To say Apple Inc. (Nasdaq:AAPL) is a flagship is an understatement. Even in a bad year for the Nasdaq, many investors and funds sought the relative safety of Apple, as the stock is “only” down 16% year-to-date. Apple’s number is currently 300 out of 500 Stocks are on the S&P 500 in terms of year-to-date performance. We remember this as the worst in recent memory for Apple, but there’s no denying that the stock has held up remarkably compared to its high-cap peers, who have lost between 30% and 75% this year.
But Apple has seen its share of vulnerabilities and bad news, the latest of which is to be expected inability on iPhone production due to protest in China over further COVID lockdowns. Not surprisingly, the stock is down 2% before it hits the market in this report and it really is Create A ripple effect on Apple’s suppliers, too. This article aims to acknowledge the undeniable importance of China, but also to warn investors not to overreact to this news by dissecting the worse impact on the company’s quarterly and annual earnings per share.
China’s influence is undeniable
Despite the recent headlines about Apple manufacturing/supplying in India And the Arizonastill China accounts For nearly 98% of iPhones manufactured. China’s influence on the bottom line is illustrated by the graph below: despite accounting for 98% of iPhones manufactured, Chinese components cost Apple a tiny percentage. Hence, it is not surprising that Apple shudders when China sneezes.
What is the bottom line?
With the data compiled from various sources, we have come to the table below. Please note that we’re underestimating the cost slightly to see the worst impact on Apple with the recent reported shortage. Obviously, the iPhone Pro 12 costs the least Around $400, with the iPhone 13 Pro costing $460 and the iPhone 14 pro reportedly costing over $500. over here.
- Let’s say the 6 million shortfall causes Apple to sell 6 million units at the highest profit/margin.
- Using the numbers above, that would mean a bottom line impact of $4.92 billion (820 times 6 million units).
- Apple owns about 16 billion shares Excellence.
- So, that works out to an EPS impact of 30.75 cents. That is, 4.92 billion dollars divided by 16 billion.
- The expected EPS for the first quarter is currently $2.04 with the full year expected to be $6.25 per share. Let’s assume the short-term worst-case scenario that the entire 6 million deficit reaches the current quarter in the first quarter. That would put earnings per share for the first quarter at $1.73 and earnings per share for the full year at $5.94.
- We acknowledge that any supply related issue is unlikely to be limited to iPhones only. Since iPhone resident It’s about 50% of revenue but add more than that to the margin, let’s discount the first quarter and EPS for the full year by another 25%. That would put Q1 EPS at $1.30 and the full year at $4.45.
- Using full-year EPS above ($4.45) under these very negative conditions, at the current pre-market price of $145 per share, Apple would continue to trade at a forward multiple of about 30. Let’s not forget that the current market sell-off has resulted in an imbalance where a company like The Clorox Company (CLX) sell When the forward multiple of 36.
- While multiples of 30 are a bit too rich for our taste, given the 9% year-over-year rate projected Growth rate over the next five years, it doesn’t seem too outlandish for what remains the most valuable brand in the world which is the money machine year after year.
- To reiterate, the figures used above are an extreme forecast assuming supply chain issues persist throughout the current fiscal year and affect higher margin units exclusively.
- Finally, supply chain issues are nothing new. Apple’s production problems have already been speculated and reported as covered over here By searching for alpha. Quoting well-known Apple analyst Dan Ives from the article above:
“Foxconn’s zero Covid China shutdowns have been a huge blow to Apple this quarter, and we believe it took roughly 5% of iPhone 14 units out of the supply chain, thus putting Cupertino in a ‘significant shortfall’ heading into next month, he wrote. Analyst Dan Ives in a note to clients.“
Thus, it is not surprising that Apple’s estimates are constantly being revised as shown below.
In addition, Apple It said Black Friday was in strong demand and it is well known that all current releases are only supply related and not demand related. For a premium product, this could 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 question of “if”) The supply chain gets better. Apple remains a buy stock on weakness, and we look forward to adding more on any unreasonable dip in price.
And investing for a minute, it’s easy to sympathize with the Chinese protesters here. Years of oppressive closure, sometimes the death, is bound to send even the most patient of citizens to their borders and beyond. As much as it hurts Apple, other companies, and their investors, anyone reading this article from an investment perspective should be thankful that we’re dealing with first world problems. Count your blessings, stay the course and don’t overreact either way. Good luck and God bless you.
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