WRAPUP 4-Apple's growth hinges on China, new devices

Wed Apr 25, 2012 9:58pm EDT

* Skeptics muted but not silenced
    * Apple tags on $50 billion in market cap in a day
    * China to keep Apple machine humming


    By Poornima Gupta	
    SAN FRANCISCO, April 25 (Reuters) - Sometimes even
eye-popping results are not enough. 	
    Apple Inc's shares rallied on Wednesday on the back
of another spectacular quarter that included soaring iPhone
sales in China, but the naysayers are still asking if the most
valuable American company might need yet another revolutionary
product in the next year to sustain its sizzling growth.	
    The skeptics certainly lost some credibility when the
company's shares surged 9 percent on Wednesday, adding about $50
billion to Apple's market value, but some have not been
silenced. 	
    Their case is based on the law of large numbers - it is
going to be more difficult for Apple to grow as fast the bigger
it gets - and on the unforgiving nature of the technology
business that can turn heroes into has-beens overnight.	
    The bulls point to emerging markets - in particular China,
whose mobile market is the world's largest and far from
saturation - and upcoming products like a 4G-enabled iPhone 5
and the oft-rumored Apple TV, as sustaining astonishing growth
such as the near-doubling of net income in its second quarter.
 	
    But the bears, with a longer-term view, fear that Google
 Android devices will eventually put pressure on Apple's
margins in China as they have elsewhere, and wonder if Apple
will be successful in tacking on another blockbuster consumer
device to its portfolio.	
    Sales in China, particularly, are key for Apple to maintain
its pace of revenue growth in the longer term, said Carolina
Milanesi, consumer technologies analyst at Gartner. 	
    "That's the big question," she said, referring to market
share in China. "From an affordability perspective, I think the
opportunity is there to allow it to maintain that growth or at
least not to see an immediate drop in sales."	
    In products, "TV seems to be one that everybody is looking
at," she added. 	
    Shorter term, over the next year, some investors and Wall
Street analysts note that Apple's sales of the all-important
iPhone could flatten out over the next few quarters as consumers
await the next version of the popular smartphone.	
    Apple's own revenue forecast was more conservative than
usual for the fiscal third quarter, a period during which an
upgrade of the iPhone or iPad are unlikely.	
    "We note that iPhone product cycles appear to be getting
increasingly pronounced, with fiscal first quarter and second
quarter benefiting from very strong iPhone 4S product cycles in
the US and China, respectively," said Toni Sacconaghi, analyst
with Bernstein Research, adding he expected the next couple of
quarters to see "more sluggish unit sales."	
    But for now, sales of 35.1 million iPhones in the last
quarter saw Wall Street analysts extend their love affair with
Apple shares with a slew of hiked stock-price targets as
concerns eased that the company was losing market share in the
cut-throat smartphone market.	
    At least 14 brokerages revised their targets on the stock by
$40 on average, a day after the company posted a quarterly
profit that blew past Wall Street estimates.	
    Apple shares closed up almost 9 percent at $610 after
touching an intraday high of $618 for an advance of 10.3
percent, the biggest single-day percentage gain by Apple shares
in more than three years. The shares prior to the earnings had
seen an unusual two-week decline.	
    Apple, as 4.2 percent of the S&P 500, gave U.S. stocks a big
shot in the arm on Wednesday, driving the Nasdaq to its
biggest single-day gain of the year.	
    "Last night, Apple's performance once again demonstrated how
quickly Apple fever is spreading around the world and this trend
continues to drive meaningful upside in the company's financial
results," said Topeka Capital Markets' Brian White, who raised
his stock-price forecast to $1,111 from $1,001.	
    	
    	
    	
    CHINA ROARS	
    Sales in greater China accounted for about 20 percent of
Apple's $39.2 billion quarterly revenue, a three-fold increase
from a year earlier. The numbers showcased Apple's sky-rocketing
growth in China, which made up just 4.5 percent of its revenue
in fiscal 2010.	
    Sales there are on track to nearly double this year, with a
combined revenue in the first two quarters of $12.4 billion.
That is almost level with revenue from China of $13.3 billion in
all of fiscal 2011.	
    Giri Cherukuri, head trader and portfolio manager for
OakBrook Investments in Illinois, said Apple had room to grow in
China but would also look to other developing countries with
large populations - such as India, Brazil and Russia - to keep
up the pace of sales.	
    "They are methodically just growing country by country, both
just building Apple stores in these countries and building
distribution," Cherukuri said. "That's partly why you are
getting strong numbers now. When a new iPhone or iPad comes out,
they can rapidly deploy those all over the world."	
    In China, Apple has yet to seal a contract for the iPhone
with China Mobile, the world's largest mobile operator
in terms of subscribers, with 660 million users. A deal with the
carrier for the next iPhone has the potential to considerably
boost iPhone sales in the country.	
    "The main challenge for Apple is to penetrate China Mobile's
600 million subscribers. The numbers look pretty good now, but
would be much better with China Mobile," said Nomura analyst
Huang Leping. [ID:nL3E8FP59X} 	
    But doing business in China has its challenges. Apple has
faced a raft of negative publicity in China in recent years,
including worker suicides at its supplier Foxconn Technology
, accusations of environmental pollution, and copyright
and trademark infringement.  	
    Now, Apple also needs to find a way to stop users who hack
into the iPhone's software to download free apps or solicit
services from e-commerce sites to download apps at a fraction of
their cost in the App Store or iTunes Store.	
    Many deep-pocketed companies have attempted to crack the
Chinese market, tempted by a large and growing middle class. But
regulations that favor and protect local businesses, plus a lack
of understanding of the market, have stumped many.	
    Wal-Mart has struggled against local rivals. But
other companies -- such as carmaker General Motors and
KFC parent Yum Brands -- have been more successful in
penetrating the market. In Yum's case, China accounts
for more than 40 percent of the company's profit. 	
    	
    MARGINS DELIGHT	
    Apple's strong results on Tuesday came after a 13 percent
decline in the company's shares over the past couple of weeks
that erased about $78 billion from its market value.	
    Following the earnings announcement, analysts discounted
worries about rising competition and pricing pressures, noting
the company's stronger margins of 47.4 percent in particular.	
    "Apple's margin upside has the most important long-term
implications for the story," said Goldman analyst Bill Shope,
who raised his target price on the stock by $100 to $850.	
    Chief Executive Tim Cook took Apple's helm shortly before
co-founder Steve Jobs died in October, and was immediately
subjected to a discussion of whether he embodied the same vision
and foresight needed to keep the company at the forefront of
innovation.	
    A smart TV - dubbed iTV by Apple watchers - is seen as the
next product to drive the next phase of growth. While Apple has
neither confirmed nor denied it was working on a TV, Jobs told
his biographer, Walter Isaacson, about reinventing the
television set and how he had "cracked" it.	
    Many on Wall Street expect Apple's version - and perhaps
Jobs's vision - to be unveiled later this year or next year.	
    So strong is the speculation that investors are likely to be
disappointed if Apple does not launch a device for the living
room, Cherukuri of OakBrook Investments said, adding however
that a television-like product is "pretty certain" at this
point.	
    "It can't just be a piece of hardware," Gartner's Milanesi
said of the possible TV, adding that it would have to "drive a
similar replacement cycle as you see in the iPad or iPhone."
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