Slowdown Controversy Unlikely To Throttle Apple Stock. Upside Remains.

Apple Inc (NASDAQ:AAPL) could see strong strong demand from China, which could drive AAPL stock higher.

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Cupertino based tech giant Apple Inc (NASDAQ:AAPL) has come under scanner after complaints that the company was throttling performance of some of its older models. A blog post by John Poole, founder of the computer-performance testing group Geekbench illustrates how iPhone computing performance slows after they upgrade to newer ioS versions. What was more interesting was the fact that the iPhone maker admitted that its latest software curtails the computing power of some models to prevent unexpected shutdowns.

This controversy didn’t only make headlines but also lead to a lawsuit. However, Apple stock remained largely impervious to this controversy and is likely to end this year with extraordinary returns. Apple stock has been part of our top stocks to buy portfolio which has considerably outperformed the broader market. The focus now turns to the future. What does 2018 hold for Apple stock?

Apple stock could deliver again.

In our previous coverage on Apple stock, we have detailed some reasons why AAPL stock could continue to deliver in the long run. The strong growth in its service segments and higher ASPs are a couple of reasons. However, in the recent weeks, there has been some concern about the valuation and lower than expected demand. Apple stock received a rare downgrade from Nomura Instinet which said iPhone X sales, as well as other positive factors, are already baked into the stock price. Some analysts have already lowered their FY 2018 iPhone sales numbers. But there has been good news too, especially from China, which could help Apple stock deliver strong returns in 2018 too.

iPhone sees strong demand from China

A recent survey by RBC Capital indicates that the demand for the higher end version of the recently released iPhone X is quite strong. “62% of respondents interested in buying an iPhone preferred iPhone X, which compares to 28% of respondents in our US iPhone survey.” the company said in a report. Moreover, some 66% of those who expressed their intention to buy iPhone X plan to go for higher priced 256 GB version while 64% of those responders who intend to buy iPhone 8 or 8 Plus plan to do the same. This is higher than U.S average. The preference for higher priced iPhone models is likely to pad the Cupertino giants bottom line in the coming year. Interestingly, a survey conducted by Financial Times had indicated a lukewarm reception for the latest iPhone models in China. However, this survey was conducted before the iPhone release.

In another bullish report, Morgan Stanley named Apple stock its top pick for 2018 due to tailwind from China demand. According to a report by the firm, adoption of iPhone X is experiencing faster adoption than iPhone 8 series. The report also contends that more customers are switching to iPhone after the latest release. According to the firm the net switching rate (% of non-iPhone smartphone owners switching to iPhone minus % of iPhone users switching away) was up 130 basis points in the four-week period that ended November 19.

Source: CNBC

Apple Inc’s love-hate relation with China.

China is a very important market for iPhone, one of its largest markets. China becomes more important if you consider the fact that the U.S and other developed western markets are largely saturated. However, like most other U.S tech companies, Apple has found China a tough nut to crack. A few years back, China was emerging as the biggest growth driver for the iPhone maker, however, it all came to a sudden halt in 2015. Apple revenues from China peaked in Q1 FY 2016 and continued to decline from then as the competition from local OEMs intensified. Oppo and Vivo stole market share from Apple in the following quarters. Apple China revenues fell from $16 billion in Q3 FY 2015 to $8 billion in Q3 FY 2017.

However, in the previous quarter, there was a trend reversal with Apple reporting strong performance in the Greater China (China, Hong Kong, Singapore and Taiwan) market. Total sales in this region grew by 12% YoY and 22% QoQ to $9.8 billion. The company registered unit growth and market share gains for iPhone, iPad, and Mac in the region. iPad units sales were up 25% and Mac sales registered all-time record.

With the strong performance this year, Apple stock is inches away from creating a history by becoming the first U.S corporation to cross the $1 trillion market cap milestone.  At $899 billion, Apple needs 11% stock price appreciation to cross this milestone, less than one-fourth of the gains it registered in 2017. The question is, can it accomplish the milestone in 2018? Save for a broad-based correction in the market, the prospects look strong.

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