What’s The Downside To Apple Stock If Its Chinese Sales Fall 50% This Year?

by Trefis Team
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Apple’s (NASDAQ:AAPL) stock has corrected by over 20% over the last four months after the company cut its guidance for the holiday quarter, driven largely by woes in the Chinese market where iPhone sales have come under pressure. While the cooling Chinese economy and the current trade tensions between China and the United States have impacted Apple’s business, we believe that much of the slowdown is attributable to the company’s strategy and product positioning. In this analysis, we spell out some of the factors impacting the company’s Chinese business and estimate the potential impact of weaker Chinese sales on the stock.

View our interactive dashboard analysis on the key drivers of Apple’s valuation, with a geographic breakdown of its revenues. You can also see all of our data for Information Technology Companies here.

High Device Prices

iPhone sales in China declined by about 20% year-on-year during Q4 2018, according to a report by IDC, with Apple’s market share in the country falling to 11.5% from 12.9% a year earlier. While smartphone shipments in China have been on the decline, Apple has been more severely impacted on account of an increasing preference among Chinese customers for lower-priced, but well-specced handsets from the likes of Huawei and Oppo. Additionally, Chinese customers spend much of their smartphone time on apps such as WeChat and Baidu which are platform agnostic, making it difficult to justify the hefty premium for an iPhone when they can get a largely similar app experience on a cheaper device. For instance, the iPhone XS Max costs roughly $1,400, about twice as much as Huawei’s flagships. The mid-range iPhone XR, which Apple has been counting on to drive volumes, also appears to be faring poorly among image-conscious Chinese buyers.

There Doesn’t Appear To Be An Easy Solution To Apple’s Chinese Woes

Apple follows a fairly consistent strategy across all its geographic markets, selling highly desirable products at a premium price point while locking users into its device and software ecosystem. However, the platform lock-in is not strong in China, where Apple’s services are less popular (for instance iMessage and FaceTime take a backseat to WeChat) meaning that an iPhone user in China is more likely to switch to other platforms compared to users in other markets. There is also a sense that the enthusiasm and brand cachet surrounding Apple’s products could be waning in China, limiting the ability to bring on new users. Apple will need to rethink its strategy to better align with the Chinese market, but there doesn’t seem to be an easy solution at the moment. Pricing is likely to be the biggest issue. While some retailers have also resorted to cutting prices (the XR saw a price drop of a little over 10% last month), it’s unlikely that Apple will be able to become more price competitive in China without hurting its broader iPhone franchise overseas.  For instance, the company could launch a lower-priced China-focused device, but customers in Western markets where the iPhone continues to do well could demand the same.

Impact Of Changes In Chinese Sales On Apple’s Stock Price 

Our base case valuation of $178 per share for Apple stock assumes that the company’s revenue from Greater China will drop by about 30% this fiscal year (FY’19) to about $36 billion. However, things can change quickly in the Chinese market (Samsung’s market share fell from close to 20% about five years ago to under 1% currently) and it’s possible that Apple could see a swifter decline. For instance, if Apple’s revenues from Greater China decline by about 50% this year (scenario is shown in blue in our dashboard), our price estimate could fall to about $170 per share, assuming all other drivers remain the same.

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