Tuesday, 22 October 2024
by BD Banks
Apple (NASDAQ: AAPL) received some good news recently when it was reported that the company is seeing strong iPhone growth in China. According to data from Counterpoint Research, through the first three weeks since its launch, iPhone 16 sales have increased 20% in China versus last year when Apple introduced the iPhone 15.
On top of that, the report says that the mix of iPhones has also been favorable. According to Counterpoint, sales of pricier iPhone 16 Pro and Pro Max models have increased even more, jumping 44% compared to the iPhone 15.
This is big news for Apple and its shareholders, as the company has struggled in the country recently.
China has been a sore spot for Apple recently, with the geography by far its worst performer this year. Through the first nine months of its fiscal year, Greater China sales have declined nearly 10% to $51.9 billion. Meanwhile, sales were down about 6.5% in China for its most recent quarter.
Notably, this hasn’t been an industry problem, as in Q2 China saw smartphone growth accelerate to 8.9%, according to IDC. Chinese domestic smartphone makers Vivo, Huawei, and Xiaomi all saw strong double-digit unit growth.
Apple, meanwhile, fell to the No. 6 spot in market share by shipments in Q2, despite offering price promotions to help drive unit sales. Overall, its unit sales fell by 3.1% in the quarter.
At about 17.5% of its sales this year, China remains an important market for Apple. The big jump in iPhone 16 sales and preference for its Pro models is thus good news for the company. The iPhone has lost its luster as a must-have luxury brand in the country, but its artificial intelligence (AI)-powered iPhone is clearly gaining some strong early interest.
What’s really interesting, though, is that the Chinese version of the iPhone 16 currently doesn’t support the Apple Intelligence feature in the Chinese language, and it isn’t expected to be added until 2025. The company is also not sure when or if it will be supported in mainland China, and has been looking to partner with a local tech company to bring AI features to mainland China customers. However, Chinese buyers have been flocking to the smartphone nonetheless. If Apple is able to introduce AI features in China in 2025, it could really boost sales next year in this market.
The strong initial iPhone 16 sales weren’t the only good news out of China for Apple. The company also struck a deal with China Mobile, home to 1 billion wireless subscribers, to give them access to Apple Music. Apple is currently the only Western music company operating in China, and while there is fierce local competition, this could be another nice opportunity.
Image source: Getty Images.
While the early strong sales in China are a positive sign for that market, it could also be an overall good omen for global demand. After all, the iPhone 16 is hot in a struggling market where its main selling feature is not yet even currently available.
Apple is betting on the iPhone spurring a hardware upgrade cycle, in which people upgrade their devices in order to be able to use the latest AI features. As the largest contributor to its sales by far, an iPhone upgrade cycle could be a major driver of revenue and profits. The analyst consensus is for Apple to sell 234 million iPhones in fiscal 2025, which is only a 4% increase over fiscal year 2024 expectations and a similar rate to sales in recent years.
As such, a more pronounced upgrade cycle could go a long way in helping Apple top these estimates. However, this is not the only way in which the company should benefit from an iPhone developed to run AI. It should also benefit from the sale of AI-powered apps, for which it gets a 30% cut on sales from developers in most regions. This is the fastest-growing and higher gross margin part of Apple’s business, and as app developers introduce AI-powered apps, it should see a nice boost to profits.
Trading at a forward price-to-earnings (P/E) ratio of 28 times based on next year’s analyst estimates, Apple is trading toward the end of its valuation range.
However, Apple has become of the largest companies in the world for a reason, as it has a very sticky business and is viewed as a luxury brand. Its closed-loop system, meanwhile, gives the company a powerful and growing stream of high-margin service revenue that just compounds over time. AI is likely only going to help accelerate this.
As such, Apple should continue to be a long-term winner for investors.
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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple. The Motley Fool has a disclosure policy.