MorningWord 4/14/16: AAPL – Long Distance Rates May Apply

by Dan April 14, 2016 10:12 am • Trade Ideas

Last night on CNBC’s Fast Money the panel discussed the opportunity for Apple (AAPL) in other emerging markets like India, on the heels of a couple years of sensational growth in China, watch here:

It’s important to note that after a few consecutive quarters of 100% year over year (yoy) sales growth in China, the December quarter reported in late January saw only a 14% yoy increase, up 47% sequentially, but still making up 24% of AAPL’s total sales.  This was the quarter that saw the bulk of the iPhone 6s sales after its late September launch.  In the prior four quarters, AAPL saw China sales grow 99%, 112%, 71% & 70% yoy. During this period China represented between 21 and 25% of the total in each quarter. China has clearly been an important growth market for AAPL as developed markets have become saturated in the high end of the smartphone market.  Wall Street analysts have factored in slowing growth for the current fiscal year, with consensus eps and sales expected to be down 1 to 2%, with an expected pick up in 2017 to 11% eps growth and 6% sales growth.  I will not argue against cheap valuation, fortress balance sheet with shit-tons of cash, growing share in computers and a near monopoly on the high end of the smartphone market. BUT, AAPL’s recent success in China is off of a very low base, but it’s now their second largest sales region over the last few quarters, over-taking Europe in fiscal Q1’15. But it is now maturing and growth is clearly decelerating.

So where is the next growth story? The likelihood that AAPL is able to replicate the last year and half’s success in China in a market like India is probably not that great. Mainly because of the difference in demographics.

Yeah smartphone penetration is very low in India, and will be a decade long growth story. And I also know that iPhone’s are aspirational products that people of all demographics in most geographies will stretch to buy, but this trend in countries like China and India is challenging because of the cost of an iPhone (not subsidized) is 13.5% and 26.5% of annual household income respectively. In the segment, Tim Seymour mentioned markets like Indonesia. But as (via Deutsche Bank from last August) noted, an iPhone costs about 40% of the median annual house income in that country.  AAPL’s slowing total sales growth is a function of price, they are hitting a wall with new customers who can afford their product that in the latest quarter represented 68% of their total sales, had an average selling price of $691 and margins above the company average of 40%.

AAPL has less than 2% market share in India, recently crossed $1 billion in annual sales a country that has a population of 1.2 billion people, and smartphone penetration below 20%. And AAPL knows full well that India will very soon be the second largest smartphone market after China, where less than half of new cellphones sold in India are smartphones, while 4G penetration is very low, low single digits actually, per Indian Express from Nov 2015:

Apple has the biggest share of the total 14.8 million 4G-enabled devices active across all important frequencies in the country, says a study by Nokia Networks. Among the top 15 4G models, Apple devices – iPhone and iPad – occupy the top two slots.

iPhone 5s and iPhone 6 devices, which support 4G services in 1800 Mhz band, are top models with 10.46 per cent and 8.9 per cent shares respectively, as per the study.

LTE (4G) device penetration is still low at 1.61 per cent.

iPhone 5s, iPhone 6 models have highest share of 18.12 per cent and 15.42 per cent respectively among connected devices that can support 4G services 850 Mhz band, says the study.

Though Apple leads the segment of active 4G devices, the study also found that six out of top 10 devices in 1800 Mhz are priced below Rs 8,000.

Which brings us to which iPhones are selling in India, despite the number being less than 2 million in the last 12 months, per IBtimes:

most of the iPhones sold in India are from the company’s legacy lineup, as it still sells an 8GB iPhone 4S for around $220 to $230, a phone which hasn’t been on sale in the U.S. for over a year. “To be honest, these lower-end iPhones are the ones that end up selling the most in India, since this is what Indians can afford,” Damani said, adding that these entry level models provide “an underwhelming user experience when compared to their Android counterparts. Apple needs to fix this if it is to grow in India.”

And as stated above, it comes back to cost and familiarity:

Another issue facing Apple is one of national pride, according to Dawson, with local manufacturer Micromax currently the top vendor in a market where up to 70 percent of smartphones sold cost under $250. Of the foreign builders, South Korea’s Samsung is the biggest but most of its smartphone sales in India come in at under $250. As former Apple CEO John Sculley said recently, at that price “they are not making any money on those phones.”

And that India may be a very different market than China:

The reason Apple is not selling more phones on the subcontinent is simple — they are too expensive. India’s GDP per capita is roughly a quarter of what it is in China. In addition, just 26 percent of the country is online, according to Internet Live Stats,


While the iPhone 6S Plus does meet the demand for a bigger screen, it is also prohibitively expensive at over $1,000 for the cheapest model, which equates to one third of the average annual salary in India.

So all of those quotes and stats don’t for a second suggest that Apple will not display staggering growth in India in the coming years, but they do suggest that moving the needle to similar levels of revenue and growth to move may be very different than the growth in China in the last couple years. And it may also be that the growth in India in the coming years may merely help to offset lagging growth in the developed world, specifically in the high end of the market, where analysts expect just 2% growth in 2016. To buy AAPL here on the “India opportunity” seems soundbitey, especially when you consider that iPhones sales are expected to decline yoy in 2016 for the first time since it was released in 2007, and the areas of future growth may lie in countries where they will need to compete on a much lower price point (which means lower margins). While AAPL investors take solace in the cheap valuation, a meaningful downtick in company wide gross margins would be the one thing that could put the stock in a multi-year hurt locker.  AAPL just introduced the iPhone SE, a souped up version of the iPhone 5S, specifically targeting the lower end smartphone consumer. It will be very interesting in the coming quarters to see how iPhone mix changes and what the effect will be on the that $691 increasingly un-subsidized ASP. And let’s remember that Android has over 80% global smartphone market share for a reason, and that’s price. These two charts, from Fortune with data from IDC tell me all I need to know where AAPL’s worldwide ASPs are going in the future as the developed world high end smartphone demand stagnates or possibly declines.

First the history of Apple iOS ASPs:


And then the ever-declining Android ASP: