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Apple's Dynamite Quarter Largely Owed to China

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Apple (AAPL) fans commence the high-fives. Following the first-quarter earnings report of $39.2 billion that blew analysts’ estimates out of the water, stock surged yesterday in after-hours trading.

“The stock is up over 6 percent,” said Motley Fool’s Joe Magyer. “In market cap, that’s the equivalent of Yahoo (YHOO) plus Netflix (NFLX) and all of Chipotle (CMG), just in after hours.”

But sit down fans... and get ready to do the wave. Soon after the market opened today, Apple stock has already climbed more than 10 percent, closing the 74 percent gap between Tuesday’s six-week low close of $560.28 to the April 9 all-time closing high of $636.23.  

The 35.1 million in iPhone sales and the underestimated 11.8 million iPad sales (by about $1 million) were the drivers of Apple’s earnings report. But if AT&T (T) and Verizon (VZ) are both reporting a decline in iPhone sales, where are the numbers coming from?

Well, remember that fictitious Foxconn factory worker with the mangled hand who found his way into Mike Daisey's hit monologue “The Agony and the Ecstasy of Steve Jobs?” You know, the one whose injuries were a direct result of building the “magical” iPad he’d never had the privilege to see in finished form?

He’s part of Apple’s new booming market.  

A must-have sentiment is sweeping across China’s working and middle classes, as more and more of the population begins moving into higher income groups with greater purchasing power. Within the space of three years -- when the iPhone first debuted in China -- the country has seen a sales explosion on par with the Big Bang. China was responsible for $7.9 billion, or 20 percent, of Apple’s total first quarter sales and accounted for $12.4 billion in the first six months of this fiscal year -- nearly catching up to last year’s total of $13.3 billion.

“I don’t know of any other company that has driven its sales from virtually zero to $13 billion in a few years,” said Donald Straszheim, a senior managing director who heads China research at ISI Group LLC in Los Angeles. “There’s a growing appetite for Apple products.”

Apple CEO Tim Cook acknowledged the amazing market potential in the country this week on a conference call with analysts. “There’s a tremendous opportunity for companies that understand China, and we’re doing everything that we can to understand it and serve the market as good as we can.”

So not only is China manufacturing the goods, they’re buying them in droves.

POSITION:  No positions in stocks mentioned.