After months of tantalizing rumors that Apple and China Mobile Ltd. (NYSE ADR: CHL) were on the brink of an agreement to allow China's largest carrier to sell the iPhone, the companies finally confirmed the deal yesterday (Sunday).
It's a big new market for Apple's primary profit machine, so it should give Apple (Nasdaq: AAPL) stock a huge boost - right?
Well...sort of. But don't put in that order for a new yacht just yet...
China Mobile's Effect on AAPL
True, Wall Street is clearly pleased, with AAPL stock up more than 3% in midday trading Monday to about $567.
But the China Mobile deal by itself won't be enough to push Apple stock up hundreds of dollars. You see, the deal had been expected for months, so much of the benefit is already priced into AAPL shares.
Make no mistake, this is a critical development for Apple and the iPhone - China Mobile will start taking pre-orders Dec. 25, with full availability expected Jan. 17 - and it will contribute to a rising Apple stock price in 2014 and beyond.
China Mobile is the largest carrier in the world. Its 763 million subscribers are more than seven times that of the largest U.S. carrier, Verizon Communications Inc. (NYSE: VZ). For that matter, China Mobile's subscriber base is twice the size of the entire population of the United States.
And the opportunity for Apple is also big. As a relatively expensive product in a market dominated by customers of modest means, the iPhone has lost market share to smartphones based on Android, Google Inc.'s (Nasdaq: GOOG) free mobile operating system.
The iPhone accounts for about 5.8% of the Chinese smartphone market, down from 10% in the second quarter of 2012, though the new iPhone 5S and iPhone 5C models have sold well. Rival Samsung Electronics Ltd. (SSNLF), however, has a 21% share.
To reverse its fortunes in China, Apple needs access to China Mobile's vast trove of customers, about 100 million of whom can afford an iPhone, analysts say.
"The China Mobile deal will significantly help Apple's position in China," Bryan Wang, principal analyst and country manager in China for Forrester Research, said. "China Mobile will use the iPhone to win back some high-end subscribers who chose to defect to other carriers because of the iPhone."
iPhone's Appeal in China
Estimates for actual iPhone sales in the first year of the deal range from 5 million to 23 million, with a consensus of about 15 million.
That figure is 10% of the 150 million total number of iPhones Apple sold in its most recent fiscal year.
Sanford C. Bernstein analyst Toni Sacconaghi has calculated that additional China iPhone sales of 15 million would deliver $9 billion in additional revenue for Apple and add $3 to the company's annual earnings per share of just under $40.
But iPhone sales could do better than many analysts expect.
"What's great about China - what not many people realize - is that an iPhone is what we call an 'aspirational buy.' It's something that the middle class wants because it's going to show their affluence and their growing power," said Money Morning Chief Investment Strategist Keith Fitz-Gerald.
Over time, Apple also figures to benefit from China Mobile's plans to expand its 4G network, which the China Mobile versions of the iPhone already can use in addition to its 3G network. The carrier has said it expects to have 4G in more than 340 cities by the end of 2014.
So while the China Mobile deal will give Apple stock a little push now, its real significance is in providing a foundation for Apple shares going forward.
For Apple stock to revisit its 2012 highs of $700-plus, the company needs a game-changing innovation to an existing product, or new product category altogether, be it the iWatch, a TV product, or something else.
As many tech investors know, good news for Apple is frequently good news for the stocks of Apple suppliers. But the best prospects are companies that benefit from tech titans like Apple, but are still "under the radar" of most investors. We call them the "shadow plays" of Silicon Valley...
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