On July 21st 2015, Apple (AAPL) closed a few percent from its all time highs. After the bell the company reported fiscal Q3 results that disappointed Wall Street, sending the shares down 4.25% the next day and ultimately culminated in a near 30% decline into the August 24th Flash Crash.
In that Q3 report AAPL’s sales in China grew 112% year over year and equaled about 26% of its total sales in the period.
In AAPL’s Q4 report on Oct 27th, the company saw its sales growth rate in China decelerate a tad sequentially by 5% and yet increase year over year to 99%, equaling about 25% of the company’s total sales. In between that period AAPL CEO Tim Cook felt the need to make a very uncharacteristic update about sales in China in an August 24th email to CNBC’s Jim Cramer.
In AAPL’s fiscal Q1 reported last week, the company released its lowest year over year increase in sales in China, (despite its largest contribution in dollar terms, $18.3 billion in total sales). This was now down to 24% of its total, and growing only 14% year over year.
What we have here is expectations, and comparisons. To some extent AAPL’s stock has been a victim of the company’s own success in China and other emerging markets as China matures and other emerging markets contribute more to the company’s growth. But that also means that the company is not immune to the strength of the dollar, even as it has gone sideways for months against most major currencies (except the yuan). AAPL now gets 66% of sales outside the U.S. The strong dollar means that they have to increase prices of iPhones to maintain margins. On their Q1 call last week the company acknowledged these actions could cause a hit to demand. I suspect this trend towards moderating growth in emerging markets, and the company’s cautious comments last week re: China will not be a one quarter event, per Tim Cook on Q1 call:
‘we are seeing extreme conditions unlike anything we have experienced before, just about everywhere look”
“not withstanding record results,earlier this month we began to see signs of economic softness in China”
Which leads me to the blow out results in the last week from Facebook (FB), Google (GOOGL) and Microsoft (MSFT). All admitted to feeling the adverse effects of the strength of the U.S. Dollar. All have 50% of their sales outside the U.S. But none of them showed concern over the uncertain global macro environment the way AAPL did.
But just as investors thought this past summer that AAPL was immune to dollar strength crimping profits, and weak demand in emerging markets tempering future growth, it could set up similarly with FB, GOOGL and MSFT. All three stocks are at or very near all time highs. And no matter how you slice it are all expensive relative to most peers and the broad market. Investors seem to be making an assumption that dollar woes that have hurt other multi-nationals won’t touch these companies. But why would that be? Its also important that ad spending is quite possibly one of the most economically sensitive forms of corporate spending in times of weak growth, if the global economy enters a recession, FB and GOOGL will not be immune, its just that simple. I fully acknowledge that these two companies are in a dominant position in one of the most epic secular shift in ad spending, but this could be as good as it gets as it appears the global economy could be at an important inflection point.