Launching its iPhone SE in March, Apple (NASDAQ:AAPL) aimed its lowest-cost iPhone at more price-sensitive markets -- China in particular. But Apple is actually losing market share in this important market, according to Counterpoint Research (via Bloomberg). Does that mean the iPhone SE is underperforming management's expectations for the device?
iPhone falls further behind
Of smartphones sold in the China market in May, 10.8% of them were iPhones, according to Counterpoint Research. That figure is down from Apple's 12% share of smartphone shipments in the same period last year, and it drops the iPhone to fifth place among the top brands of smartphones in the country. Highlighting the importance of price in the market, all the smartphone manufacturers in China ranking above Apple are local companies marketing mostly low-cost devices.
This is particularly interesting news following Apple's March introduction of the iPhone SE, which had a starting price of $399, or $250 less than the starting price of Apple's flagship iPhones. But investors should keep in mind that Apple's lower market share this year compared with last year doesn't mean the iPhone SE failed at generating higher demand for iPhones in China.
As it turns out, despite the lower market share for iPhone in China in May, there's good reason to believe the iPhone SE could be a hit in China just as investors hoped it would be: iPhone SE deliveries were supply constrained during most of Q3, with iPhone SE buyers -- even as late as June -- having to wait several weeks before their phones were shipped.
The iPhone SE's supply constrained sales throughout the quarter highlights two important things: First, it suggests that demand for the device probably exceeded management's expectations for the quarter. Second, it paints Counterpoint's market share data in a different light; the market share loss represented a small year-over-year decline, considering Apple's newest iPhone was supply constrained during the quarter.
Whether or not the iPhone SE pans out to be a success in China, Apple will likely need more tactics than a beefed up iPhone inside the body of a three-year-old form factor to reinvigorate the once-booming China catalyst. Apple's overall revenue in Apple's Greater China geographic segment, which includes mainland China, Taiwan, and Hong Kong, is facing headwinds recently, falling 26% in the company's most recent quarter compared with the year-ago quarter.
But it's worth noting that Apple's declining revenue in Greater China isn't entirely representative of how Apple products are really faring in the market. Apple CEO Tim Cook broke down more specific numbers on Mainland China, which highlighted a more optimistic view of Apple's performance in the market, during the company's most recent earnings call (via a Reuters transcript):
If you look at mainland China, which is [the market within Apple's Greater China segment] that I am personally very focused on, we are down 11% in mainland China, on a reported basis. On a constant currency basis, we are only down 7%, and the way that we really look at the health or underlying demand is look at sell-through, and if you look at there, we were down 5%. Keep in mind that is down 5% on a [comparison] a year ago that was up 81%.
Cook's last statement is worth further emphasis. Apple's year-over-year revenue growth in mainland China in the same period last year was 81%. The tough comparison, therefore, understates how well the tech giant is doing in China. Notably, Apple's second-quarter revenue in mainland China was still up significantly from where it was in the same quarter two years ago.
However, Apple's inability to continue increasing sales in China does suggest growth in the market won't come as easy in the future as it has in the past. Even Cook said during the company's second-quarter earnings call that Apple "may not have the wind at our backs that we once did" in China.
Overall, while falling iPhone market share in China, as a well as Apple's recent year-over-year decline in Greater China revenue in Q2, may make Apple's China market situation look worse than it is, it's still a concern worth keeping an eye on. If sales in Apple's second-largest market continue to decline over the longer term, even Apple's price-to-earnings ratio of 11 may begin to look expensive.
Daniel Sparks owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on 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.