Apple (NASDAQ:AAPL) shares have soared higher in the last couple months behind a second-quarter earnings report in which iPhone sales surpassed expectations. The reason for this performance seems to be its China Mobile (NYSE:CHL) partnership boosting Apple's exposure by a significant margin while cutting into Samsung's (NASDAQOTH:SSNLF) market share. Can China take shares of Apple even higher, or has it reached its peak?
The resurgence of the iPhone
Apple shares have soared a whopping 48% in the last year but an even more remarkable 23% since April 21, a couple days before its strong earnings report. In the second quarter, Apple surpassed iPhone sales expectations of 36.5 million units sold by selling 43.7 million units; iPhone revenue of $26.07 billion equates to more than 55% of its total revenue.
The iPhone has an estimated gross margin of more than 55% and is Apple's most profitable device. This means that the iPhone, more than any other Apple device, is crucial to the performance of its stock. Investors should be happy with a recent Morgan Stanley report that forecasts 25% year-over-year iPhone unit growth, 39 million phones total, which is better than the 35 million that are expected.
Why are iPhones suddenly outperforming again?
After growth slowed and margins fell in 2013, investors must ask what's the driving force for this seemingly sudden improvement iPhone sales? The obvious answer is China Mobile.
Late last year, Apple announced a long-anticipated deal with China Mobile, the world's largest telecom company by subscribers. China Mobile has 780 million subscribers and has grown at an annualized rate of 9% over the last three years. Therefore, not only is China Mobile much larger than U.S. telecoms, but it's also growing faster and is believed to be very important for Apple to increase its worldwide market share.
Earlier this year following the China Mobile announcement, Apple shipped 1.4 million units to handle demand for January alone. Analysts expected that China Mobile would result in a 12 million-unit boost this year.
However, in Apple's second quarter, iPhone sales in China increased 28%, year over year, which is far better than the 20% that was expected. Apple CEO Tim Cook said in the conference call that more than 60% of new 4s and 5c consumers switched from Android, which implied a hit to the Chinese leader and competitor Samsung.
Cook's statement coordinates well with Samsung's first-quarter earnings results that were recently published. Samsung's IT and mobile communications segment saw a 4% decline, and Strategy Analytics now estimates that Samsung's leading global market share has declined from 32% to 31% over the last year. This further signals that Apple's partnership with China Mobile is boding well for the company, and that sales above expectations could continue.
In 2013, Samsung sold 300 million smartphones, which was just about double that of Apple. Since Samsung has a large low-end device presence, its market share will likely stay significantly higher than Apple's share. Yet, second-quarter earnings, the third-quarter outlook, and recent market-share data all suggest that Apple is performing better than expected and that China continues to be a main cause for the performance. If this trend continues, then Apple's revenue, profits, and stock could all go a lot higher.
Brian Nichols owns shares of Apple. The Motley Fool recommends Apple and China Mobile. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.