Is Huawei the Apple of China’s Eye?
Apple is down 5.9% in the first four days of trading in 2024 – dragging Wall Street down with it. Is this just strategic profit-taking by Wall Street whales, or is there more at stake? Is the Huawei hype justified? What about China’s ban of iphones in government? Another potential problem is that The New York Times and multiple other outlets are reporting that the U.S. Dept. of Justice is ready to file a “sweeping antitrust suit” against Apple.
In this blog, we’ll examine:
China and Huawei
2023 Worldwide Smart Phone Sales
Nothing: the Hot, Hyped New Phone
2024 Smart Phone Forecasts
Streaming and Services
Macs and iPads
And here is more information on each point.
As we reported on September 7, 2023, China has banned the use of iPhones at government agencies and for any government business. (The U.S. did this to Huawei in 2017, and expanded their attack on the company over the next few years – even having Canada arrest Huawei’s CFO in December of 2018.) During the same week of the iPhone ban in China, Huawei shocked the West by releasing their Mate 60 series made with domestic chips. (Huawei had been blacklisted from U.S. chips.)
The concern is that Huawei will quickly outcompete iOS in China (and beyond), just as the company did before being banned by the U.S. TechInsights forecasts that Huawei’s HarmonyOS will surpass Apple’s iOS in China this year, taking second place behind Android.
This has a bit of déjà vu to it. Apple missed earnings in the December quarter of 2018 largely due to weak sales in China and aggressive competition from Huawei. At the time, Huawei was the #2 global smartphone company (by units), behind #1 Samsung, and followed by #3 Oppo. Apple dropped to #4 by devices sold (but ranks higher in revenue). According to Counterpoint Research, Huawei experienced double-digit revenue growth in the 3rd quarter of 2023. 4Q 2023 sales data should be available from IDC next week.
The reviews of Huawei’s chips and phone have been top-notch – even those by Western media. That has Apple investors concerned, particularly since the company is sporting a high price-earnings ratio of 30, while at the same time reporting an annual decline in revenue of $648 million in the September 2023 quarter (a small, but meaningful -0.72%). The greatest area of weakness was in China, where revenue was down $386 million from a year ago (-2.5%). Apple’s CFO pointed out that the decline was due to foreign exchange, with sales actually up slightly using constant currency.
While Apple CEO Tim Cook was quite vague about expectations for sales in China for the December quarter, he did admit in the Nov. 2, 2023 earnings call that predictions were for the market to contract. We’ll know the details when Apple reports their December quarter earnings at the end of Jan./early Feb.
Revenue in Greater China accounted for 17% of Apple’s revenue in the September quarter of 2023, so weakness akin to what happened in 2018 might require the company to revise its outlook. The company might also curtail its share repurchase program leading up to the quiet period before their earnings release, as they did in December of 2018. This could be a problem for Wall Street. In December of 2018 when Apple stopped their share repurchases, stocks experienced the worst December since the Great Depression, with losses of -9.18% in the S&P500 (source: S&P Dow Jones Indices).
2023 Worldwide Smart Phone Sales
So, which companies are the top-selling smart phone brands today? Apple continues to be the premium market’s undisputed leader, according to a report released by Counterpoint Research on Jan. 2, 2024. However, Android has a much larger market share than iOS, and Samsung continues to be the #1 smartphone brand by devices.
Nothing: the Hyped, Hot New Phone
Apple customers tend to be very loyal, even when products are priced much lower. Nothing, a company GQ calls the “most hyped company in years,” has sold over two million products since launching in 2020. Their Android-based phone is priced at just $599, while the iPhone 15 Pro retails for $999. A friend recently purchased the Nothing phone when his iPhone stopped working. When I asked him how he liked it, he responded that “Apple is still the best. I'll probably go back to iPhone whenever this dies.” Perhaps this is why the global premium smartphone market increased 6% year over year, compared to a decline in the general marketplace. Payment plans allow more people to choose the phone they prefer, even if it costs a lot more.
2024 Smart Phone Forecasts
Global sales are projected to decline -3.5% in 2023, and improve slightly next year with year-over-year growth of 3.8%. The 4th quarter of 2023 is expected to show growth of 7.3% over the same period in 2022. While this is all good news, investors are forward-thinking, and will be keen to know if Huawei will be the new Apple of China’s eye.
The next few weeks will reveal a great deal. China is certainly trying to curtail Apple’s influence in the country. However, Apple had the top four selling phones in urban China last year, according to CEO Tim Cook. Reports from my family and business colleagues in Hong Kong are that everyone is still in love with all things Apple. In the September 2023 quarter earnings call, Cook said, “I just took a trip over there and could not be more excited about the interactions I had with the customers and employees and others.” Of course, Cook wasn’t able to meet with President Xi Jingping during his trips to China in 2023. The Huawei Wars have undoubtedly hampered their relationship. Meanwhile, President Xi praised Bill Gates in a meeting in Beijing on June 16, 2023, calling him “an old friend.”
Streaming and Services
iPhone accounts for almost half of all Apple revenue, at 49%. However, a surprising second is their services category with a 25% share. The services category includes Apple TV+, Music, apps, AppleCare, iCloud and more. While Apple TV isn’t displacing Hulu, Disney+ or the plethora of platforms that are all starting to charge for streaming, the studio has made impressive strides. Ted Lasso was a darling of Emmys and audiences, while Martin Scorsese's Killers of the Flower Moon secured 7 Golden Globes nominations, including Best Motion Picture (Drama). Coda, another Apple release, won Best Picture at the 2022 Academy Awards.
Macs and iPads
Mac and iPad both experienced noteworthy revenue declines in the September quarter of 2023, at -34% and -10.2%, respectively. According to IDC, global sales of personal computing devices declined 9.9% in Q3 of 2023. The IDC press release explained why Apple’s losses were so much more, writing, “Apple's outsized decline was the result of unfavorable year-over-year comparisons as the company recovered from a COVID-related halt in production during 3Q22.”
Apple’s market share for PCDs was 10.1% in the 3rd quarter. 2024 is expected to recover, with growth of 4.1% in PCDs.
Apple purchased $15.5 billion of its shares in the September quarter, with $5.5 billion purchased in an accelerated program in August (the month before the Chinese government restrictions and the Huawei launch). While their robust buyback plan remains at the top of Wall Street, with $77.550 billion worth of buybacks over the past 12 months, this is behind the pace of the previous year’s purchases of $89.402 billion.
With total debt of $111 billion, net cash of $51 billion and a commitment to net cash-neutral, Apple’s buybacks are likely to continue at a solid pace in 2024, though perhaps less robust than the record highs of 2022.
There are plenty of headwinds for Apple, including a Department of Justice investigation into antitrust, foreign exchange, a strong dollar, increased competition and restrictions in China, a slowdown in the U.S. economy and a high price-earnings ratio. However, the company is still beloved by Apple aficionados and has been very successful in their Halo Effect, client stickiness and quality. Apple devices work seamlessly together, making it very difficult for iOS devotees to swap out the smartphone or the iPad/Mac for Android or PC without an interface nightmare. (We are spoiled by having all of our devices speak and share with each other so effortlessly.)
Apple is embedded in the daily lives of hundreds of millions of people around the world, with $383.3 billion in revenue and $97 billion in net profit last year. With a market value of $2.83 trillion, the company can buy their way out of a great deal of problems. However, Apple shares are priced very high for a company that is hitting headwinds, in an economy that is expected to slow down. Therefore, profit taking (share price weakness) is likely to continue. Shares could take a dive if any negative headline hits the airwaves, whether it is a lawsuit with the U.S. government, a slip to third in smart phone sales in China, or double-digit sales for Huawei.
Those who have been long on Apple might consider selling high and trimming their exposure back to a more diversified plan – or even moving out of the individual stock altogether in favor of a fund that is anchored by the Magnificent 7 (which includes Apple, but also has Meta, Microsoft, Amazon, Alphabet, Nvidia and Tesla). iShares has a breakthrough technology fund, TECB, and their large cap growth funds, are rich in information technology and communication services.
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Natalie Pace is the co-creator of the Earth Gratitude Project and the author of The Power of 8 Billion: It's Up to Us, The ABCs of Money, The ABCs of Money for College, The Gratitude Game and Put Your Money Where Your Heart Is. She is a repeat guest & speaker on national news shows and stages. She has been ranked the No. 1 stock picker, above over 830 A-list pundits, by an independent tracking agency, and has been saving homes and nest eggs since 1999.