Source: PaxForex Premium Analytics Portal, Fundamental Insight
With a market value of $2.26 trillion, Apple is the most expensive company in the world. The company's dominance in the industry has made it one of the best growing stocks: Over the past five years, its stock has risen 227 percent, despite a market decline in 2022.
The iPhone maker has a lot of positives: its product lineup is capable of pulling consumers into its ecosystem with just one purchase. But the company's services business, including subscription-based platforms such as Apple Music, TV+, Fitness+, Arcade, News+, and iCloud, is particularly promising for long-term growth.
Meanwhile, Apple's reliance on China to produce iPhones may create more short-term obstacles. Let's get into that.
- Growing services business
Apple's services business quickly became the company's second-largest segment, generating 19.8 percent of revenue in fiscal 2022. For the year, services revenue grew 14% YoY to $78.1 billion.
The most attractive aspect of Apple's services business is its strong profit margin. In the fiscal year 2022, the company's services gross profit margin was 71.7%, compared with 36.3% for products. Services gross margins have also been growing over the past three years, with 69.7% in 2021 and 66% in 2020.
In the product segment, Apple accrues operating costs for every device it makes through materials and labor. But in services, the company can pay once for a piece of content and sell it millions of times to consumers around the world. And adding a monthly subscription for consumers to access that content increases margins even more.
In October, Apple raised prices on all of its services, with Apple TV+, in particular, going up 40%, from $4.99 to $6.99 a month. With 2023 just around the corner, service revenues are likely to rise over the next year as the popularity of Apple products continues to grow and consumers are attracted to all the offerings associated with them.
- Production challenges
In the fiscal year 2022, Apple earned $205.5 billion from the iPhone segment, which accounted for 52% of total revenue. As a result, when news broke in late October that a COVID-19 outbreak in China had forced the government to impose strict restrictions, Apple stock began to fall as investors began to worry about possible problems with iPhone production. From October 28 to November 9, the company's stock fell 13.4%.
Reportedly, Foxconn - also known as Hon Hai Technology Group, which produces about 70 percent of all iPhones - could face a 30 percent drop in iPhone production under quarantine. Although quarantine production restrictions in China allow factories like Foxconn to remain active, workers must live in the factories to keep working, which has understandably led to opposition from employees.
Foxconn said it was coordinating standby production with other factories to reduce the negative effects. However, this has done little to alleviate investor concerns about Apple's overreliance on China to produce its biggest profits.
Apple has recently taken steps to move some iPhone production to India; it is estimated that the tech giant will move about 5 percent of iPhone 14 production to that country by the end of 2022 and 25 percent of all its production by 2025.
China's hardline coronavirus policy seems to be the last straw for Apple as it begins to improve its supply chain. The shift, however, will not happen quickly. Analyst Daniel Ives estimates that with Apple's aggressive approach, it would take until 2025 or 2026 to move 50 percent of iPhone production to India or Vietnam.
Apple may suffer temporarily from a troubled supply chain, but its stock is still worth buying in the long run. The company ended Sept. 30 with $111.4 billion in free cash flow, proving that it has the means to invest heavily in changing its manufacturing strategy. Given that the company is home to a fast-growing services business and some of the world's most in-demand products, it would be wise not to bet against Apple's long-term prospects.
As long as the price is above 140.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 141.64
- Take Profit 1: 148.00
- Take Profit 2: 153.00
Alternative scenario:
If the level of 140.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 140.00
- Take Profit 1: 136.00
- Take Profit 2: 132.00
