Bidness Etc

Bidness Etc looks at how China has impacted Apple’s growth ambitions

After an 18%, rally Apple Inc. (AAPL) stock dipped 4.20% after publishing its third quarter fiscal year 2015 (3QFY15) results. The weak 4Q guidance and a miss on iPhone shipment consensus estimates, explains why the stock mostly trended downward, confirming our bear thesis.

The forthcoming iPhone refresh led investors and analysts alike to expect a healthy rebound, until China devalued the yuan, earlier this month. This appears to substantiate a suspicion that the country’s economy is slowing down.

After the US, China is Apple’s next key growth market, with quarterly revenue growth hitting 112% year-over-year (YoY). The devalued yuan has increased currency pressures on Apple stock, which has slipped to a 52-week low of $92.

The weak yuan and China’s macro issues aren’t the only clouds on Apple’s horizon. Competition in the country is intensifying. Research by Canalys suggests that Chinese smartphone manufacturer, Xiaomi, has overtaken Apple to become China’s top smartphone seller.

Smartphone sales have seen their slowest growth since 2013, says a Gartner research note. Its research director, Anshul Gupta, wrote “China has reached saturation — its phone market is essentially driven by replacement, with fewer first-time buyers.” Chinese smartphone sales have slid 4% YoY, a first for what Gartner describes as the biggest market for smartphones.

Source: Gartner (August 2015)

The chart above shows SAMSUNG ELECT LTD (F) (SSNLF) tops the list of global smartphone sellers, followed by Apple. Huawei has become another serious rival. Its 28% YoY increase in market share, easily passes Apple’s 19.70% YoY growth.

Cupertino supporters say inroads into India – now the fastest growing smartphone market - can offset lackluster growth in China. Apple has grabbed a 2% share in the Indian market in the face of intense competition from Samsung and local brands. Adding to that mix is Xiaomi’s announcement that it will partner with Foxconn to introduce affordable high end devices for Indian consumers.

The Chinese slowdown has added to Apple’s near-term worries. It could raise prices in the territory to counter the yuan’s devaluation, although this could weigh down demand. In either case, China has presented difficulties, with both intense competition and low purchasing power undermining the market’s profitability.

Price Movement Confirms Technical Thesis

Based on this graph, our latest technical analysis suggests Apple shares will experience a final wave of correction (marked C), sliding towards $94.12 to $93.35 price levels. Any immediate recovery attempts are seen capping at $108.73.

These shares behaved as we expected and fell to a new 52-week low of $92 in Monday’s pre-market trade. The stock rebounded to $108.80, before closing at $103.12 after the opening bell.

Conclusion

We maintain our bear thesis on Apple. We believe negative catalysts for stock are factors such as: smartphone market saturation, the failure of Apple Watch, no material changes to iPhone 6S, loss of market share, shrinking gross margins, which have compounded to miss consensus expectations.

The iPhone generates 70% of the organization’s revenues, a massive share. This overdependence can be reduced by exploring other avenues. A foray into the autonomous car market for example.