Apple’s Next Big Thing

There’s some irony in the notion that the next big new thing for Apple isn’t a long-rumored smart television or long-awaited touchscreen Macs or even lower-price iPhones or iPads. It’s a business deal
Investors polled by Morgan Stanley said that Apple getting the go-ahead to sell iPhones through China Mobile, the world’s largest operator, with almost 700 million subscribers, is the number one catalyst for the stock to reach the mythical $1,000 price set before it.

Apple already sells the iPhone in China through its 2009 agreement with China Unicom and its pact earlier this year with China Telecom. But with about 230 million and 150 million subscribers, respectively, China Unicom and China Telecom are dwarfed by China Mobile, which is hoping to move its subscribers en masse to faster 3G and LTE networks next year.

A deal with China Mobile would expand Apple’s reach there just as demand for smartphones is starting to get serious. China is expected to be the world’s top smartphone market by the end of the year, surpassing the U.S. Only one out of ten Chinese who own a mobile have a smartphone. In the U.S. that proportion is already half and half.

China has become Apple’s second-largest market after the U.S., thanks to insatiable demand from a growing and brand-conscious middle class. Sales in China jumped 78% to $23.8 billion and accounted for some 15% of Apple’s revenue in the fiscal year ended in September. That’s up from $13 billion in 2011 and a mere $3 billion the year before.

The analyst who ran the study, Katy Huberty, thinks the deal with China Mobile could happen in the second half of 2013. If it does and Apple comes through with lower-priced iPhones and iPads, she sees the shares reaching $980, or 14 times estimated earnings per share of $70. Amit Daryanani, an analyst at RBC Capital Markets, says Apple could win over 13% of China Mobile’s 3G customers, grabbing sales of 10 million to 16 million iPhones in the first year alone. There are already between 15 million and 20 million China Mobile customers using full-price iPhones on the carrier’s slower 2G network.

“We continue to see it as an extremely exciting market with more and more people wanting Apple products,” Apple CEO Tim Cook said in October. His China stores–there are now seven–saw riots after the iPhone 4S went on sale last January. Hours after the iPhone 5 debuted in the U.S. in September, it was being smuggled into China to feed a thriving black market.

Apple faces challenges, especially against low-cost Android models that make up about 90% of the Chinese smartphone market. Apple’s iOS operating system has 12% or less of the market, depending on whose numbers you look at. And the China Mobile deal isn’t a slam dunk, with technical issues to resolve, such as whether the Qualcomm chipset in the new iPhone 5 will work on China Mobile’s proprietary network. Jefferies & Co.’s Peter Misek doesn’t think a deal can be done in 2013.

Apple shares are now in bear market territory, pushed down by sellers looking to avoid a tax hit on capital gains next year. If the bulls don’t get their China Mobile deal, they can take solace in a sales bump from the other two big carriers, as well as a completely refreshed line of tablets, iPods and laptops. Apple doesn’t have to conquer China for the stock to rebound. Just a few more points of market share will be enough for it to earn its outsize portion of smartphone profits.



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