MorningWord 12/5/13: $AAPL and the Ol’ Wink Wink, Nod Nod

by Dan December 5, 2013 9:15 am • Commentary

MorningWord 5/5/13:  After spending the better part of the last month straddling $520 a share, AAPL took off in an almost straight-line since just prior to Thanksgiving, with this morning’s pre-market gains equaling about 10% appreciation since November 22nd.

AAPL 30 day chart from Bloomberg
AAPL 30 day chart from Bloomberg

Many will attribute the break higher to enthusiasm over new product refreshes in both iPad and iPhone that are sure to be big hits this holiday season, but for those in the know, the news they were waiting for on came in the form of last night’s fairly official report that “China Mobile has signed a long-awaited deal with Apple to offer iPhones on its network“.  Make no mistake, no matter how many insider trading cases are going on in the courts or be plead behind closed doors, there are still those who are most definitely still in the “know”.  The largest market cap company in the world doesn’t mysteriously rally 10% in a straight line, tacking on more than $50 billion in market cap just on a whim that the new iPad Mini Retina is going to be a big Black Friday seller.

For longs, this was the one catalyst that had illuded the company and AAPL shareholders for more than a year. Remember the hope of Apple TV??  That was soooo 2012, this was always the big one.

So now that it here, what does it mean?  Forbes contributor Chuck Jones had a very thorough rundown on their website of what it could mean for units and earnings this morning (here), here are some of the highlights from his post:

China Mobile had 759 million users at the end of October and has been adding about 5 million additional users every month for the past 4 and a half years. It has 176 million using 3G technology (23% of its base) and has been adding almost 7 million a month over the past year.

Various analysts estimate that Apple has about a 6% to 7% share of the Chinese smartphone market. There have also been various reports that there are already between 25 million to 35 million iPhones that have been hacked to work on China Mobile’s network. While this shows there is demand for the iPhone it could limit the number of buyers in the first year if they bought it recently.

Overall I believe Apple could fairly easily sell 15 million iPhones in the first year. This would only be 8.5% of China Mobile’s 3G install base which is only slightly higher than the estimated 6% to 7% share that Apple has of the entire Chinese smartphone market. At 15 million iPhones with an ASP of $550 they would generate $8.3 billon in revenue and add 4.5% to Apple’s revenue growth in the first year.

Note that for every 5 million iPhones Apple would generate an $2.8 billion in revenue and $1.05 of EPS.

By all accounts this is great news for AAPL at a time where margins have softened in developed markets as the high end smartphone market has become a bit saturated. There has been pressure on carrier subsidies and the tablet market continues to demonstrate immense competition where AAPL’s competitors can only really compete on price.

Last Quarter, at the end of September, AAPL did update their revenue guidance after strong initial iPhone sales, which Jones suggests some investors could be expecting if the iPhone were in fact to ship prior to the fiscal Q1 end on December 28th, but probably unlikely.

I would make one anecdotal observation from my experience buying every iPhone since the 3G back in 2008: Despite carriers in China only recently officially selling the device, there has been a very vibrant black market for them. As Jones noted in his post about the unlocked phones.  I live 3 blocks from one of AAPL’s busiest stores in the world on West 14th street in Manhattan, and the line that I stood in for an hour on the second day after the iPhone 5s and 5c launch was clearly filled with those who had no intent of using for themselves. In fact most would pay in cash, spoke no English, had flip phones in their hands and would get right back in line after they got their 2 allotted phones.  This went on for weeks, and many of you might have noticed this, but these black market buyers would camp out each morning waiting for the store to get their allocation and buy up what they could.  And this has gone on for years as I have witnessed this activity at this very store for years.

Here is a picture from Oct 5th at the West 14th Street Apple Store, 2 weeks after the latest iPhone launch, with the usual suspects in line for the NEXT day’s delivery.  Ask any AAPL salespeople in NYC and they will tell you that maybe 30% of the phones that they sell after the initial launch are not activated and paid in cash and go straight out of the country, from what they can tell.


So I bring this up, because it gets little attention, but the iPhone has been in China for years, and the initial launch at China Mobile could be met with *slightly* less enthusiasm than some analysts and investors think. And after the stock’s recent rip, I am not sure how much more upside we see between now and the New Year, or perhaps before we get official guidance from the company in late January.