by Jeff Reeves | December 4, 2012 11:07 am
Last week, after painful delays, China finally approved the iPhone 5 launch from Apple (NASDAQ:AAPL) and the device is just starting to trickle into the market.
Ironic, isn’t it, that a country that so blatantly flouts global patent laws of big Western brands makes a show of granting regulatory approval to Apple?
But that’s neither here nor there; the big story about the China launch of the Apple iPhone is that it isn’t a big story — at least when it comes to profits and revenue.
In fact, many analysts worry that China will be the Achilles’ heel for Apple stock as the fast-growing market gravitates to key competitor Samsung (PINK:SSNLF) and leaves the California tech giant in the dust.
I first touched on China risks for Apple back in August, pointing to research that showed iPhone market share in the country was just around 10% in Q2 according to tech research shop Gartner (NYSE:IT) — and worse, that market share has been declining. A more recent report from Gartner validates that trend, with Apple’s share dipping to below 7% in Q3.
A big reason for this is the high price tag for Apple products thanks to providers like China Unicom (NYSE:CHU) and China Telecom (NYSE:CHA) refusing to pony up big subsidies like AT&T (NYSE:T) and Verizon (NYSE:VZ) do in the states. Imagine paying $649 instead of $199 for the latest model, and you can understand the hurdle as competitors sell handsets for literally a third or even a quarter of the price.
However, another more sinister reason for Apple’s stagnant market share is the ascent of Korea-based tech giant Samsung. This maker of the Galaxy handsets (among other models) that run the Google (NASDAQ:GOOG) Android operating system holds almost 17% of the market, according to Gartner, and is the No. 1 smartphone provider in the nation.
To be sure, there is no truly “dominant” hardware manufacturer if the leader commands just 17% of the market. But it’s undeniable that China is a crucial battleground for the iPhone as growth slows in Western markets and Apple is held hostage to the upgrade cycle to generate sales. If Apple fails to gain a foothold, it could weigh significantly on the stock — not just in regards to the iPhone 5, but for years to come.
Remember, Apple makes its big margins thanks to a premium image and subsequent price point. If AAPL isn’t the “cool” phone everyone wants to have, that’s going to create big headaches.
Before you freak out, it’s worth noting that Apple has hardly lost the war for China smartphone sales just yet. Its business is substantial there, with 15% of total revenue coming from China, according to the latest AAPL earnings — and its tablet business is exploding, with China iPad sales surging about 80% year-over-year thanks to a favorable trademark dispute resolution. In its full-year results through Oct. 31, Apple reported $22.8 billion in net sales from China — almost double the $12.4 billion in fiscal 2011.
But if you haven’t learned by now, Apple stock performs based on expectations — not raw numbers. And if investors are looking for a huge splash from the iPhone 5 launch, they could be disappointed if market share continues to be weak.
More importantly, you have to wonder whether these troubles eventually will translate to other markets, too. Apple wowed America with its first-generation iPhone about five years ago, but many competitors are closing the gap — both on technology and on price. If Chinese consumers decide Apple is nice but not indispensable, could other markets — including the U.S. — follow?
These are the biggest risks for Apple as I see them. That said, as a shareholder, I’m willing to ride out the stock — mostly because I had the good sense to buy in almost a year ago and give myself a pretty decent dividend yield.
But if you’re looking to put new money in Apple, the risks of China and Samsung are very real and worth considering.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at email@example.com or follow him on Twitter via @JeffReevesIP. As of this writing, he owned a position in Apple but no other stocks named here.
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