Even though there are a lot of ancillary products and services under the Apple (NASDAQ:AAPL) umbrella, which are sold in numerous markets, there are really only a couple of things investors need to follow in order to see where the stock is going: China and the iPhone. That's it. Everything else is window dressing at this time.
For example, one could get bogged down analyzing whether or not the iWatch is doing as good as suggested by Apple, or if wearable tech in general really has the potential many believed just last year. The decent performance of its Mac could be measured against the disastrous performance of the iPad and iPod. And we don't even want to start considering how Apple Car and Apple TV may improve the performance of the company.
There is of course Apple Pay, which has long-term potential, but it will take a some time before it adds to the top and bottom lines of the company, if it ever does.
Apple's hefty market cap hasn't come about from these secondary products or services. It is primarily driven by the real or expected growth of the iPhone. How the iPhone goes, so will go Apple. And how the iPhone does in China, so also will go Apple.
That's one of the reasons for concerns by some over the recent volatility of Apple, which is partly from the crash of the Chinese stock market and the many concerns on whether or not it will have an impact on consumer spending.
(click to enlarge) Source: StockCharts.com
I want to focus on the potential impact the crash in the Chinese stock market may have on Apple's sales of the iPhone there.
First of all, approximately 90 million Chinese had money invested in the market, and almost all of them were first-time investors. For a number of years they believed the official government line that it was in a long-term bull market and it was a safe place to put their money.
So when the market crashed, a crisis of confidence in the Communist leadership, and by extension the health of the economy, weighed, and still weighs, on the minds of the investors residing in China.
Not only did they lose money, but hundreds of stocks had trading halted, which meant investors have no way to get their money out until those rules are rescinded. That has created a sense of panic and disempowerment, which has the strong probability of tightening up the spending of Chinese, who save more than Westerners in the best of times.
Even though there are hundreds of millions of Chinese who didn't have their money in stocks, watching this play out almost certainly has resulted in them being very cautious with their money. They may be less apt to spend as a result.
Investment implications of Chinese cultureThere are a couple of things those not familiar with Chinese culture need to know as it will help to understand their psychological state during this ongoing stock market crisis and how it could have an impact on Apple.
First, the Chinese tend to be a people who make decisions as a groupbased upon consensus, rather than as individuals. That has changed some as they do more business with the West, but in general, that is how they act. There are of course exceptions to that rule, but as a whole, that is how the Chinese people operate.
Secondly, there is a lot more respect and trust of leaders in China than in the West, and they tend to believe much of what is told them and are willing to take action based upon that information.
Combining these two cultural traits, you have a people that usually move in response to consensus, with much of that consensus coming from talking points of its government leaders. So when the stock market collapsed, it was a shock to the Chinese, and somewhat devastating, as the watched their hard-earned capital shrinking before there eyes, which in many cases they couldn't do nothing about because of the halt in trading on many stocks mentioned earlier.
Why this is important to investors in Apple is there is a deep psychological crisis going on among the Chinese at this time, and as it continues on, I believe they will become even more thrifty than usual, and will probably resist spending on larger ticket items until they see more clearly what the real condition of the Chinese economy is.
There's a positive side of this for Apple too. If the Chinese eventually believe they are safe to spend more money, they could en masse gravitate to the iPhone. That time isn't here, but once this sorts itself out, it could become a reality.
The opposite also is true, which is what's probably going to be the reality for some time, which is the Chinese could move back to buying Android phones as their choice of smartphone, bypassing the more expensive iPhone.
What concerns me with Apple is if the Chinese tend to do this as they have done historically as a culture, which is to come to a consensus over what smartphone to buy, in the short term that could hit Apple hard. It would be disastrous heading into an already challenging quarter, which will struggle because of the strong comps it faces from sales last year.
That will be especially true if the stock market further unravels and Christmas sales plummet.
The key thing to take from this is the Chinese people have had their confidence shaken and how they respond as consumers is what is at stake with Apple. Since the response could be in large blocks of consumers, it could be a serious blow to the giant tech company.
How the Chinese stock market performs going forward, and whether or not the Chinese people can get their money out of the market, and at what level of loss, will determine much of how this plays out.
At this time we don't have any idea when China's leadership will allow trading on the hundreds of companies to resume. When it happens, the Chinese will storm the market to get their money out. In my mind, there is no doubt they will hold on to their money for a long time afterwards, which would have a dramatic impact on consumer spending.
iPhone growth in China is slowingAnother thing investors need to understand is iPhone growth in China has been slowing and it's not going to continue at the prior pace it had enjoyed. That means revenue will probably slide over the next several months, which could put further downward pressure on the stock.
With expectations high and tough comps, it's hard to see how Apple can reach those heights, and its more modest guidance suggest they are in agreement with that.
In the latest quarter Apple was able to sell over 47 million iPhones, a gain of 35 percent over the same quarter last year. With the outlook being high concerning sales and guidance, the miss resulted in the stock getting hammered.
Add to this the uncertainty in the Chinese market during these volatile and uncertain times, and there's no real visibility in the near term that can be counted on. For that reason, the volatility level isn't acceptable to a number of investors, meaning they don't consider the risk worth the potential reward at this time.
Consumer spending economyThe pros and cons of China and its economy include that it has been one built to grow via industrial investment and exports. Now that strategy is maturing and China is looking to transition to a consumer spending economy. That will take a number of years to happen.
When I mention pros and cons, I mean it's potentially a positive and negative for Apple. Obviously Apple has enjoyed solid growth in China with its iPhone, as revenue soared 112 percent over last quarter. For reasons mentioned above, that isn't going to continue, at least in the near term.
That said, and even tough it will take time for China to grow its economy via consumer spending, Apple will continue to grow its footprint there, and it will probably become its biggest market once consumers consider it safe and desirable to spend that much on a smartphone.
Keep in mind that the economic and market conditions have changed drastically, and what was happening just a little over a month ago may have already changed drastically. The next earnings report will reveal that.
For that reason, it's troubling to see some financial writers talking about the plunge in Apple's share price as a buying opportunity as if a drop in price is the only variable to consider. To me, this is gambling, even if the share price rebounds. There may be some short-term money to make, but there's no way of knowing, under the conditions in China, how this will play out for Apple for many months.
ConclusionMy belief is there are only two things to watch with Apple, as I mentioned earlier, which again, are the economic conditions in China and the sales volume of the iPhone. Analysts and others may point to all the secondary products and services of Apple, but they will only be relevant as far as they complement strong iPhone sales or if iPhone sales are weak, bring the performance of Apple further down if they slow down in sales as well.
I understand the fact the valuation of Apple is very attractive and would seem to be a buying signal. But keep in mind the last time there was a cyclical downturn, the valuation also was very attractive, but the stock still fell about 30 percent.
Unfortunately for Apple, this couldn't have come at a worse time as Chinese consumers, to some degree, had started to migrate from Android devices to iPhones. That's not to say Apple was dependent on that to generate sales, as the build of their growth of iPhone sales in China came from growing the overall smartphone market, not from taking share away from its competitors. Nonetheless, the company was strengthening its brand there, and that will slow down some because consumers will be more skittish to spend on big ticket items than in the recent past. For the Chinese, this would be considered a big ticket item, even if it isn't in most Western countries.
I think we've seen the peak of growth acceleration for the iPhone in China, and that means the share price of Apple is probably going to be under further downward pressure over the next year, and it will be more volatile.
My reasoning for that is everything associated with strong growth will be more subdued, including the level of earnings beats, and the decrease in the pace of the market share it wins in China.
Finally, there isn't a lot to get excited about with the level of improvements in the next iPhone release, and the future doesn't look quite as bright as the recent past for Apple's iPhone.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Source: How China Will Take A Bite Out Of Apple's Growth Momentum
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