Tuesday, April 26, 2016

Apple Inc.: Is China About to Weigh on AAPL?

With iPhone sales slowing, AAPL needs its ecosystem now more than ever

It’s no secret that the Chinese consumer market is one of the largest untapped potential revenue streams in the world, and countless U.S. companies have strived to gain entry.

Apple Inc. (AAPL) hasn’t been a complete exception, although the tech behemoth has had far fewer problems than other American corporations. That was, anyway, until earlier this month when Chinese regulators forced the shutdown of Apple’s iBooks Store and iTunes Movies services.

For Apple, China is its second-largest market behind the U.S. With iPhone sales in the country beginning to slow, revenue from the region will become even more dependent on the iOS App Store. The future appeared bright, considering that “In the March quarter, revenues from the Chinese iOS App Store surpassed Japan for the first time — showing them on a course to eventually top the U.S.”

However, with this month’s moratorium on Apple’s sale of digital books and movies, some investors are concerned about not only the current quarter’s overall revenue expectations, but the stability of AAPL’s historically secure operations in China.

The question, then, is if the ban isn’t lifted any time soon, how much of a negative impact will that have on both revenue and the price of Apple stock?

It Depends on the Duration of the AAPL Moratorium

Simply put, both the short- and long-term damage to Apple stock will depend entirely on how long Chinese regulators maintain the ban on AAPL’s digital content.

According to The New York Times:
“To a degree more than many tech companies, Apple relies on the smooth operation of its software — including its App Store and services like iTunes, which are tightly integrated with the iPhone and iPad — to keep customers coming back to its devices.”
The various facets of the Apple ecosystem, which include the App Store and related digital goods platforms such as iBooks Store and iTunes Movies, have been intentionally linked as tightly as possible to one another. This makes Apple’s ecosystem hard to leave.

Even if a large number of Chinese consumers “are buying [an iPhone] for the status and the cachet of owning an Apple product,” any hindrance to the accessibility and operation of the App Store will surely hurt AAPL’s earnings.

Over the past three fiscal years, 23%, 41%, and 53%, respectively, of AAPL’s overall revenue growth has been attributed to China. So, considering that trend, even the smallest challenge to Apple’s ability to continue smooth operations could be a significant detriment.

Forrester’s Frank Gillett mused, “Is this the beginning of more pressure on Apple by the Chinese government?” Either way, for many investors, this month’s ban is “a symbolic turn, and the question is to what extent is it a harbinger.”

“The effect of this is you are going to see a more fragmented global internet system, where China asserts control over an alternate internet that is at odds with the Western ideas of free flow of information,” said Samm Sacks, a China analyst at Eurasia Group.

Bottom Line for Apple and China’s Ban

Citing an obvious cliche, only time will tell. The faster Apple management remedies the situation with Chinese regulators, the faster it can reopen the iBooks Store and iTunes Movies services. There’s no telling what restrictions the State Administration of Press, Publication, Radio, Film and Television will place on Apple, and to what extent, if any, such restrictions might impact future revenue.

According to Reuters, “Wall Street expects adjusted earnings per share to drop 14 percent to $2.00 and revenue to drop 10 percent to $52.0 billion.”

Last month’s initiation of a host of new rules regarding “virtually all types of internet content in China” demonstrate the country’s continued — and increasing — insistence on censoring its citizens’ access to content deemed undesirable by regulators. Clearly, nobody is above the law or exempt from those rules, including AAPL.

There’s no doubt that Apple management will rectify the situation however possible, and as soon as possible, but to what extent the App Store and related digital goods sales platforms must be censored is yet unknown.

In the meantime, AAPL stock could suffer short-term quarterly losses, but ultimately this situation shouldn’t amount to much more than a temporary setback.

Article originally appeared on InvestorPlace (04/26/2016)

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