MorningWord 8/21/13: $AAPL Letter of the Day, C

by Dan August 21, 2013 8:56 am • Commentary

MorningWord 8/21/13:  Last week, in this space, I flagged the fact that AAPL’s June quarter miss of nearly 3 million iPad sales (on a 17.6 million estimate) might have been the “tell” for the weakening global consumer,  as the device’s general lack of necessity may serve as the ultimate “within reach” discretionary object on the planet.  While certainly useful it is not a “can’t live without” device like a smartphone or a laptop.  As we get closer to AAPL’s hotly anticipated media event, supposedly scheduled for Sept. 10th,  the rumor mill is hitting fever pitch. One of the expected updates is in the iPad family. Expectations for a new Revolutionary iPhone have quickly shifted to just their Evolutionary S update (obviously with the new iOS). But most importantly, everyone seems to be focused on the specs of the rumored iPhone 5C (C for cheap?) a lower cost iPhone for the masses, most specifically the Chinese masses.

For AAPL investors, China is likely to be as important as any hot new product for the developed world, as the company’s recent market share losses in China in both iPad and iPhone may speak to a very different retail opportunity than that in North America and Europe.  In just the last quarter, AAPL has seen a significant market share losses in China for both iPad and iPhone.  On the iPad front, IDC reports that in the quarter just ended, AAPL saw its tablet share drop from 49% to 28% as Samsung and other Asian oems make inroads.  As for iPhone, AAPL saw share drop year over year in the last quarter from 9% to 5% with Samsung owning the smartphone lead with ~18%.   Is Samsung creating their own “Halo Effect” with Android in Asia and for some reason do their products resonate more with Chinese consumers? I have no clue to the answer, I suspect it has more to do on price, and coincide with the cooling middle class Chinese consumer which was recently evident in high-end fashion brands like Prada, which saw first half 2013 growth drop to only 12% from the first half of 2012 at 36%, largely based on slowing Chinese sales.

SO the rumored iPhone 5C could pose some competition in the U.S. at the time when the mix shift in the last quarter results showed unit upside coming from older devices like the iPhone 4S (which if launched at same time could see this trend continue), but this pales in comparison to the sort of unit and market share growth a lower cost iPhone could achieve in China.  While the expected media event is not an analyst meeting (an announcement of a foreign carrier relationship would be odd for this sort of event), the best piece of news AAPL investors could get with a new shiny plastic iThingy would be that China Mobile agreed to sell the device to its more than 700 million customers. (John Paczkowski of the WSJ’s All Things D blog had a great post detailing a very bullish scenario outlined by Morgan Stanley’s AAPL analyst Katherine Huberty for the iPhoneC, read here)

It is out view that there is a lot of good news in the stock given its recent run from $435 in the last few weeks, and while the best case scenario for the company would be a bunch of major refreshes (from iPad, iPhone and Macbooks), I would argue that a more staggered refresh schedule would be better for the stock, one that investors had become accustomed to in stocks historic run up since the intro of the iPhone back in 2007, thru the intro of multiple iPads starting in 2010.

Anything short of the iPhone 5s and iPhone 5C and stock likely pulls back to the level where Icahn last week announced his investment.  Fancy activist investors or not, AAPL will need to show some product innovation and/or diversification for the stock to get back to unchanged on year in the very near term.  Make no mistake about it though, in the last few weeks the sentiment shift in the name was epic and not likely to turn on a dime anytime soon. But glass empty to glass full may need a little more time than 2 month’s time to find a new equilibrium.