The dueling narratives of Apple and Nike's fourth quarters — driven largely by their success (or not) in China — highlight how the world's second-largest economy can impact some of the world's most influential companies.
The bottom line: Apple is a big company on an absolute level, but it's a tiny part of the Chinese economy, where consumers are just as fickle as they are anywhere else. What we learned this week is that Apple looms unrealistically large in investors' imaginations. China can help deliver spectacular growth, but that growth will always be bumpy, especially for foreigners. Investors shouldn't be surprised when it is.
Data point 1: At the end of December, a huge American consumer brand announced a blockbuster quarter, driven largely by sales in China. Before accounting for currency fluctuations, Nike's quarterly sales soared 31% in China, with digital sales in the country growing even more.
- "We have not seen any impact on our business from some of the U.S.-China dynamics that we’re all reading about," said CFO Andrew Campion on the earnings call. "We’re mindful of those, but in the context of being mindful of those, we continue to see very strong signs of momentum in China."
- When Nike stock started trading after the results were announced, its shares were up more than 8.5% from where they had closed the previous day.
Data point 2: At the beginning of January, a huge American consumer brand announced it was going to have a disappointing quarter, driven largely by sales in China. For the first time this century, Apple will see a year-on-year revenue decline in the all-important final quarter of the calendar year.
- "While we anticipated some challenges in key emerging markets, we did not foresee the magnitude of the economic deceleration, particularly in Greater China," said Apple CEO Tim Cook. "In fact, most of our revenue shortfall to our guidance, and over 100% of our year-over-year worldwide revenue decline, occurred in Greater China."
- When Apple stock started trading after the results were announced, its shares were down some 8.8% from where they had closed the previous day.
The big picture: This is how capitalism works. Brands seek growth, especially in China, which will drive most of the future increase in global consumer demand. When those companies succeed, their shares rise; when they fail, their shares fall. So far, so unremarkable.
The important difference between Nike and Apple is that while the former was considered to be a Nike story, the latter was considered to be a China story. Nike's earnings didn't boost the stocks of other companies with China exposure, but Apple's earnings sent hundreds of other stocks tumbling. There was even a significant effect on 10-year Treasury bond yields. That's bonkers.
- The Chinese economy is not growing as fast as it was, but we knew that already. And there are lots of Apple-specific reasons why the iPhone might be seeing lower sales in China. Apple's news, on its own, is not an indication that the Chinese economy is doing worse than we thought; it's just one small data point among many.