AAPL Stock: The Next Billion Dollar Opportunity For Apple Inc

 Can India be the next growth driver for Apple Inc after China?

AAPL Stock The Next Billion Dollar Opportunity For Apple Inc
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Shares of Cupertino, California-based tech giant, Apple Inc (NASDAQ:AAPL) have been rallying for the past one month, hitting a new all-time high. Apple stock has gained more than 12% since the last earnings report and is up around 18% YTD compared to an 8.6% gain in the Nasdaq Composite (INDX:COMPX). AAPL stock has been buoyed by improving consumer sentiments, better than expected results and the hype around the launch of iPhone 8 later this year. Another factor which has been in news recently and which can provide a billion dollar opportunity for Apple is its increased focus on the emerging markets, especially India.

Slowdown in sales in China is a major headwind.

One of the main challenges facing Apple is the slowdown in its revenue growth. Market saturation in developed countries and its size are the two main obstacles for the iPhone maker's revenue growth. To overcome the problem of saturation in developed markets, especially the United States, Apple has been focusing on China, the world's largest smartphone market. That effort had paid off with China dawning the mantle of Apple's biggest growth driver. However, Apple's China growth came to a crashing halt this year.

According to IDC, China's smartphone market grew 19% YoY. However, as a result of strong competition from local smartphone manufacturers such as Oppo and Vivo, the iPhone's market share declined from 15% in 2015 to 11%. Apple's China sales declined by 12% in Q1 2017, compared to 13% growth in Q1 2016. According to reports, iPhone unit sales declined by 18% in 2016 with total unit sales coming in at 43.8 million. There are some who suggest that a large part of the decline in China sales is due to customers deciding to wait for iPhone 8. However, the company is not taking any chances. To make up for the slowdown in China, the company has renewed its efforts in China's neighbor, India.

India is the fastest growing major economy in the world, and according to Counter Point Research, it recently overtook the United States as the world's second largest smartphone market after China. In 2016, the smartphone market in India grew by 16% compared to 3% growth worldwide. Apple has recently seen some progress in the country. India has been one of the fastest-growing markets for Apple. According to Counter Point Research, Apple sold a record 2.3 million iPhones in India in 2016, up 39% from the previous year. Of the total, one-third of the total units were sold in the last quarter pushing Apple close to its first 'million units sold' quarter in India.

But despite the recent growth in sales, India still contributes barely 1% of Apple's global iPhone sales. Apple occupies the tenth spot in the list of largest smartphone makers by market size in the country. However, Apple has over 60% market share in the premium segment (above $450). This strong market share in premium segment suggests that many consumers with high disposable income will prefer iPhone over its competitors. Also, smartphone sales in India will continue to grow. Analysts estimate that over the next five years, there will be around 750 million smartphones sold in India. Even if Apple manages to capture a small portion of this, it will give the company a big boost. Apple's case will also be helped by rising disposable income which is expected to double by 2020.

The problem? iPhones are too expensive.

While India represents a huge potential for Apple, there is one big hurdle: pricing. iPhone 7 currently costs around USD 750 in India. For comparison, around 80% of the smartphones sold in India are below $200. The price becomes even more expensive when you consider the fact that India's per capita income (annual) is just around $1750. Such a high price immediately narrows the target market size. For Apple to sell in India, it needs to bring the pricing down. Apple has taken several steps to address the pricing problems.

The Cupertino based company is in talks with the Government of India to manufacture Apple products in India. The company is asking for the relaxation of several local laws and import tax exemption for fifteen yers. While the talks are still on, Apple has decided to go ahead with the assembly of iPhone SE in the country. According to reports, Apple's partner Wistron is expected to handle iPhone SE assembly at its facility in Bangalore. Assembling iPhone SE in India could lead to a cost saving of up to 20% which could help in lowering the price. Apple is also seeking permission to sell refurbished phones in India. The company's earlier request to sell refurbished phones was denied due to the concern that India may become the dumping ground for used electronics. If Apple gets the permission, it will be able to sell newer models at much cheaper prices, helping it to increase its market share.

Conclusion

With the slowdown in iPhone sales in China, Apple has increased its focused on China's southern neighbor, India. India is the second largest smartphone market with a strong growth potential which could provide reasonable growth opportunities for Apple. The main factor which is holding Apple back in India is the pricing of iPhones. To address the pricing issue the company is planning to start manufacturing in India which will lower its cost of production and also taxes. Apart from pricing, another factor which could impact iPhone sales in India is competition from Chinese manufacturers. The same companies (Oppo, Vivo, Xiomi) which ate into Apple's market share in China, dominate the Indian smartphone market. It remains to be seen how Apple will tackle them in India. If Apple could crack the Indian market, it could become one of its strong growth drivers.

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Kumar Abhishek Kumar Abhishek   on Amigobulls :

Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice.

Buying and selling of securities carries the risk of monetary losses.Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions.

Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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