Apple: iPhone Production in China Declining, a Decade (NASDAQ:AAPL)


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while Apple (Nasdaq:AAPL) remains a TechStockPros favorite, we maintain our bearish thesis on the stock. Our bearish sentiment is based on our belief that the company is under pressure on two fronts. The first is the weaker consumer Spending at home, with inflation at a 40-year high. We believe that fewer and fewer customers will be incentivized to upgrade their Apple devices to more expensive models. The second is an overseas problem at Foxconn, Apple’s largest iPhone maker. The factory in Zhengzhou, China, has been hit by the COVID-19 outbreak and protests, causing production to slow down significantly. We expect sales of Apple’s iPhone 14 and iPhone 14 Plus models to be relatively flat at the end of the year and may sell in smaller quantities than the Apple iPhone 13 series in the second half of 2021.

We’re also concerned about Apple’s financial performance as foreign currency headwinds build up. Apple CFO Luca Maestri spoke about foreign exchange headwinds in our Q4 2020 earnings call, noting that the company’s year-over-year total revenue will slow compared to the September quarter due to foreign currency headwinds. We expect the strong dollar to sustain Apple for double-digit revenue growth. Despite the macroeconomic headwinds, the fourth quarter of 22 for Apple Earnings reported $90.1 billion, up 8% year-on-year. We’re bullish on Apple for the long term, but we don’t expect the company to grow meaningfully in the near term. We recommend that investors wait on the sidelines for a better entry point for the stock.

Fewer customers have chosen to upgrade their iPhones

We do not expect Apple to achieve expected iPhone 14 and iPhone 14 Plus sales. The current macroeconomic environment is harsh, with rising consumer prices 9.1% During the year end in June current interest rates rose by 0.75% this year. We believe Apple customers are feeling the macroeconomic headwind pressure. We expect this to be reflected in Apple’s upgrade cycle product sales. We think the upgrade cycle with new iPhones, MacBooks, Watches and AirPods made for an attractive lineup at the Far Out event. We don’t expect flat sales due to any inefficiencies from the company, and instead, we expect disappointing sales to be a result of the current macroeconomic environment. IDC reported global smartphone shipments decreased by 9.7% Y/Y to 301.9 million units due to weak consumer spending. Apple derives most of its revenue from its iPhone sales, which were about 41% in Q3 2020. We believe the company will experience disruption as global smartphone shipments decline.

The following chart shows Apple’s revenue from its iPhone sales.

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Reuters

While Apple’s iPhone remains the gold standard for smartphones, we don’t think it’s immune to a dent in consumer spending. Apple generated iPhone revenue of $42.63 billion in the fourth quarter of 2020, an increase of 9.67% year-on-year. Apple’s iPhone 14 hit the market as the biggest upgrade in the Pro models. The iPhone 14 Plus model is Apple’s first relatively affordable Plus phone. Despite this, the iPhone reported for sale lower volume Units of iPhone SE3 and iPhone 13 mini. As the macroeconomic headwinds continue, we think Apple will see fewer customers choosing to upgrade their Apple devices for more expensive models.

iPhone production slows down at Apple’s largest production plant

Apple’s largest iPhone assembly plant has been hit by the COVID-19 outbreak, and we expect to see iPhone production take a hit as a result. Apple relies heavily on China for most of its iPhone production 70% of iPhone shipments worldwide. We believe the company is vulnerable to no-COVID policies in China, specifically in cases of outbreaks. The factory in Zhengzhou, China, was battling a new wave of the disease this month, prompting new lockdown restrictions. We expect iPhone production to decline by 30% next month due to tightening restrictions to control the outbreak.

To make matters worse, protests It reportedly broke out in Zhengzhou, where hundreds of workers marched chanting, “Stand up for our rights! Stand up for our rights!” Foxconn protesters were met with police brutality as they accused the manufacturer of changing their contracts after they were placed in quarantine and canceling previously promised subsidies. We expect the protests at Foxconn to put more pressure on iPhone production next month.

Foreign exchange headwinds maintain double-digit growth

We believe that Apple will face pressure from foreign currency headwinds due to the strength of the US dollar. Market volatility, recession, headwinds in the foreign exchange market, COVID-19 issues, the Ukraine-Russian war, and China-Taiwan tensions are affecting Apple and its competition. Apple CEO Tim Cook stated, “The foreign exchange headwinds are over 600 basis points about a quarter. “We expect headwinds to continue to weigh on Apple’s financial performance in the first half of 2020.

The following chart from the fourth quarter of 2022 shows Apple’s sales by region, showing Apple’s net sales ending for the three months in September 2022 compared to September 2021.

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Fourth quarter report 22

evaluation

Apple is not cheap. On a P/E basis, the stock is trading at 21.8x C2024 EPS $6.88 compared to the peer group average of 18.0x. The stock is trading at 5.7x EV/C2024 sales versus the peer at 4.1x. We believe there are more downsides that will be priced into the stock towards the end of the year. We recommend that investors hold the stock.

The following chart shows Apple’s evaluation table compared to the cloud.

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Word on Wall Street

Wall Street is overwhelmingly rated to buy Apple. Of the 45 analysts covering the stock, 38 are rated buy, six are rated hold, and the remainder are rated sell. We believe Wall Street’s bullish sentiment is because they expect Apple to be relatively resilient to any risks in the near term. The stock is currently trading at $150. The middle and middle price target are set at $180 and $178 respectively, with a potential upside of 19-20%.

The following table shows Apple’s sell-side ratings and pricing targets.

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What do you do with the stock?

We maintain our outstanding rating on Apple. We believe Apple shares are not a safe haven for investors as consumer weakness continues, and iPhone production in China slows. We expect more declines in the future and recommend investors to wait for a better entry point.


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