This is a Guest Post by AK of Fallible
AK has been an analyst at long/short equity investment firms, global macro funds, and corporate economics departments. He co-founded Macro Ops and is the host of Fallible.
The big news last week was Apple (AAPL) cutting first quarter revenue guidance on weaker than expected iphone sales.
Apple gapped down on the news, bringing its recent selloff to close to -40% from all-time highs.
Tim Cook blamed the lowered guidance on slowing the slowing Chinese economy. Here’s Tim Cook explaining the miss:
While we anticipated some challenges in key emerging markets, we did not foresee the magnitude of the economic deceleration, particularly in Greater China. In fact, most of our revenue shortfall to our guidance, and over 100 percent of our year-over-year worldwide revenue decline, occurred in Greater China across iPhone, Mac and iPad…
Lower than anticipated iPhone revenue, primarily in Greater China, accounts for all of our revenue shortfall to our guidance and for much more than our entire year-over-year revenue decline. In fact, categories outside of iPhone (Services, Mac, iPad, Wearables/Home/Accessories) combined to grow almost 19 percent year-over-year.
In much of the world Apple enjoys the high retention rate of 80% amongst iPhone users; meaning iPhone users tend to buy new iPhones rather than, say, an Android. But, in China, due to the ubiquitousness of WeChat, Apple’s iOS holds a less prominent place in the Chinese user’s mindspace — the iPhone retention rate is only 50% there.
And so, the major differentiator then for the Chinese consumer, becomes the look of the phone itself (ie, it’s role as a status symbol). Since the most recent iPhone product cycles have not materially changed its appearance there’s been less reason for Chinese people to upgrade. Hence, the recent disappointing sales…
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