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Every one of my four children has an iPhone, but I’m a committed android (Samsung Galaxy) user.
Why? Mainly because my aging eyes prefer a bigger screen and because I’m too cheap to pay the premium prices that iPhones command.
The iPhone fans turned out in droves last week when Apple opened three new retail stores: Miami, Florida; Cologne Germany; and Nanjing, China.
Apple store openings have turned into big media events with thousands of customers eagerly waiting in line to be a part of the excitement. In China, customers started queuing on Thursday, two days BEFORE the Saturday opening.
Apple understands the gigantic opportunity in China. In 2016, it sold a whopping 476 million smartphones in China. To put that 476 million in perspective, it is 2.86 times the Apple phones sold in the U.S. market.
Moreover, the size of the smartphone market in China is huge — 33% of the world’s total sales — and it grew by 11.4% in 2016.
No wonder Apple is aggressively expanding into China. The new Nanjing store stands as its 41st foothold in the Land of the Red Dragon.
However, all those Apple stores aren’t translating into booming sales.
Apple sold 18% fewer iPhones in China in 2016 — 43.77 million — than it did in 2015. And it saw market share slide to less than 10%, making it only the fifth-largest mobile-phone seller in China.
Yes…fifth place! After…
- 1st Place: Hauwei, which sold 2.02 million units in January alone and which has an impressive 23% of the Chinese market.
- 2nd Place: Oppo.
- 3rd Place: Vivo.
- 4th Place: Xiaomi.
Huawei, Oppo, Vivo and Xiaomi have a combined market share of 55.5%.
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| Eager shoppoers line up outside a new Apple store in Nanjing, China. |
The reasons for Apple’s struggle are simple: China is full of cost-conscious consumers, like me, and all of the above four companies offer substantially cheaper smartphones.
In general terms, Chinese smartphones offer approximately the same level of technology and features for half the price of an iPhone.
Yup … half the price.
My point is that Apple is doing very poorly in the largest, most-important smartphone market in the world. And that has some serious long-term implications for Apple investors.
If you own Apple shares, you should consider the following:
Trouble Sign #1: Apple shares have appreciated by more than 30% (market cap gain of $150 billion!) since Samsung’s phones started catching on fire. Samsung’s global sales fell from 83.8 million to 72.5 million in the last year. But Samsung will return to recover some of its lost market share and that is going to put even more pressure on Apple.
Trouble Sign #2: Apple is spending about $6 billion a quarter to buy back its stock. Hey, there’s nothing fundamentally wrong with stock buybacks. Heck, I think they’re great! However, a thriving tech innovator grows its profits through rising sales, not a falling share count.
Trouble Sign #3: The once red-hot iPad isn’t so hot anymore. Sales of iPad fell to 13.1 million in the fourth quarter from 16.1 million during the same period a year earlier, an 18.6% decline.
Moreover, sales are so bad that Apple chopped prices in desperation to goose sales.
Trouble Sign #4: Did you know that Al Gore sits on the Apple board of directors? And did you know that Gore sold $29 million worth of his Apple stock in February?
I’m not talking about an inconsequential number of shares, either. Gore sold 215,437 shares and now owns 230,137 shares, which means that he sold almost 50% of what he owned. Whenever an insider dumps half of his stock … pay attention!
Trouble Sign #5: $5 billion for headquarters … really? Apple will soon open its new 2.8 million-square-foot, ring-shaped headquarters. I’m sure the millennials will love this new high-tech campus … but come on! $5 billion for a building?!
Trouble Sign #6: Over the past 12 months, Apple reported per-share-earnings of $8.35, which means that it is now selling for 17-times earnings. That may not sound expensive, but it is the most richly valued that Apple has been in the last five years.
If you are an Apple investor, I’m not suggesting that you rush out and sell all your Apple shares tomorrow morning. What I am saying is that Apple isn’t the red-hot growth stock that it used to be and that smart investors should have a strategy to protect their gains if more signs of trouble continue to pop up.
The mobile, smartphone market isn’t dead. Quite the contrary; it is going to explode, but Apple is far from the best way to invest in it.
Best wishes,
Tony Sagami
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{ 16 comments }
I think they have 220 billion in cash. 5 billion for a building is nothing
Mere pocket change :)
However, the empire-building inherent in a lavish new headquarters is a reliable warning sign and a sell signal. Tony is right about this.
Is Huawei the stock to buy?
How do you buu Huawei?
I am astounded that Chinese people cued up for an Apple Store opening. It has been my experience that Chinese do not cue! Also, I would not normally pay much attention to anything that Al Gore does or says. Maybe he sold Apple stock because he needed the money for something else.
The largest problem with Apple is that their pricing policies continues to be “rotten to the Core”! Back in 1984, when the first Macintosh computer was released, Microsoft was still struggling to bring its GUI operating system to the marketplace. This was a rare opportunity for Apple to overshadow Microsoft, had Apple been willing to aggressively price its product to build the volume needed to interest large software companies in porting its products to the Mackintosh. Pricing and lack of apps badly stunted market share for the Macintosh product. Since Macintosh, overpricing allowed competitors to overtake Aplle in its tablet and smartphone product line.
An Apple product does cost more but it functions extremely well, has highest quality, is supported betterthan any other companies phone. If you have ever had a problem and went to a nearby Applestore and had it solved by the Genius bar you understand. The Apple product is worth the cost.
if pull back come off load some moreshares. e
Full disclosure: I am reading and writing this on an IPad. I use an iPhone. Question: what new technology such as a unique autonomous vehicle might be in development that will re-ring the still ringing bell? In addition to current communication, tech, computer couldn’t they move into robotics by purchasing an entity such as Knightscope and enlarge their robots security imprint throughout the world? Security would work very well with their tech and communication format. And same thing with encryption. But back to robotics: how about the medical and military uses of exoskeletons? Other companies are doing excellent and advanced work in these areas. Some smart company or companies will buy these innovators and expand their horizons a million times over. Apple has tech, computer, communication, and marketing, and a large presence. The right leadership might expand their role, their presence and their profits. It would be a sea change, but it would point them in opportunities for success.
Sounds to me like being penny wise and pound foolish. Why would U drive a Volkswagen when U can afford a a Lexus?
Sorry – but I’m not going to run out and sell Apple. In fact, any time I can do the opposite of Algore I consider it a great move.
Off Subject, BUT, your Money and Markets letter gives me a fit to read (poor eyesight)
SO, can you change the font
to the one in this comment, {six warning flags for apple} Just a little darker than your letter. Thanks in advance, Carl
Better the check the actual share of smartphone profits before dogging market share and units of Apple.
Who cares about unit volume, cost per unit or market share based on units when they regularly take 90% to 100% OR MORE of the global smartphone market? The other companies who push cheap, low profitability units simply wish they could offer the experience and technology Apple offers.
To say these vendors offer the same technology at half the price is to show your ignorance on the technology.
It’s about profit, not market share or pushing cheap units. And they have a phenomenal track record of profitability.
This is link bait.
Their stock could be overvalued. That’s a totally different discussion from whether or not their business strategy of making 40% profit on every device they sell is awesome. Everyone would do that if they could, Apple is the only one who has shown the ability to do so.
If our Pres. is wise he will put forward a so called repatriation tax of 10% or less and
dedicate the increased tax revenue to infrastructure. This would be a great plus for
AAPL and imho would cause the stock to rise substantially .
In the meantime I will continue to collect my divd. and sell out of the money covered calls.
How could Apple sell 476 million smartphones in China in 2016 but only sell 43.77 million iPhones in China in 2016? Does Apple sell another kind of smartphone?
Hey Terry I still 300 shares of Apple at 1:05 based on a contributor of money and markets The claim was that Apple wasn’t up on the cloud and as a result would drop. I followed his rationale
I don’t know about you but $10,000 is a lot of money