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Motley Fool Issues Rare “All In” Buy Alert
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Apple (AAPL -0.50%) is increasingly experiencing the downside of production in China. Workers at Foxconn, a China-based iPhone supplier, have slowed production in a dispute over overdue pay. And COVID-19 lockdowns in the area have also taken a toll on both the factory workers and overall production.
The slowdowns are significant enough that some Wall Street analysts forecasted slower iPhone sales despite high demand. Now, the question for investors is how the slowdowns might affect the investment thesis for Apple.
Analysts at Wedbush Securities now predict iPhone production slowdowns at a Foxconn factory. Foxconn is an Apple supplier based in China, and workers there have protested because they have not received overdue pay, leading to production slowdowns for the iPhone. Officials in China have also placed the city of Zhengzhou, the home of the Foxconn factory, under lockdown in pursuit of a zero-COVID policy.
Wedbush believes these challenges could lead to a 5% to 10% reduction in output. A Bloomberg report appears to echo these concerns, as its sources estimate the issues at Foxconn could reduce iPhone production by approximately 6 million units this year.
The lost revenue from that production shortfall is a concern, but Apple can probably take the hit. At a $2.3 trillion market cap, it remains the world’s largest publicly traded company. Also, with about $169 billion in liquidity on its balance sheet, the stock might even appear bulletproof.
But investors should note that there is still potential for trouble. The iPhone made up 52% of Apple’s revenue in fiscal 2022 (which ended Sept. 24). For all of the focus on products such as Apple’s M2 chip or its Apple Services offerings, the iPhone remains the company’s cash cow.
It also highlights a crucial vulnerability. Apple depends on product sales for around 80% of its revenue. Since it has relied primarily on suppliers from China, this could lead to potential slowdowns in other products.
Investors should also note that Apple did not escape the bear market. Its stock is down by just over 20% from its 52-week high.
Despite such issues, Apple stock can outperform the markets in the longer term. The iPhone is in the midst of a 5G upgrade cycle, and the devices continue to benefit from high demand. Warren Buffett’s Berkshire Hathaway still has close to 40% of its portfolio in Apple. That vote of confidence is hard to top for any company.
Instead, investors should worry about whether they will want to buy the dip in Apple stock, a point that seems less clear. At a price-to-earnings (P/E) ratio of 24, the valuation is higher than the pre-pandemic P/E, which rarely topped 20. Such a valuation might have prompted Buffett to choose Taiwan Semiconductor Manufacturing (TSMC) stock over Apple. TSMC, an Apple supplier, sells for just 14 times its earnings.
Concerns about China might not go away quickly, and the country’s troubles could remain a headwind for the foreseeable future. This could cause some pain for Apple — it might have to shift more production to other countries. Nonetheless, these are likely temporary concerns, which should bode well for the FAANG stock in the longer term.
Will Healy has positions in Berkshire Hathaway (B shares). The Motley Fool has positions in and recommends Apple, Berkshire Hathaway (B shares), and Taiwan Semiconductor Manufacturing. The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), long March 2023 $120 calls on Apple, short January 2023 $200 puts on Berkshire Hathaway (B shares), short January 2023 $265 calls on Berkshire Hathaway (B shares), and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.
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