Apple Inc. recently reported its first-ever revenue decline in 13 years. The stock price of Apple has declined by about 30% over the past 12 months. The high flying stock was trading at a high of $135 around May of last year but today it trades around $95. The billionaire investor Carl Icahn announced last week that he had sold his entire stake in Apple citing China’s economic slowdown. He also worries that the government could make it very difficult for Apple to conduct business.
Some financial gurus disagree with the market’s negative assessment of Apple and the company’s future prospects. The Sage from Omaha, the Financial Guru Warren Buffet, does not share the market’s adverse outlooks on Apple. Buffett’s Berkshire Hathaway Inc. declared on May 16 that it had invested $1 billion in Apple Inc. stock earlier this year. Apple stock went up the same day by about 4% which created value of more than $18 billion.
Among various Apple products, the iPhone business is the prime driver of Apple’s profitability and global growth. Apple iPhones account for almost two-thirds of its global revenues. China plays a crucial role in propelling Apple’s business. Following the U.S., China is Apple’s second-largest market in the world. Tim Cook, the CEO of Apple, has visited China 8 times since taking up the reigns of the company.
Many investors have serious doubts whether China can contribute towards Apple’s growth. With a slowing Chinese economy, phone sales have declined in China which is a key reason for Apple’s deceleration in revenues. To confront the decay in revenues, Mr. Cook visited China earlier this month and met with senior government and Communist Party leaders. Apple also announced that it would invest $1bn in Chinese ride-hailing app Didi Chuxing to better understand the Chinese market.
Is the China commentary likely to lead to “one bad apple?” Carl Icahn seems to believe so.
Cookin’ With Spices
The solution for Apple is to replicate the Chinese success story with another country with comparable population and one that is hungry for smartphones. Low and behold, Cook landed in India this week just in time for a monsoon wedding. Mr. Cook is hobnobbing with the Indian Prime Minister, meeting with key industrialists, and boogying with the Bollywood starlets. Mr. Cook is cookin’ Apple strudel with a hint of cinnamon!
India accounts for only 1% of iPhone sales. Why? The answer is simple. India’s market is dominated by phones under $75, while Apple’s models start at around $500. As a price sensitive market, it is not surprising that Apple with its expensive iPhones has been unable to make a dent on the smartphone market in India. Apple is now aiming to grab the Indian smartphone market share and resurrect its growth story.
Apple has announced major investment in India. It plans to set up the first development Centre in India in Hyderabad. Apple also announced a “design and development accelerator” in Bangalore. Although, Apple is expected to continue to have its manufacture hub in China, the company had announced last year that it plans to invest $5bn in India to make Apple devices.
But what does Apple want in return for its massive investments in India? According to the Economist, Mr. Cook is hoping that the Indian government will allow Apple to sell its refurbished phones in India, which has the dual advantage of finding an outlet for its used phones and also meet the lower price barrier of smartphones in India.
Future of Apple stock?
Hard to say, but winners like Apple have a way of figuring out how to win even when the odds are stacked against them. They defy all odds, which is why we call them winners.
It is safe to ride the apple wave with the King of Omaha.
New York, May 20, 2016; 12.12Pby