Say Apple Inc. (NASDAQ: AAPL) is an indicator is an understatement. Even in a terrible year for the Nasdaq, many investors and funds have sought the relative safety of Apple, as the stock is down “only” about 16% year-to-date. Apple is currently at 300 of the 500 S&P 500 stocks in terms of year-to-date performance. It’s the worst Apple in recent memory that we can remember, but there’s no denying that the stock has held up remarkably well against its mega-cap peers which have lost between 30% and 75% this year.
But Apple has seen its share of weaknesses and bad news, the most recent being the expected shortfall in iPhone production due to protest in China linked to new COVID lockdowns. Unsurprisingly, the stock is down around 2% before market on this report and is already creating ripple effects on Apple’s suppliers as well. This article aims to acknowledge the undeniable importance of China, but also to warn investors not to overreact to this news by dissecting the most adverse impact on the company’s quarterly and annual earnings per share.
Undeniable impact on China
Despite recent headlines about Apple manufacturing/sourcing from India and Arizona, China still accounts for nearly 98% of iPhones manufactured. China’s impact on the bottom line is further highlighted by the graph below: despite accounting for 98% of iPhones manufactured, Chinese components cost Apple a negligible percentage. So it’s no surprise that when China sneezes, Apple shudders.
What’s the bottom line?
With data compiled from various sources, we arrived at the table below. Please note that we are underestimating the cost a bit to see the most adverse impact on Apple with the recent reported shortfall. The iPhone Pro 12 is obviously the cheapest at around $400, the iPhone 13 Pro is $460, and the iPhone 14 pro is the most expensive at $500, as shown here.
- Suppose the total shortage of 6 million results in Apple selling 6 million units with the highest profit/margin.
- Using the numbers above, that would mean a net impact of $4.92 billion ($820 times 6 million units).
- Apple has about 16 billion shares outstanding.
- Therefore, this corresponds to an EPS impact of 30.75 cents. That’s $4.92 billion divided by $16 billion.
- Projected EPS for the first quarter currently stands at $2.04 and the full year at $6.25 per share. Assume the short-term worst-case scenario that the total 6-month shortfall hits the current first quarter. This would put Q1 EPS at $1.73 and full year EPS at $5.94.
- We recognize that any supply issues are unlikely to be limited to iPhones alone. Since iPhones still represent about 50% of revenue, but add more than that to the profit margin, let’s reduce first-quarter and full-year EPS by an additional 25%. That would put Q1 EPS at $1.30 and full year EPS at $4.45.
- Using full year EPS arrived above ($4.45) under these extremely negative circumstances, at the current pre-market price of $145 per share, Apple will still be trading at a forward multiple of around 30. Let’s not forget that the current sell-off market has led to an imbalance where a company like The Clorox Company (CLX) is selling at a forward multiple of 36.
- While a multiple of 30 is a bit too rich for our liking, given the projected growth rate of 9%/y for the next 5 years, it doesn’t seem too outlandish for what remains the world’s most valuable brand. world that is a slot machine year after year.
- As a reminder, the numbers used above are extreme projections assuming supply chain issues persist through the current fiscal year and exclusively affect the highest profit margin units.
- Finally, supply chain issues are not new. Apple’s production issues have previously been speculated and reported as covered here by Seeking Alpha. To quote well-known Apple analyst Dan Ives from the article above:
“The Covid China Zero Shutdowns at Foxconn were a major blow to Apple this quarter and we believe they removed around 5% of iPhone 14 units from the supply chain, putting Cupertino in a “shortage”. major “as we approach next month,” analyst Dan Ives wrote in a note to clients.“
It’s no surprise, then, that Apple’s estimates have been continuously revised downwards, as shown below.
Moreover, Apple would have had a strong demand for Black Friday, and it is well known that all current problems are only supply-related and not demand-related. For a premium product, this may end up being good news in the medium to long term, as pent-up demand will send buyers into a frenzy. when (it’s not a matter of “if”) the supply chain is improving. Apple remains a stock to buy on weakness, and we look forward to adding more on any unreasonable price pullbacks.
Putting investments aside for a minute, it’s easy to sympathize with the Chinese protesters here. Years of oppressive confinement, sometimes to death, are sure to send even the most patient citizens to their limits and beyond. As much as it hurts Apple, other companies, and their investors, anyone reading this article from an investment perspective should be grateful that we’re dealing with some first-world problems. Count your blessings, stay the course, and don’t overreact back and forth. Good luck.
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