Apple (AAPL +1.18%) has been growing revenue around the world thanks to top products like the iPhone and Mac and sales of its services. In fact, in the most recent quarter, Apple reached record revenue in more than two dozen countries and regions. And that helped the company increase earnings per share by 16% in the reporting period.
But one particular country is representing a challenge for Apple these days, and unfortunately, that country is key to growth as it generally makes up about 20% of Apple's total sales. I'm talking about China. In the quarter, Apple's revenue there sank 13%, and its operating income in China dropped 17%. Should you worry about these declines in such a significant market? Let's find out.
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Why Apple's revenue fell in China
It's important to consider why Apple's revenue has slipped in China, and it looks like a couple of reasons may be behind the movement. A property crisis and weakened economic growth in the country have weighed on consumer confidence -- and this could impact a customer's decision to buy a high-end smartphone, tablet, or other device.
So, today's difficult economic environment may nudge the Chinese consumer toward lower-priced options. And speaking of options, this brings us to the second and maybe even the biggest reason why Apple has seen sales cool in China.
Apple is facing renewed local competition from smartphone giant Huawei. The Chinese company fell behind a few years ago as U.S. sanctions prevented it from accessing chips to power 5G phones. But last year Huawei made a surprise comeback, launching a 5G phone relying on a China-made chip. And Huawei returned to the top 5 in the China smartphone market in the fourth quarter for the first time in two years, according to IDC.
Huawei's launch of the Mate 60 Pro phone could be just the beginning in this new era of growth for the Chinese company -- and that means Apple may face much stronger competition in this key country moving forward.
Now, let's get back to our question. Should you worry about Apple's slowdown in China? Not necessarily and here's why. First, economic factors driving consumers to cheaper products generally represent a temporary trend -- and Apple has managed today's situation pretty well, increasing its smartphone market share position.
NASDAQ: AAPL
Key Data Points
The No. 1 smartphone in China
Apple actually claimed the No. 1 smartphone spot in China last year for the first time, and as of the fourth quarter held 20% of the market compared to Huawei's 13% share, IDC data show. And this is within the context of a difficult economic situation with the lowest overall volume of smartphone shipments in a decade.
Apple also said it saw "solid growth" in mainland China customers upgrading their phones during the most recent quarter. This is particularly positive because it indicates current Apple users are sticking with the brand rather than turning to cheaper rivals. It supports the idea that, over time, Apple's brand strength serves as a moat, or competitive advantage, that should keep it ahead. So, even if Huawei gains some market share and Apple experiences headwinds in the near term, the iPhone maker still could continue growing over time.
A comment from Chief Executive Officer Tim Cook in the recent earnings call supports this idea. Cook said he's "very optimistic about China over the long term."
So, what does this mean for you as investor? Even if China doesn't supercharge Apple's revenue in the coming months, the technology and consumer goods giant still represents a great investment. The company recently reached its highest level ever of devices installed globally, at 2.2 billion -- and these offer even more revenue growth opportunities as customers subscribe to services.
As for China, Apple is a leader there, has made progress in certain areas as mentioned above, and is aware of today's challenges -- so there's reason to remain confident in the company's ability to weather the storm and handle local competition.
Apple has a solid track record of earnings performance, and analysts expect double-digit annual growth from the company over the coming five years, meaning even considering the China situation, Apple remains a top growth stock to own now.
