How Apple Intends to Dominate in 2014

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The stage is set for Apple (NASDAQ: AAPL  ) to blow away expectations in fiscal 2014. Investors have many reasons to be excited for what the upcoming year holds, including what's likely to have been a great holiday quarter, and the much-awaited deal with China Mobile (NYSE: CHL  ) . After a tough 2013, in which Apple struggled amid an environment of rising costs and no meaningful product launches, the new year couldn't come soon enough.

Not only does Apple have strong momentum in its underlying business, but because of its relatively cheap valuation, a unique opportunity now presents itself.

A "watershed" moment
That's how Apple Chief Executive Officer, Tim Cook, described his company's partnership with China Mobile, which has finally closed. Starting Friday, China Mobile will begin selling iPhones in China. The deal has received significant media attention, and rightfully so. China Mobile is the largest telecommunications carrier in the world, holding approximately 760 million subscribers.

The latest versions of the iPhone are already sold by other carriers in China, including China Telecom  (NYSE: CHA  ) . It's clear that China Mobile's competitors, including China Telecom, sense the partnership as a threat. In anticipation of the agreement between Apple and China Mobile, China Telecom announced it would slash iPhone prices by 15%.

Several key objectives fulfilled
The deal between Apple and China Mobile satisfies several of Apple's goals, the first of which is to retain the image of a premium brand. As Tim Cook stated on CNBC, Apple's vision is to produce the best products, not the most products. A cursory overview of the deal's pricing strategy proves as much. The 16-gigabyte iPhone 5s will cost about $874, while the 64-gigabyte version will be $1,139. While that level of pricing might seem prohibitive at first glance, China Mobile received more than 1 million pre-orders leading up to the big debut.

In addition, the partnership expands on Apple's stated goal of further penetrating the Chinese market. Apple sold more iPhones in China last quarter than ever before, and the agreement with China Mobile will only further Apple's growth in the country. Because of relatively low economic growth in mature nations like the U.S., meaningful growth in emerging markets represents the best growth opportunity for a huge company like Apple. Time Cook admitted as much during the interview, referring to China, specifically, as a key market.

China Mobile stands to benefit from the partnership as well. Its profits fell over the first nine months of 2013 due to rising costs and a lack of high-quality customers, and average revenue per user remained flat during the first three quarters of the year.

Of course, a major consideration from China Mobile's perspective will be the likely subsidies. China Mobile has not yet released this information, but will do so when it reports its quarterly results in March.

Valuation presents a compelling opportunity
Apple already had some strong momentum heading into the new year, as the holiday shopping season in the U.S. looks strong. Retail sales rose in December at a 0.7% rate, excluding automobiles. This is seen as the "core" rate of retail spending, and December's growth rate blew away expectations, which called for a 0.3% increase.

The prospect of a strong holiday shopping season in the U.S., and the likelihood of additional growth in China, means Apple has the wind at its back. Consider, too, that Apple shares trade for just 14 times earnings, well below the valuation of the broader market. Apple is a company with increasing momentum and a compelling valuation, meaning investors are set up very well in 2014.

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Read/Post Comments (3) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 21, 2014, at 3:31 PM, GaryDMN wrote:

    Android has become a commodity, complete with commodity pricing and future price wars. Apple has clearly survived the supposed iPhone, iPad, Apple killers and emerged as the top shelf mobile operating system. The Android market will be a bloodbath as price becomes the primary differentiator between commodity vendors.

  • Report this Comment On January 22, 2014, at 5:13 AM, prodigy191145 wrote:

    Another marketing propaganda for Apple. Apple will never dominate the market.

  • Report this Comment On January 22, 2014, at 7:03 AM, Mathman6577 wrote:

    2015 looks good too if iWatch and a larger iPhone come out this year (not to mention iBeacon and a payment system which might be announced in June) and as long as the ignorant Apple bashers (did they know the rat Eric Schmidt really stole Android from Apple?) and hedge funds stay away from the stock.

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Bob Ciura

Bob Ciura, MBA, has written for The Motley Fool since 2012. I focus on energy, consumer goods, and technology. I look for growth at a reasonable price, with a particular fondness for market-beating dividend yields.

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