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Are Investors Underestimating Apple Inc.'s Opportunity in China?

In January, Apple (NASDAQ: AAPL  ) finally inked an agreement with the world's largest wireless carrier, China Mobile. But the agreement wasn't enough to get the Street excited about Apple stock. It still trades incredibly conservatively, at just 13 times earnings. Is the market making a big mistake?

The best argument for Apple's potential in China
A report from Umeng, China's largest analytics firm, that made rounds this week (via analyst Benedict Evans) provides some very useful data about the smartphone and tablet market in China. But two points in the Umeng presentation, together, make an extremely compelling case for Apple's opportunity in the country.

First, consider that the smartphone market in China grew from just 380 million active devices in the first quarter of 2013 to 700 million by Q4. That's not just any growth, that's explosive growth. Apple's opportunity to grow annual sales incrementally in the country has not come to an end by any means -- especially with Apple's recent arrangement with China Mobile to sell the iPhone 5s and the 5c on the network for the first time.

Second, China's premium phone market is booming. Five hundred dollar-plus-priced smartphones account for 27% of China's active smartphones, second only to the $1-to-$150 price segment.

Data for chart retrieved from Umeng's 2013 report.

This is great news for Apple. The premium segment, of course, is where Apple shines. In fact, the iPhone makes up 80% of the active devices in this segment, according to Umeng.

Taken together, that's a fast-growing smartphone market in which the Apple-dominated premium priced segment is booming. Smells like upside opportunity.

The China Mobile growth story
The exact implications of Apple's China Mobile deal are hard to estimate. But it would certainly be difficult to argue that the long-term opportunity isn't a big one.

As of last count, China Mobile had a whopping 772 million wireless customers -- more than twice the population of the United States. That figure alone speaks of Apple's opportunity with the carrier. But there's more: The value proposition for a premium smartphones on the network is about to get a whole lot better. Apple CFO Peter Oppenheimer explained in Apple's fiscal 2014 first-quarter earnings call that "China Mobile's 4G service is only available in 16 cities today, and they plan to complete the rollout of more than 500 thousand 4G base stations, which will cover more than 340 cities by year-end."

The upside potential, combined with Apple's conservative valuation, exposes an excellent long-term investment opportunity. As the world's largest smartphone market, Apple could see a significant boost to its most profitable product segment in the coming years as Chinese citizens continue to justify spending the extra money to buy an iPhone. But meaningful growth like this isn't priced into the stock.

To top it all off, analyst Benedict Evans estimates that China may now have more iPhones users in the country than in the United States. So any meaningful growth in smartphone sales in China will likely be noticeable on Apple's bottom line.

The next revolution?
If you thought the iPod, the iPhone, and the iPad were amazing, just wait until you see this. One hundred of Apple's top engineers are busy building one in a secret lab. And an ABI Research report predicts 485 million of them could be sold over the next decade. But you can invest in it right now, for just a fraction of the price of Apple stock. Click here to get the full story in this eye-opening new report.

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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 March 16, 2014, at 7:29 PM, iphonerulez wrote:

    Almost everyone seems to doubt Apple can do anything to boost growth. It seems mostly everyone in the tech industry believes Apple will fail at every venture it tries. I honestly don't know where this lack of confidence comes from considering Apple is probably the wealthiest and most successful company on the stock market.

    China Mobile has all those customers and yet it's claimed Apple will only be able to sell iPhones to just a tiny fraction of those customers. It is what it is. I guess if someone believes a company won't succeed that's just a personal opinion and may likely have nothing to do with fact.

  • Report this Comment On March 17, 2014, at 1:56 AM, PaulTee123 wrote:

    Why is it that Google has been moved up on hype rumors that it MAY make money in the future? But Apple is NOT going up in value ,knowing that it is NOT a rumor but a fact that China Mobile had 4G in 16 cities four months ago and currently has installed 4G in over 40 cities. With additional installation of 4G in another 296 cities with in the next 9 MONTHS. This all translates into BILLIONS of dollars in additional Apple phone sales. Fact,not rumor hype and dreams that the Wall Street analyst promote Google stock with. Right now Apple should be trading at $850 a share and Google should be trading at $450 a share.Wall Street is setting up Google stock holders for a HUGE short sale.

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Daniel Sparks

Daniel is a senior technology specialist at The Motley Fool. To get the inside scoop on his coverage of technology companies, follow him on Twitter.

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