Apple (AAPL) has recently just announced that the assembly facility located in Zhengzhou, China is currently operating at "significantly reduced capacity" due to reported COVID-19 restrictions.
Want to purchase for yourself or a loved one, the new iPhone 14 or iPhone 14 pro for Christmas this year?
Unfortunately, it may not be possible due to COVID-19. Yes, COVID still is a thing and it's ravishing China and bringing life to a halt under China's zero COVID-19 policy. Due to the new Omicron variant causing a major outbreak since September large portions of the country have been facing severe lockdowns. In fact, the outbreak is so bad this time around that today on Monday the 7th of November 2022, reports have emerged of the highest daily count of COVID-19 infections in six months. So far over 5,600 cases have already been confirmed with more expected.
As a result, consumers looking to purchase the new iPhone may have to wait until after this holiday season since the factory operated by Foxconn (2317.TW) is operating at a reduced capacity and the COVID-19 measures affect the flow of items in and out of the complex. The Chinese manufacturer, formally, Hon Hui Precision Industry Co Ltd, produces 70% of iPhone shipments globally of which over 200 thousand of these employees are at the Zhengzhou plant. They also have some smaller production sites in India and Southern China. In order to address this issue, the employees have literally been living at the factory in order to isolate themselves. However serious concerns have reportedly arisen regarding the treatment of the employees staying at the plant and their available provisions such as food and drinks. In fact, some employees have even run away and escaped. In response, Foxconn has decided to give significant bonuses in order to retain loyalty during these difficult periods.
As such this affects investors, and Apple (and its subcontractors) will struggle to meet the demand for the upcoming holiday season. In order to diversify future risk, Apple is planning to subvert some of the production to rivals Luxshare (002475.SZ) and Pegatron (4938.TW). While this will not necessarily impact Apple's short-term obligations to meet consumer demand, it will certainly help mitigate future risks if these plans do indeed come to fruition. Shipments from these new production lines may commence as early as 1Q23 starting with Luxshare.
4Q22
Fortunately, the company was able to beat forecasts on Wall Street in the latest fiscal fourth-quarter earnings on revenue and earnings per share.
On Oct 27th, Apple announced revenue of $90.15 billion beating the $88.9 billion forecast and up 8.1% year over year. Earnings per share also increased to $1.29 above the $1.27 forecast. In addition, computer sales were well above expectations with revenue from Mac computers up 25.39% year over year. Annual revenue was also up 8% year over year to $394.3 billion. Apple stock owners will also enjoy a cash dividend on November 10, 2022, of $0.23 per share.
“Our record September quarter results continue to demonstrate our ability to execute effectively in spite of a challenging and volatile macroeconomic backdrop. We continued to invest in our long-term growth plans, generated over $24 billion in operating cash flow, and returned over $29 billion to our shareholders during the quarter. The strength of our ecosystem, unmatched customer loyalty, and record sales spurred our active installed base of devices to a new all-time high. This quarter capped another record-breaking year for Apple, with revenue growing over $28 billion and operating cash flow up $18 billion versus last year.”
That being said, certain core products such as the iPhone came up short of expectations at only $42.63 billion versus the $43.21 billion forecasted. Problems previously mentioned above only exacerbate this shortfall and will likely impact the results of 1Q23. Another major factor at play has been a strong dollar. Because of this, consumers across the globe from Japan and Australia to the United Kingdom to Germany saw significant price increases on the latest iPhone. The only markets not affected were the United States and China.
In addition, Apple's services business reported under 5% growth in 4Q22, down from 12% in 3Q22. This trend is exemplified on an annual basis, where it is evident the services business grew to $78.13 billion which is only 14% growth in 2022 down from 16% growth in 2021 and 27% in 2020. Apple's services business includes Apple TV+, Apple Music, and the App Store with around 900 million total subscriptions contemporaneously. This downward trend is somewhat concerning as these services businesses are more profitable than the hardware products like the iPhone or Mac book partially due to the fact that they bring in recurring revenue.
1Q23
While Apple will find itself dealing with problems emanating from COVID-19 lockdowns and foreign exchange headwinds the company is taking assertive positions to mitigate these issues and is reaching further than ever to be more integrated in our daily lives. Furthermore, Apple is working hard to integrate also into the financial realm with Apple Pay and Apple Card. The company announced a new high-yield savings account in partnership with Goldman Sachs (GS) that will be available with the Apple Card in the upcoming months. This new high-yield savings account is expected to expand usage of the Apple Card making it more attractive and thus increasing consumer reliance on Apple's infrastructure. If you are interested in Apple (APPL) and similar stocks then subscribe for daily forecasts given at six-time intervals.
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Sources:
1. Apple Newsroom, "Update on supply of iPhone 14 Pro and iPhone 14 Pro Max" (2022)
2. Alarabiya.net, "China reports highest daily COVID-19 cases in six months despite grinding lockdowns" (2022)
4. Reuters.com, "Apple supplier Foxconn quadruples bonuses to staff hit by China COVID lockdown" (2022)
5. Apple Newsroom "Apple Reports Fourth Quarter Results" (2022)
6. Trend Force, "Projected iPhone Shipments for 4Q22 Has Been Lowered by 2~3 Million Units as Foxconn’s Base in Zhengzhou Temporarily Keeps Capacity Utilization Rate Around 70%, Says TrendForce" (2022)
7. Apple Consolidated Financial Statements, "CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS" (2022)
8. Apple Newsroom, "Apple Card will soon let users grow Daily Cash rewards while saving for the future" (2022)
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