Business Insider on Tuesday spoke to Morgan Stanley analyst Katy Huberty about her views on why Wall Street fundamentally misunderstands Apple’s strong business in China.
She starts off by remarking that China is largely misunderstood by Wall Street:
If you look at Apple’s results over the past year, China is a disappointing region. The investment community dialogue around that is that Apple may be losing its edge to local Chinese-branded smartphone makers like Vivo or Lenovo.
We absolutely do not think that’s the case.
While Apple’s Mac, iPad and Services business are growing in China, iPhone is flat but that’s about to change come next month, she explained:
It’s highly unlikely that Chinese consumers are paying $2,000 for a Mac at home, but carrying a cheaper smartphone device with them. More likely, the explanation is that Apple’s retail system is alive and well.
High-end Chinese users want to buy Apple products, but iPhone has not had a form factor change for three years. We believe that Chinese consumers are just waiting for that change.
She’s counting on pent-up demand driving the next super-cycle stemming from the next iPhone featuring all-new industrial design. The analyst doesn’t believe that Chinese makers of capable and affordable phones pose a grave threat to Apple’s position in the marketplace.
All Wall Street looks at is shipment data, but that data can be misleading.
Many companies report shipments but just because a company ships a bunch of phones into a channel somewhere doesn’t mean they end up being purchased and activated. That unsold inventory in the system still counts as a shipment, which she deems problematic.
The quality of those devices are not as good as an iPhone, and therefore they don’t last as long. They tend to get upgraded every 18 months whereas an iPhone tends to get upgraded every two to three years.
What that means is you have to sell a lot more of them to have the same market share of the installed base. The shipment data is misleading. Wall Street looks at that and says that Apple is losing its edge, the reality is that there’s a situation of pent up demand.
While every now and then feels like there’s a new winner in China in terms of smartphone shipments, a year or two later they start to decline and another one emerges. Of the four major local phone brands—Vivo, Oppo, Xiaomi and Huawei—only Huawei has any significant staying power even though the company hasn’t seen as much growth lately as Vivo or Lenovo.
Huberty’s models predict a 23 percent growth in iPhone sales over the next fiscal year thanks to Apple’s strength in the Chinese market vs. Wall Street’s growth projection of 13 percent.