Apple Earnings Preview: What To Know About Greater China

Less than a week away from Apple’s earnings day, the Apple Maven addresses Greater China. Could the region outperform once again, after a solid start to fiscal 2021?
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Apple’s  (AAPL) - Get Report earnings day lurks around the corner. Ahead of it, the Apple Maven wraps up its preview series talking about Greater China – an important piece of the company’s business that has been going through ups and downs in the past few years. Will the region shine again in fiscal Q3?

As a reminder, we have addressed the following earnings-related topics so far:

  1. Wall Street’s expectations for revenues and earnings, refreshed as of July 21;
  2. The expected performance of the iPhone in the quarter;
  3. How the iPad could be the star of the show this time;
  4. Concerns around deceleration in Mac revenue growth;
  5. What history says about trading AAPL around earnings day.
Figure 1: Apple store in Shanghai, China.

Figure 1: Apple store in Shanghai, China.

(Read more from the Apple Maven: This Analyst Sees Apple Stock Rising Another 15%)

Some background first

Once upon a time, Greater China was one of Apple’s key growth opporunities that seemed to be materializing quickly. In 2015, one-fourth of the Cupertino company’s revenues came from the region, fueled by the popularity of the brand and a thriving upper-middle class.

But since then, sales have been unwinding. Political tension between China and the US probably did not help, as Apple found itself stuck in the middle of a power struggle that fueled the trade war between the two countries in 2018.

The better news for AAPL investors is that its Greater China business showed signs of strength in the past couple of quarters. Probably aided by the launch of the 5G-capable iPhone 12, segment revenues skyrocketed in the first two quarters of fiscal 2021 – see below.

In fiscal second period, Greater China sales represented 20% of total company revenues for the first time since the comparable quarter in 2018.

Figure 2: Greater China YoY growth since fiscal 2019.

Figure 2: Greater China YoY growth since fiscal 2019.

(Read more from the Apple Maven: AAPL After Hours: Why Apple Stock Rebounded Viciously)

Good news, bad news

In fiscal Q3, Apple has the benefit of facing modest comps in Greater China. The comparable quarter in 2020 saw revenues increase less than 2% (the worst of Apple’s geographic segments by far), despite the region having started to recover from the pandemic earlier than Western countries.

Part of the problem was increased competition from the likes of Huawei, which doubled down on its China strategy amid softness elsewhere around the globe. This time, during a year of recovery from COVID-19, the competitive pressures could be better distributed around the globe.

The bad news is that Apple’s momentum in China may have fazed quite a bit. The country’s economy has been “flashing hints of weakness” in the past weeks, dragged by declining consumer sentiment in the face of new COVID-19 cases.

Paulo Santos at Seeking Alpha notes that the challenges seem to have manifested in iPhone sales in China. According to him, shipments probably disappointed in April and June, leading to a total quarter drop in unit sales of between 1% and 5%.

Should softness in iPhone sales in China be confirmed, and should similar weakness be observed in other product categories, Wall Street’s revenue growth estimate of over 20% in fiscal third quarter might be at risk of being a bit too aggressive.

Twitter speaks

Apple’s Greater China sales in the first two quarters of fiscal 2021 were outstanding! Can the Cupertino company deliver strong numbers in the region in fiscal Q3?

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(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting The Apple Maven)