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Apple has huge potential in China

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A staff of a China Mobile shop (R) explains a function of the iPhone 5s to a customer in Beijing January 17, 2014. REUTERS/Kim Kyung-Hoon

For Apple, times have changed. In the second fiscal quarter of 2015, Apple's revenue jumped 27% from the year-ago quarter. And now the company is expecting revenue for the second fiscal quarter of 2016 to decline from the year-ago period. This sudden shift in growth has investors wondering if the tech giant can return to growth. Is a return to growth on this horizon? It's definitely possible -- thanks to one massive market with big potential: Greater China.

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First, here's a review of how Apple's rapidly growing revenue transformed into expectations for a year-over-year decline in the current quarter.

How Apple's revenue slowed
Apple's iPhone unit sales leaped in fiscal 2015 as the company benefited from high demand for its new form factor in the iPhone 6, which sported two versions with much larger displays than its predecessors. And, now, Apple's new iPhone 6s line, which it began selling shortly before Apple's first fiscal quarter of 2016 began, isn't living up to the blockbuster sales of its predecessor.

As it turns out, living up to a year of high growth when annual sales are well over $200 billion isn't easy -- particularly following a year in which the iPhone, which accounts for over 60% of sales, saw unit sales soar. Hence Apple's paltry 2% year-over-year revenue growth in the first fiscal quarter of 2016, along with Apple's guidance for revenue to decline by 9% to 14%, year over year, in Q2.

But Apple's Greater China market could eventually serve as an answer to the company's slowing revenue. Here's how.

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The significance of Apple's Greater China market
During Apple's first fiscal quarter of 2016, one market stood out as the tech giant's fastest-growing market by far: Greater China. And particularly intriguing about this market is that not only is it Apple's fastest-growing market, but it's also now its second largest market.

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The Motley Fool

Apple CEO Tim Cook shared a few more reasons to be optimistic about this market during the company's most recent earnings call: 

  • iPhone sales in Greater China during Q1 were higher than ever.
  • App Store sales in the market were also at a record high.
  • iPhone sales in Mainland China were up 18% compared to the year-ago quarter.
  • Mac sales in Mainland China were up 27%, year over year.
  • Almost half of iPhones sold in Mainland China during Q1 were to first-time buyers.

Going forward, Cook cited low LTE penetration and a growing middle class as potential catalysts for growth over the long haul.

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Wong Campion/Reuters

But it may take some time
Notably, however, Cook did seem to imply that Greater China many not be a meaningful catalyst in the near term.

"Notwithstanding these record results, we began to see some signs of economic softness in Greater China earlier this month, most notably in Hong Kong," Cook explained.

This "economic softness" in Greater China is likely one of the reasons the company is guiding for a year-over-year revenue decline in Q2.

Longer term, however, Cook said Apple is still confident in the long-term potential for Greater China to be a growth driver.

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As Apple launches new products in Greater China, particularly its iPhone 7, which should sport a new form factor, Apple looks positioned to benefit from growth catalysts in the important market. And considering how significant the market is becoming to Apple's results, growth in the market could be a meaningful contributor to overall revenue growth over the long haul.

Investors should hope for the important market to help drive growth for the company as soon the fourth calendar quarter of 2016, which is Apple's first fiscal quarter of 2017. If the market isn't driving growth by then, Apple may be overestimating the market's potential.

Read the original article on The Motley Fool. Copyright 2016. Follow The Motley Fool on Twitter.
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