Apple Can Stuff Investors’ Holiday Quarter Stocking With Profits From Fast iPhone 5 Rollout

by Trefis Team
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With final month of the holiday quarter upon us, Apple (NASDAQ:AAPL) is looking to spruce up iPhone sales and make the iPhone 5 rollout the fastest ever in its history. The company announced Monday that the iPhone 5 will launch in more than 50 additional countries this month, helping it meet its target of launching the popular smartphone in 100 countries before the year-end. Among the countries announced is emerging giant China, one of Apple’s key markets, where the iPhone 5 is slated to launch on December 14th. The roll-out of the iPhone 5 has so far lagged 4S’ last year, but December’s launch schedule should help Apple more than make up for the lost ground and put to rest concerns about a clogged supply chain struggling to keep up with the high iPhone 5 demand.

There might however be a margin impact this quarter due to the high component costs at the start of any product cycle, exacerbated by the number of new products Apple has launched this holiday season. Over the next few quarters, however, we expect margins to rebound as component costs fall, but in the long run margins could see a steady decline in a maturing market. Longer term, we also see China contributing heavily to Apple’s growth both in terms of iPhone as well as iPad sales. Accounting for the largely untapped smartphone market in China as well as the subsequent margin pressures due to rising competition, we maintain our $710 price estimate for Apple’s stock, about 20% ahead of the current market price.

See our complete analysis for Apple stock here


China supports iPhone growth story

At close to 55% of Apple’s value, according to Trefis’ estimates, the iPhone is the single most important product for the company. The iPhone’s global mobile phone market share has steadily increased from zero at the start of 2007 to around 5.4% in 2011 as iPhone unit sales have been growing at an average annual rate of about 90% every year. This year, however, we estimate iPhone sales to grow at less than 45% for the full year despite accounting for what we think will be a strong Q4.

With the smartphone market in developed regions such as the U.S. saturating (U.S. smartphone sales grew y-o-y by just 9% in Q2), Apple will be looking to tap the  fast-growing emerging markets such as China to grow at historical rates. China, despite being only in the early stages of smartphone adoption, has already pulled ahead of the U.S. as the world’s largest smartphone market by volume. This is an incredible statistic given that 3G penetration in China stands at less than 20% currently. Considering the huge 2G subscriber base that the Chinese carriers are looking to upgrade to 3G, the potential for Apple to ride the boom is huge.

Apple’s revenues from greater China, which includes mainland China, Hong Kong and Taiwan, grew 26% year-over-year in Q3 and accounted for 15% of Apple’s revenues for the fiscal year.

As the country grows and the average Chinese buyer sees an increase in buying power, we expect to see a growing shift in demand from 2G to 3G smartphones. The iPhone can help Apple tap this phenomenal growth in demand. Currently, the iPhone is available on only China Unicom and China Telecom, the smaller two of the only three Chinese wireless carriers. A deal with the remaining carrier, China Mobile, which is not only the biggest carrier in China but also globally with about 700 million subscribers, could almost double Apple’s addressable market in China.

But it seems Apple might have to foot a part of the subsidy bill and take a hit on margins for such a contract to happen. (see Apple Faces China Mobile-Sized Stumbling Block Limiting China Upside Potential) Penetrating China could mean long-term margin pressures as well as the company seeks to compete against the rapidly growing Android market, mitigated to an extent by the carrier subsidies. With cheap Android smartphones seeing huge demand and the pricing war gradually dragging prices down to sub-$100 levels, Apple will do well to avoid this segment for as long as it can without sacrificing growth. It therefore bodes well that Apple is only just getting started in China and has ample opportunity to drive sales in the country without having to drop prices anytime soon.

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