So is there any evidence that the conditions in China are having an impact on consumer spending? On August 24, Tim Cook, in a Tweet to CNBC's Jim Cramer, said that "we have continued to experience strong growth for our business in China through July and August." I hope he does not regret saying that. Two weeks later on Sept. 8, Alibaba, the leading e-commerce platform in China, lowered their expectations for gross market value growth by 5 percent relative to their guidance less than a month ago. A lot can change in two weeks except the desire of my children to want to play video games instead of cleaning their rooms. Baba saw macro factors negatively affecting consumer psychology in China, which drove lower average order values. We would note that Apple already missed Street expectations of 51 million to 52 million iPhone shipments globally in the June quarter when they shipped 47.5 million. (We were positioned to benefit on their April earnings release from a stock decline and we did.) We believe the stress on the global consumer, not just China, is even greater in the current quarter.
For us, investing is all about risk versus reward. Maybe shorter upgrade cycle driven by their new leasing program counteracts the risk from China and the stock continues to outperform the S&P. Having said that, Apple's revenues from China are 27% versus the S&P at about 2%. In our view, the downside risk is currently not worth the reward. When Apple finally does launch their own over-the-top TV service sometime next year, I will be there with a long position in the stock, sitting on my couch with my ginger beer and ready to view more mindless content but until then I am worried about the guy in Beijing viewing his brokerage statement.
Commentary by Dan Niles, founding partner of AlphaOne Capital Partners and senior portfolio manager of the AlphaOne Satori Fund. Previously, he was a managing director at Neuberger Berman, a subsidiary of Lehman Brothers.
Disclosure: AlphaOne and Dan Niles currently have a position(s) on Apple stock which benefits from a price decline.
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