Technology Company Apple
Trading activity is negative for shares. There were rumours Tuesday night that Apple would scale back its 2019 iPhone production expansion, and on Wednesday morning, the rumours were confirmed.
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After "an anticipated surge in demand failed to materialise," Apple reportedly told its suppliers to scale back their plans to increase production of the iPhone 14 product family by as many as 6 million units in the second half of this year, as reported by Bloomberg, citing people familiar with the matter. Some of Apple's suppliers reportedly started gearing up for a 7% increase in orders before the iPhone 14 launch, as the company raised its sales forecast.
Thesis
Bloomberg reported Tuesday night that Apple Inc. (NASDAQ:AAPL) has reportedly told its suppliers to reduce smartphone production in the second half of 2022, leading some to speculate that global demand for Apple's iPhones may be waning. This is the latest episode in a very gloomy global market narrative, and it runs counter to market expectations that Apple will be relatively unaffected by the weakening economic backdrop. Since the news broke, Apple stock has fallen as much as 4.5 percent; therefore, I think it would be prudent to either lock in profits or use PUT spreads to protect long positions. Stock in Apple may be riskier than the market currently accounts for, but it is trading at a premium. As a result, Apple's rating has been lowered to "Hold"
Competition From Other Devices Could Slow iPhone Sales
Apple's plans to reduce iPhone production were reported Tuesday night. Before the release of iPhone 14, the company predicted that sales would increase by 7% in the second half of 2022 compared to the first half. Apple has revised its 2H 2022 iPhone production goal down to 90 million from 96 million. This would indicate that output is holding steady in comparison to the same time frame in 2021.
I think this is bad news for AAPL investors who have been hoping Apple would weather the current economic storm relatively unscathed. Any successful consumer brand eventually loses ground. When compared to market expectations and hopes, this is a major deviation. Just recently, Unhedged in Financial Time predicted that Apple would be the best stock. And with regards to the June 2022 quarter, some comments
A Greater Danger Than Apparent
Because of this, Apple stock is susceptible to a general economic slowdown. This is to be expected, as the iPhone maker's revenue exposure is almost entirely dependent on discretionary spending. However, from a technical standpoint as well, Apple is riskier than the market suggests. Thesis-counterarguments focus on two main areas: investor sentiment risk and political risk.
It's important for potential buyers of AAPL stock to realise that the company's shares represent a significant portion of the market. Therefore, if investor sentiment worsens and the market falls sharply, the value of Apple stock will likely fall in tandem with the major indices.
Second, I'd like to draw attention to the fact that geopolitical tensions with China pose rising risks for Apple stock. Specifically, I am concerned that the CCP will impose limitations on the use of Apple products and services at some point in the future. Information and safety concerns might make this acceptable. As a countermeasure against the United States' sanctions, such as the recent Nvidia chip restrictions, China may restrict the import and sale of iPhones. However, it's important for investors to keep in mind that China is responsible for about 20% of iPhone demand worldwide and, directly or indirectly, about 90% of Apple's production supply chain.
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