With final month of the holiday quarter upon us, Apple (
) 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
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
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
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