When Apple (AAPL) reported its earnings on Wednesday after the close of trading, there was a surprise for investors: Sales in China fell by only 2.4%, capping off a tough year in that nation.
Now, analysts say Apple’s China revenue is poised for a comeback.
“We think there's a very good possibility that Apple returns to growth in China in the December quarter,” Angelo Zino, senior industry analyst at CFRA Research, told Yahoo Finance’s On the Move. He has a Buy rating on the stock.
In January, Apple slashed its guidance for the first quarter, blaming all of the shortfall on China. “We did not foresee the magnitude of the economic deceleration, particularly in Greater China,” CEO Tim Cook wrote in a letter to investors at the time, saying that trade tensions could exacerbate the situation.
The smartphone giant went on to report a 26.7% year-over-year drop in China revenue in the first quarter, followed by a 21.5% fall in the second quarter. Declines have since moderated, but the $11.1 billion in Greater China revenue recorded in the fiscal fourth quarter is a far cry from $18.0 billion in the first quarter of 2018.
“Remember, all the haters out there, all the conspiracy theories, there was a view that you'd be burning iPhones in the street in China. And instead, they're actually buying them,” said Dan Ives, managing director of equity research at Wedbush Securities.
The U.S.-China trade war remains a significant risk for Apple, with tariffs on iPhones set to kick in with the next batch due to go into effect on December 15. Ives thinks those tariffs will either be delayed or Apple could win an exemption. If not, “worst case, it would cut EPS by 4% for Apple if they ultimately absorb that. If they pass it through, and it’s more elongated, then it could actually start to hurt U.S. demand by potentially 6-8%.”
Concerns and uncertainty over tariffs have held back the stock, Ives said. “That continues to be, in our opinion, probably about a $15 overhang on it.”
There’s also the challenge of competing with 5G-enabled phones in China, since Apple doesn’t yet have a 5G offering.
The 12-month price target on Apple’s stock is $247, according to an average from 40 analysts surveyed by Bloomberg. That’s right around where it closed on Thursday, following its earnings report.
Julie Hyman is the co-anchor of On the Move on Yahoo Finance.