All the hype regarding Apple Inc.’s (NASDAQ:AAPL) deal with China Mobile seems to have vanished now. The company had earlier announced that it had an upcoming deal with China Mobile where China’s largest carrier would sell subsidized iPhones. However, the company recently said that it was still in talks with company which has given rise to the feeling among the people that the deal is uncertain. The market hasn’t reacted positively to this news. The common feeling is that this would affect Apple adversely. However, I think this deal being undone would prove to be blessing in disguise for Apple. Let me cite the reasons for saying so:
Absence of leverage in China:
Apple simply doesn’t have the leverage in China that it has in the US. In spite of the fact that it has a hell of a lot of customers all around the world it would be wrong to say that it same advantage in all the markets that it has in the US. In fact, for that matter, I’d say that Apple would be better off if they don’t go for the deal. The reason is that the Chinese government does not favor those products that are produced outside the nation’s boundaries. Samsung, the South Korean giant, though, has a pretty strong presence in China. This can be owed to the tech giant’s brilliant marketing skills. This apart, even Lenovo and ZTE has a pretty huge market share in China. Xiaomi, widely regarded as the Apple of China has the maximum market share in China. The iPhone bug hasn’t bitten the Chinese yet. This is pretty evident from the fact that the people in China view iPhones as a nice product but not a ‘must have’. So those investors that view Apple from a US-centric perspective are missing the global picture. All in all, it wouldn’t be wrong to say that though Apple has a considerate market share in China it is nowhere close to being a leader there.
- Warning! GuruFocus has detected 5 Warning Signs with AAPL. Click here to check it out.
- AAPL 15-Year Financial Data
- The intrinsic value of AAPL
- Peter Lynch Chart of AAPL
Shareholders would bear the brunt:
The China Mobile subsidy deal will eventually happen. This would mean that Apple would have to sacrifice on the profit margins. This is because the company would be bearing the US carrier-like prices with low subsidy. The end result would be that Apple shareholders would be losing. The analysts are saying that a further compression in margin would do the company in.
The road ahead:
The deal with China Mobile isn’t going to help the company at all. The reduction in margins would mean a drop in the shares of the company. The shares are likely to drop after going through a 50 day simple moving average of $528. If the revenues continue to be low for a long time the share prices would hit an all-time low.
The company could also announce a bigger buyback and/or a fatter dividend to cushion any blow. However, these would only be short term solutions.
Apple should go for the deal only after analyzing its impact on its financials. That they would go for the deal is quite certain, what’s there to see is the extent to which would the shareholders be penalized. The investors must therefore play their cards carefully.