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Why China Is Key To Apple Inc.’s Fortunes

Just about every aspect of Apple (NASDAQ: AAPL.US) at the moment lends itself to hyperbole. This is the world’s most valuable company. It has made more profits than any other company in history. It could eventually be the world’s first trillion dollar company. The numbers are just mind-boggling.

The concept behind the world’s leading company is surprisingly simple

And yet, the concept behind Apple’s success is quite simple: it has made computing and technology more accessible, easy to use and fun than it has ever been. You could say that, ever since the launch of the Apple Mac, the company’s brand has always been about immediacy and simplicity. So the iPhone was really the culmination of three decades of creativity and thinking differently.

What has surprised many commentators and critics, including myself, is how the firm just keeps growing profits and share price, beyond anything we had imagined possible, let alone likely.

Apple’s Q1 2015 results showed it had made $18 billion of profit, with revenue of $74.6billion. With increasing sales from products such as the incredibly profitable iPhone, gross margin increased to 39.9% from 37.9%. Earnings per share growth was nearly 50% higher.

Not surprisingly, the company’s share price went higher… yet, if this level of profitability can be maintained, Apple will still only be on a P/E ratio of around 11. Thus, after all this growth, I still rate Apple a buy.

Analyse the numbers and we start to understand why the company is growing so quickly: overseas markets now make up two-thirds of Apple’s revenues. Dig deeper, and we can see that Apple’s resurgence can be explained in one word: China.

China is changing

I often read people say that China’s rise is over. They seem to gloss over the fact that this is one of the world’s largest economies, and that it is still growing faster that just about any other country on this planet.

The reality is that China’s growth is not ending, but it is changing. Many commentators have been predicting that China’s economy will transition from manufacturing to the consumer. Apple’s growth in China shows that this transition is happening right now.

There were many fears that smartphone companies based in China, notably Xaomi and Huawei, would grow at the expense of Apple. After all, their products were similar to Apple’s, and yet they were considerably cheaper. Why would anyone buy an iPhone?

But people have been underestimating the strength of Apple’s brand. Apple is now the leading smartphone maker in China. iPhone sales in the Middle Kingdom have now nearly doubled in a year. And, you know, I think sales are still increasing.

This is why China is key to Apple’s fortunes. And it is key to the fortunes of many other companies, too: think of the growth that Unilever, PrudentialMarks & Spencer and Tesco could enjoy as China’s hundreds of millions of consumers start to spend.

Many people still think of China as our greatest threat. What Apple is showing us is that it can be our greatest opportunity.

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Prabhat Sakya has no position in any shares mentioned. The Motley Fool UK owns shares of Apple, Tesco and Unilever. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.