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We're talking about Target and looking at that Stott j TGT is to tick her to load into your Bloomberg terminal. Up eleven point seven percent today, So a nice move here.
Jen Bartash just joins us.
She covers all the retail industries for Bloomberg Intelligence. She's coming to us via zoom from our office down in Princeton. Jen, the street likes Target. What did Targets say to get the stock up so much today?
Well, first, I had a good quarter, but they're also giving an investor update today and so they've really revealed their plan for growth over the next several years and that has been resonating well with investors. And it's all about recapturing top playing growth, traffic, market share, and they're a little bit more upbeat on where they see the consumer right now.
And when we look at inventory being an issue that was such a big problem for Target back in the pandemic or during the pandemic. It does seem like that's being worked through. Kind of what's your expectation with how Target is handling their inventory ahead of schedule or not ahead schedule.
Yeah, they've done a major pivot with inventory, and obviously they had huge issues a couple of years ago with markdowns, and they've really been able to write size inventory that's shown up where inventory right now is actually lower than it was last year, and yet in stocks are better
than they've been. And so that focus on those retail fundamentals of making sure that you have things in the stores and in stock has really been playing through and driving some of the results that they've seen and a lot of that stems from inventory. And so right now they're very well positioned going into twenty twenty four and that should hopefully be a tailwind for them for for the rest of this fiscal year.
An affinity card, can you explain what's going on there?
Yeah, So they're they're they're kind of reimagining their loyalty program. So, so the baseline was Target Circle, which was free to join. They have one hundred million users that have have joined it, and that's where you can go in and save different offers and you get an extra ten percent off your your your paper towels, you know, that week and that brand. What they're doing is they're taking that, They're making it
so you don't have to search and save. You get the things automatically when you when you scan, when you when you check out. And if you're a Red Card holder, for forty nine dollars, you know, you can get unlimited free delivery, same day free delivery to your house, and they're calling this Target three sixty. You can also subscribe to just that if you're not a Red Card holder. Also an introductory price of forty nine, but it will go up over time, although they didn't say to what.
So it's a move where they're trying to get, you know, a little bit deeper into consumers' lives, you know, doing more home delivery. There's some additional perks in there where you can access all of what Ship does, which is their same day delivery service, and that includes being able to shop at other retailers. So that's kind of the differentiator here with regards to the membership program that once you have it, you could also have your your target
run include something from Crossco for example. But it's early days and we'll see how much appetite consumers have for yet another membership that they have to pay for.
Well, what are your expectations on that?
Because I feel like everyone pays for Amazon Prime and Walmart Plus, I know has had a strong roll out and has partnerships with different credit cards. Like, what can Target really do to get people to pay another annual fee when it seems like, at least looking at the streaming platforms, they're struggling to maintain users.
It's a great question, and I think that's one of the big questions that we're going to need to see they really talk about what differentiates this program because you know, forty nine dollars is cheap, but it is an introductory, introductory price, and there are a lot of people out there that do delivery, and so it's you know, when I look at it, I think in order for it to be a successful program, they're going to have to really do something extraordinary that appeals to people to prompt
them to pay extra And historically, you know, Target's formula for success has never been mimicking others. It's been about kind of forging their own path. And I think This is an example where it's going to be very very important for them to do that, but it's not clear yet how that's going to fold, how that's going to be you know, realized.
And we had Brent Shooty of Northwestern Mutual earlier on the show talking about a potential recession.
How does Target play into a recession.
Are they one of the companies that can weather the storm because of their loyalty or how does that play out just given their typical demographics.
Well, if there is a recession, you know, with their typical demographics, Target's customer base is extremely loyal but Target's you know, product mix does skew two more discretionary items, and so whenever there's a pullback and spending, it tends to have an outsized impact on Target versus other big box retailers. Now, Target has been really focused in the last eighteen months, especially on value. They've launched some new private label brands that are you know, meant to be
the cheapest option in every category in the store. So they're trying to respond to that. So, you know, they have the breadth of category and they have the loyalty of consumers that they can weather a recession. But it will make it harder for them to get back to that top line growth and that expansion of margin that they're talking about today if we find ourselves in the midst of a recession.
Hey, Jen, how do I differentiate how much shopper between Target and Walmart?
It's all about perception, right when you think about Walmart is usually about lowest price. Walmart is a is an d l P. Every every day you get the lowest possible price. They've got a very big assortment, and you know it's uh and they have, you know, some some perks with regards to their Walmart Plus program. When people think of Target, they think a little bit more of discovery, they think a little bit more about inspiration versus function
you know, than than functionality. And and that's where you really see the divergence between those two retailers.
I will say, when I go to Target, I always end up buying more than I want, where if I go to Walmart, I'm kind of.
In and out.
Jen, question off of that comparison, I always talk up the fact that Walmart owned Sam's Club. When you look at the company, makeup, how much does that differentiate Walmart versus some of the other peers just given as you mentioned, Target potentially partnering with Costco if you're using their membership card.
Yeah, so you know, obviously there's a there's a great benefit to Walmart of having both It's It's US Walmart stores as well as the Sam's Club stores because they really can capture they can capture spending by by different
groups of people and for different shopping reasons. Now, when I talked about shipped, it's not so much that you get the benefits of a Costco membership, for example, with Target, it's just more that you can have your delivery person pick up purchases from other retailers, which is something that isn't embedded in a Walmart program for example. But you know that that Target membership fee is going to be
competing with your Costco membership fee. It'll be you know, competing with a bja's membership fee along with all of your streaming services and everything else out there. So you know, Walmart definitely benefits from the scale of having both the Core stores and Sam's Club. But you know, it is a little bit of a different business model than what we're talking about with Target.
Just for what's worth I put up the comp function c o MP for the last five years S and P five hundreds compound and annual growth rate about fourteen point six percent, So we all did pretty well there. Walmart's right spot online there fourteen point eight percent. Target a little bit better, just under twenty percent, So Target out performing Walmart over.
The last five years a little bit.
Jen Bartashas, thanks so much for joining us. Jenny is a senior retail annaly say. She has a very long title, but I just call her senior retail analys. I'm going with that. Bloomberg Intelligence joining us on zoom from the BI headquarters in Princeton, New Jersey's talking about Tarja had some some good numbers, got their inventory kind of in line here, and the stocks up about her eleven percent today, so a good move there.
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It's my data come in today.
Services side a little bit weaker than expect although the new orders will hire. Let's break it down with Anthony Nievi's Chair of Ism Services Committee, joining us via zoom from Los Angeles. So, Anthony, I'm looking at the is some services data come in a little bit lower than last period, a little bit below expectations.
What are your takeaways?
Well, when you look at the composite index at fifty two point six, it's actually up slightly from the twelve month running total of fifty two point four. And what's actually dragging down the composite index is the contraction we're experiencing from the employment index as well as supplier deliveries, and that's attributed to deliveries. We have improved capacity, some logistical challenges, but overall less backlog than what we've seen
in the past. Just improvements all across the supply chain. And the employment continues to be a mixed bag, with companies managing that variable expense as well as having difficulty in backfilling some of the open positions that have been within their specific companies. Respective companies, and.
Anthony, I'm looking at it.
Some demand measures those strengthening, So gauge of new orders placed with service providers increasing to fifty six point one that's the highest since August. When you look at that data point in some of the trends underlying it, What can we make from demanding those orders being placed with service providers.
Yes, when you look at new orders and it tells us what's in the pipeline. The one thing we have to keep in mind is that the cycle time for orders on services is it's less than what you would see on the manufacturing time just from the nature of the different businesses that make up the industries and the industries that comprise the sector. But overall it does tell us going forward. It is a leading indicator that we'll
see this continued trend. We've seen this composite index stay in the middle to low fifties over the last twelve months, and it's just that sustainable levels and we've not seen any head fakes or anything that might distort the picture going far forward.
So, Anthony, we know services are critical to this US economy, probably approximately seventy percent of the US economy. Here are there regional differences that you see in your data.
We don't measure it regionally, but we can tell by the companies that comprise our survey committee. So we can see the different areas, and we know that certain things will impact demand as well as the throughput, and it's based on the geographic location and the effects of weather
and different variables such as that. But overall, the way that we comprise this survey, it's based on contribution to GDP percentage wise, and it's small, medium, and large companies across all of the eighteen industries, so we really mirror what we see on the trailing GDP figures, so it maps closely over a time How about.
That services employment data. The employment data came in at forty eight on the index. The consensus was fifty one point four. Last period was fifty point five, so noticeably lower.
What do you make of that?
Yeah, I look at it, and I see that we had decent number in November. It pulled back in December. To me, that was more about cycle time and the holiday season and things kind of slowed down traditionally there historically, and we had a nice little pop up in January. Now it looks like it's a combination of wariness. And
I'm getting this from responding comments. They're saying they're a bit wary as to what's going on, and so they're managing that expense, and others are saying they're just having difficulty finding applicable workers to their open positions.
And the individual data points are important, but the underlying trends are really what kind of drive expectations? What are you keeping an eye on, and what trends stand out to you when you put this February data point batch of February data points into context.
The key things are and looking at the four indexes that make up the composite, and we know that employment also drives this sector. But I also look at some of the specific industries the top four as well as the wholesale trade because this sector is so reliant on the intermodal as well as the distribution channel, so it
tells me what kind of activity. So looking at the leading indicator of new orders and everything else, And to your point earlier when you set out the demand, the demand is still there and we're still seeing this sustainable growth moving forward here for this sector.
All right, Anthony, thanks so much for joining us. Appreciate getting your thoughts here. Anthony Niavis he's the chair for im Services Business Committee, joining us from Los Angeles via zoom. And again, the ISM Services index came in at fifty two point six and put that into context. The consensus was fifty three, so a little bit below consensus, and it was about fifty three point four last period, so
below last period. Although it was Anthony, it's pointed out it's higher than the twelve month trailing average of fifty two point four, so staring some consistency of nothing else. And again the key point, it's above fifty, showing that the services economy is growing. So so breaking down the news there.
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I'm gonna talk about global shipping it's impact on the economy, and man, we've got a good guest for that. Chris Williamson JOINANTCE is chief business Economists for S and P Global Market Intelligence, based in London, but we got them here in the States.
Chris, what brings you to the USA? You were at a conference, right?
We did?
Yeah down in La.
The CPM we say out in La, out in La. That's how you do it.
Sure foreigner in this land. Yeah yeah, out in La the GM conference, the big annual shipping conference that the General Commerce which smones is holding. So fantastic opportunity to speak to the shippers and the shipping companies about what's happening right now in the world.
In the Red Sea.
Boy, let's start right there, because I mean, Bailey and I have been talking about, you know, just over the less several months, that what's happening in the Red Sea and it's impact on shipping on the Bloomberg Terminal. We have a function called map go map and you can link it to shoe where all the container ships are and oil tankers are around the world.
I could take where they're not. They're not in the Red Sea, they're not in the Zeez Canal. Where are we with that whole situation? How's that impacting the economy?
Well, it seems that a lot of the IMPACT's already gone. It's been and gone, So late December January was the peak impact really, because what you've got to remember here is there's no capacity been taken out of global shipping.
It just had a delay.
So it's one One.
Shipping company told me that their clients when all this hit, they missed one week's delivery. Everything was re routed. But now they're getting deliveries every week again. So yeah, it's costing a little bit more, so it slight inflationary impact, but it's not huge. And the impact is it's kind of been and gone, it seems. And we saw this with our the Global Manufacturing Peermise Supplies Delivery Times Index. Now that was an index that joined the pandemic, was
one of the real worrying signals. Its spiked higher unprecedented levels, pushing prices higher. So that rose again in January for the first time in the year, signaling longer shipping times, but then it fell back in January again, so another sign that this is kind of it's all over, really yep.
And working through that, were there regions that were more impacted than others, like in terms of US, Europe.
UK indeed indeed, yeah, yeah, So when I say it's all over, it's all over on a global basis, but there are some impacts still. Obviously in Europe. The UK's
is by far the biggest hit. It's an island, right, so there's lots of research from the pandemic showing islands have always been bigger hit by this sort of So the UK has got quite severe delays and that's feeding through to quite a bigger price spike in goods in the UK and also the Mediterranean countries because they're they're fed less by land than the likes of Germany for example.
Are there goods or industries that are more impacted in terms of looking at the UK, like, are their products that have faced longer delays or have had kind of greater hurdles or greater inflationary impact.
Yeah, there is, but again it's it fits the sort of narrative of what you normally ship. So these are you know, the big expensive goods to move, so they're not moved by air, they're moved by ship. It's the lumber, it's the construction materials. There's lots of big white goods and so forth. So those are the sectors that have
been hard hit. But again I would urge some caution into reading too much into this because while the UK has been disproportionately hit and there was quite a significant lengthening of delivery times in the UK and in the likes of Italy and Greece, these are you know, it's likely to be short lived, it should fade.
So what you're with the shut industry, what are they seeing in terms of the global economy, because there's a rule, as you well know, there's a lot of folks that are just unsure where this economy is going on a global scale.
What are they seeing just from their perspective.
Yeah, Well, it's interesting because at this conference is where a lot of people do their deals, fixing the prices of shipping for the next year. So everyone seems to fix their rates in the next month or so. And the last two years it's very much been a sort of buyer's market that we've had low shipping volumes because of the manufacturing malaise we've had. We've had two years now of virtually no growth in global manufacturing, we had two years of falling exports. So this has led to
some really quite soft shipping rates. But this year seems to be the first time where things are coming more into balance, So you're seeing some hardening of those shipping rates, and the consumer goods companies in particular, I think bracing themselves for some tough negotiations this year.
And was that just a dumb question in person before? Like in terms of of getting back out of COVID. Were you in l A last year, No.
I wasn't.
No, No, that's this is the first time that I've been there, so no, but it's yeah, fascinating conference.
What are they saying about China because that's also in the news again, just people really concerned about that economy and sort of the shippers. I mean, obviously, you know, in Gene Succora from the Port of Los Angeles, we have as a guest all the time, and he's a good read for us on ship you know, shipping and volume and experts out of China to the rest of the world.
What do some of the shippers say about.
China, Well, in the most broadest context, really you when you talk about China, very soon the words come to diversification and resilience in the same conversation, right, So the focus is very much on diversify your supply chains to ensure that you maintain a constant supply and the ability to switch suppliers quickly if one country or one shipping route becomes a problem, then you've got other options where
you've already got contracts and relationships in place. And obviously China is really at the forefront of that diversification away from China towards especially the other Asian economies, and closer to home towards Mexico.
So I was going to ask just in terms of diversification away, it does seem like a lot of that would be in South and Central America, which, in turn, if an event like the Red Sea, everything that's going on with the Red Sea, you would be able to kind.
Of bypass that.
Yeah.
Absolutely, So you know, being caught once is one thing, but being caught twice is another.
You know.
So we had the pandemic and now with this Red Sea, so you know, you really don't want to be living your life like this going forward. And there's the whole area of protectionism and climate change which add additional risks to shipping and supply chain. So diversification is and resilience is everything.
All Right, We had some S ANDB global PMI data today. This came in better than expected, better than last month. What should we take away from that?
Yeah, surprising resilience in the US economy, right, and the em data that come out as well, I've supported that. It looks like we're doing well. If you drill down into the data there's encouraging signs of this being broader based as well. Consumer spending seems to be reviving again
on goods and services. So to maybe backtrack a little bit, if you go back a few months, this strength that we've had in the global economy and the US economy driven by financial services, right, this was the big acceleration we saw, and this is all predicated on lower interest rates in twenty twenty four. Remember back in December, they were pricing in one hundred and sixty paces points and cuts, and that spurred this big strength demand for new mortgage
years and so forth. Our fastest growing sector that we had with our global pmis in January is realist state, followed by insurance, then banking, these sectors propelling it. And as those financial conditions loosened, you know, the stocking disease that we had rising, all that wealth effect coming through is feeding through to consumers now. And interestingly, in a difference to early twenty twenty three, when consumer spending was largely focused on services, as economies reopened, we all went
and enjoyed more holidays and recreation. This time it's more balanced goods and services showing stronger growth. So this is an encouraging picture. Manufacturers are doing less inventory reduction now, in fact even switching around to restocking, so that's supporting this whole picture as well. And consumers see some real wage growth coming through as well as the prospect's lower interest rates. But it's the latter that is the concern
because it's all predicated on those lower rates. And if we don't get them, what do.
You think do you think the Fed's is going to do this year?
Well, our base time because it's similar to everyone else, which is the first cut in May now with with maybe three four four cuts for the rest of the year, but as these days to come in, that's starting to look increasingly challenging to see that, right.
We're function my favorite, Paul, right now, first cut with a real certainty is June, maybe July.
So we saw that really.
Pushed back from the beginning of the year where people were pound of the table for March as much to six this year.
All right, Chris, thanks so much for joining us, Really appreciate it. Chris Williamson, chief business economist at SNP Global Market Intelligence, joining us here in our Bloomberg Interactive Broker Studio on his way back from La to New York and then off to London.
Right, is that how we're going?
Indeed?
Thanks very good? Now are you going in the right direction?
There?
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Look at this market here.
You know what we were looking for towards the November December a little bit improvement and breadth and bailey. We saw some of the small cap names, you know, start to perform better. The SMP equal weighted outperforming closing the gap with the SPX a little bit not so much this year, kind of going back to the big guys, kind of leading the.
Parade, driving the market, especially in a day like today. SMP down on zero point nine percent. Laggard's Microsoft, Apple and Video, Amazon, TESPLA, your main stocks that have really driven most of those games so far.
You're to date Mac seven, Fab five, however.
You want to call it exactly. Brett Shrudey joins a.
He's a chief investment Officer Northwestern Mutual Wealth Management Company, joining us from that zoom thing from Milwaukee again pound for pound, Milwaukee, I think is some of the best portfolio managers anywhere.
Brent, What do you make of this market here?
Are you one of those folks that are concerned that maybe we don't have better breadth, better representation and the move higher in this market that it's kind of pretty narrow.
At the top.
I am concerned about that. You've had a small group of companies actually pushing the market higher. It reminds me a lot of the late nineteen nineties where you were later in an economic cycle like I think you are today, and a small group of companies drove the market higher, which eventually, as we all know, kind of unfolded in a way after a recession where they didn't do so well over the next time period in the next cycle.
But I think there's still opportunities in those other parts of the market like there were that And so I think about those names that you mentioned. I think about small cap stocks, I think about mid cap stocks, I think about value stocks. Those stocks still trade at fairly low historical level levels, especially relative to their large cap friends, which I think sets them up well in the next economic cycle, which I think unfortunately happens after we have
a recession. So I still think one is likely, But I think the downside in those even in the recession is pretty low, just given the fact that they haven't participated. They traded a cheap valuations, and I think the opposite side is going to be pretty powerful for those types of names.
And Brent, with those names, are you talking about energy or banks? What are some of the bigger names that you see as better position given as we were mentioning the rally broadly for large tech.
So I think of value more as a factor, and not necessarily industry by industry or sector bisector, but certainly those are areas are areas that typically have more value type of stocks. I think they will do well Historically if you look at every economic cycle, So if I go back to the nineteen eighty one economic cycle, the next economic cycle after that has had different market leadership, while whatever drove the last cycle typically doesn't do well.
And so if I take you back to late late nineteen nineties, you did see obviously energy, you saw commodities do well in that next economic cycle as well as banks, and so I do think it's largely the same type of setup, but I think more broadly as just things that are cheaper versus things that are more expensive right now, which a lot of those names have certainly earned the right to be expensive, and they have good prospects going forward.
But much like back then, you wonder how much of that is already priced, and I think the answer is quite a bit.
So give us your recession scenario at Northwestern Mutual. How long do you guys think it'll be, how deep you think it'll be, and you have any sense of kind of timing because a lot of folks we've been talking about this for a while and we haven't seen anything.
Yeah, I think it's always calling the exact time period of a recession is difficult. I think it's made more difficult by what happened during COVID with all the stimulus, all the excess savings, and the reality that the US economy is not that interest rate sensitive because people and corporations termed out their debt. This is where I think we're at the end of an economic cycle. You look at wages right now, wages look like they're at the end of an economic cycle. The unemployment rate is low,
it's hard to find workers. We have about everything that looks end of the cycle. I think it's hard to time that because you haven't seen that penetrate the US economy as much because that debt has been turned out, has been fixed. The longer the fed lea's rates higher. As your prior guest, I think on Leaden said, the greater the chance there is an accident. To me, I put it differently, and I say, the greater the chances
it works its way in to the economy. And you're seeing that happen now, as mortgage debt reprices, as credit card debt reprices, as auto loans repriced, and as access savings wear often. So I still think one is in the not too far offing, and I think it'll be more mild, just because we don't have large levels of excess like we have in past recessions that were longer.
I don't think that necessarily means the market won't fall, especially some of those larger cap names, which I think are priced to perfection, and I don't think perfection is likely in the coming quarters.
Well, that's my next question. If we do get a recession and you look at weakness in Nvidia, is that one of the stocks that falls. You would assume Apple would be one of the laggards though they've been underperforming. Ass have Tesla, which are I would say more consumer facing than the likes of a Nvidia and some of the other high flyers.
I'll brun it out a bit more and just say that the top ten names, the S and P five hundred in the year thereafter haven't historically done all that well over longer periods of time. And now I even take you back to I think today's one of today's magnificent seven, Microsoft, which was in the top ten names back in nineteen nine and nine. Those who unfortunately about Microsoft in ninety ninety nin it took them seventeen years to get back to where it was in nineteen ninety nine.
And so to me, this kind of takes you back to some common sense things and investing, like not concentrating in anyone part of the market and kind of basing your whole financial outcomes in the future on that leadership changes and typically what was in favor in the past economic cycle and kind of drove that economic cycle economically is also in favor in the markets and the next economic cycle. We typically cure our shortages, and so you know, I just think it's more likely than not we get
different leadership. I think valuation matters over longer periods of time. It's an imperfect timing tool, but I think parts of the market that are cheap right now will do well as we kind of get past this hopefully mild and short recession.
So the Federal Reserve, I guess the question is, you know, when are they going to start cutting, and maybe in to what degree will they cut. We started the year discounting maybe six rate cuts this year. Now I think I think we're down to like three or four here. How do you think the FED will will you know, execute for their men?
I mean, this is another common sense thing. We're't a difficult spot for the FED. If they cut too soon, they risk the nineteen sixty six to nineteen eighty two time period. If they cut too late, they risk job losses, which, as we've seen in the past, once job losses start, even if the FED starts cutting rates, they tend to trend.
There is nothing between upo point five percent on the utterplant rate in cycles to being up one point nine percent and so it tends to trend, and I don't think they're going to be able to land an economy that is one hundred and sixty eight million labor market and twenty eight trillion big exactly, with just a little
bit of growth, not too much, but not negative. And so right now, the reason why I don't believe there's going to be a soft landing is I don't think inflation pressures are gone, and I don't think they'll be gone until you actually see a recession, which has happened at the end of every other economic cycle. And so right now inflation is still moving back up. We saw that last week in PCEE. You saw the distribution of a inflation components rising five percent or more fifty seven percent.
You see CPI, you see service is still too hot. And actually the median CPI, the meetiing PC they're moving in the wrong direction. And so to me, the FED leaves rates high until they see signs that the labor market is weakening and by then it's too late, which I think the good news is because that will kind of take the steam out of inflation altogether. They will be able to cut aggressively. On the opposite side, of this,
but not until they actually see that. And so I don't think rate cuts are likely in the near term. And that's why I still think you're likely to see a recession as they leave rates high enough and that continues to bite in the economy.
Well, a lot of folks would say, you know, given that and if you look at the real time data, inflation is in fact whipped, and that they should be cutting rates. Now, what do you think about that argument?
I mean, I take you back to CPI. I invite you to look at CPI services. I invite you to look at the CPI, the Cleveland Fed median CPI which bottomed in July and is actually moving higher. I invite you to think about wage growth, which is running at four point three to four point eight percent. Pick your favorite metric which typically weaves into the end of an
economic cycle. I invite you to look at one year inflation break evens, where the bond market is telling you that inflation may be a near term thing, as well as to your break evens. And so certainly, I think people have become a little bit too optimistic on inflation. As a reminder, I thought inflation would come down because it was tied to COVID. It was transitory, and that's
what I think carried us through twenty twenty three. Unfortunately, I think now inflation is more tied to the economic cycle, where you run out of labor market slack, wages rise, Companies eventually try to raise prices. That gets squashed by the Federal Reserve. And eventually, if your wages are going up on your employees, so your expenses are going up, but you can't raise prices, your margins get hit. And that's where you begin letting you employees.
Smart stuff as always you bring in every time. Brent really appreciate it.
Chicago NBA folks, they're pretty smart. Brent Shredy joins US here a chief investment officer Northwestern Mutual Wealth Management Company, joining us on zoom from Milwaukee. That's a sobering view, cautious view, I guess, I'm not sure a reasonable view.
I don't know.
I guess it depends on your perspective. But he's not just diving in on this momentum trade keep buying him.
No, And that's interesting. I mean, we have seen.
Caution really kind of being a tone that's been struck. But again, it's interesting to see what different people who are actually putting money on the line are thinking and looking at and just given kind of again. Markets churning around near all time heisman.
I know I hit it earlier. Yeah, Bitcoin at least on entryday basis hitting a record.
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Apple down about two point eight percent today, about eleven and a half percent year to date. The news today Apple's iPhone wills in China deepen with a twenty four percent sales plunge.
Let's break it down with Anurag Rana.
He's a senior technology analyst to Bloomberg Intelligence, joining us via zoom Anurag what's causing this decline in the early part of twenty twenty four in iPhone sales for Apple in China?
Is it market share lost? Is it a contraction in the market. What's going on?
I think it's a bit of both for them, and this is the same story that's been going on for the last six to nine months, ever since Wawei released their higher end phone last year. So Apple's been losing market share there that has been you know, you could say deepened on coupled with consumer weakness in China, and it's all that's you know, driving these problems right now.
And when I look at the PGeo function on the terminal, iPhone accounts for more than half of Apple's revenue China, call it a fifth of their sales anak. When you look at those numbers, what does this actually mean for Apple if they're going to see that competition eating into their sales, Yeah, I.
Think it's going to be a tough time for Apple in China for that at least this year and maybe into next year before they can, let's say, make some inroads in India and other markets. Emerging markets is the real growth driver for Apple, there is no two ways about it. And and you know iPhone is the big growth driver. So if phones are not selling in China, that's a problem for Apple. It means numbers need to
come down even more for Apple this year. You know, we saw about double digit sales drop in China last quarter. I looked up this morning on MDL consensus is about seven percent drop in China for this quarter. I think that number needs to creep up to someone in the low double digit decline going forward.
So it's good, it's it's a pain.
It's a painful situation for Apple, and frankly, there aren't at many you know, rosy things looking forward at least for twenty twenty four.
So I guess the biggest concern for Apple obviously is competition, because they haven't really had that robust of a competitor and they're part of the market. Are there any responses Apple can make here from a competitive landscape other than lowering the price point?
Yeah, Paul, I think there is a little more hype in that competition news than reality only because Huawei didn't release a phone for many years, So that you can think about it. If you have an install base of Huawei phones, I mean, let's say you know that's X and that hasn't been updated for four or five six years, and you just certainly get a brand new phone. All of those people will we are going to go and refresh that. So I think you should take that as
a bigger factor. Plus the subsidies they are getting in China from the local providers. So I think Apple will do okay in China over the long term. But I think that's not going to be a twenty twenty four story.
And you mentioned emerging markets as the next driver.
What countries, what regions are going to be able to pay up for what I would say is quite an expensive phone.
Yeah, I think that's the most important question. And I think you know, just by the sheer size of it, India is the next one. But frankly speaking, right now, Apple doesn't even operate in you know, five percent of the entire market because of the price point of the phone. I think the strategy India is going to be a mix of the lower phone the se as well as the refurbished phone where the price point is even lower. But having said that, I think India is a developing country.
The middle class is getting more richer, so I think that's going to be the next big growth catalyst. But this is it's not going to play out in twenty four to twenty five. That's more of a I would submit to long term story.
So is there a thought for we've talked about this before that Apple might introduce a lower price phone into India for just that reason. Is that something they're still considering or will they just wait for the market to kind of move up to where the Apple phone price point is.
I think it's going to be the latter. I've done a lot of analysis of how much share they can gain if they drop the se price by fifty dollars hundred dollars, and you know, when I publish that stuff, I think that year they actually raised the price by fifty bucks. So they don't leave in dropping prices. They are more on a margin story, you know, So think of Apple more on the long term basis right now,
not on the short term. I don't think they're going to you know, I would say swap margins for market share. They've never done that in their history, whether it was on the mac side or on the phone side.
And quickly anorak. I look at the news, there's no more Apple car, there's tepid reception to the vision pro What actually drives the stock, what drives sales in the next twelve to eighteen months.
Yeah, I think that's the most important question for Apple investors. And I think there's going to be an event in June the World Wide Developers Conference, where they have pledged that they're going to show a lot of AI enhancements
to the operating system. I think that really is the one wildcard that can completely change the sentiment of the company, both in terms of sales and the gloomy investor sentiment only because remember, Apple has a distribution network that stands, you know, next to nobody out there in terms of you know, affluent people using their phones. More than one billion device is connected just on the on the on the smartphone. I think that really is the big driver.
One of the things I was thinking about was if you go back, you know, five years, seven years, there were apps such as trip advisors and Yelp where people used to go for their you know, specialized functions for restaurant advices and tourism. But when you look at somebody like Google, a lot of that traffic has moved on to them because they control the distribution. I think Apple has the same ability, but they have to show up with some AI products otherwise that's not going to flow all right.
On rog Rana, thanks so much for joining us as always on rog Rana Senior technology analysts.
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