin. In its smartphone sales report, Strategy Analytics notes:
“Huawei is now closing in fast on Apple and Apple will be looking nervously over its shoulder in the next few quarters.”
Apple is expecting to see record iPhone sales when it launches the iPhone 8 later this year, and the new flagship will undoubtedly leave companies like Huawei scrambling to catch up once again. But the warning signs are there. AAPL stock remains largely driven by iPhone sales and their high margins. Competing against Samsung is tough enough, but if Huawei overtakes AAPL in second spot and manages to break into the U.S. market, maintaining growth and margins will become increasingly difficult for Apple.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
