I believe that Apple (NASDAQ:AAPL) has a fantastic business model, excellent products with significant brand equity, and is led by a strong management team. However, I believe Apple operates in a challenging climate, with increasing risks and uncertainties. I think the diminishing desire for its newest iPhone 14 models is concerning, as even the high-end models appear to have lost appeal, and demand for these goods continues to plummet. On the other hand, the weak low-end iPhone 14 models have been disappointing and may present near-term headwinds to production unit numbers, as Apple may modify the figure downward if demand declines.
Another concern for Apple stock investors is China, which has recently seen a decline in smartphone shipments and weakening retail sales for the third quarter. Consumer sentiment remains weak due to the Chinese authorities strict covid policies and the impact of the property and technology sectors on the Chinese economy.
Overall, I would suggest investors stay the course with Apple stock. In my opinion, it is still not a good time to buy more shares because the risk-reward ratio is skewed further to the negative.
After a Great Start, Demand for iPhones Has Dwindled
According to UBS Evidence Lab data, their investigation revealed that the initial strong demand for the high-end iPhone Pro Max is beginning to decrease. The UBS Evidence Lab data examines iPhone availability in more than 30 countries and supply networks and wait times for iPhones.
Wait times have continued to fall in recent days compared to post-launch, with the United States remaining an outlier in terms of wait times. The waiting period for the iPhone 14 Pro Max in the United States is now 27 days, longer than in China (23 days) and the rest of the world (21 days). As a result, the strength of the US region has resulted in an over 30% sell-through for the iPhone.
The trends in the United States continue to favor the iPhone 14 Pro and Pro Max, while demand for lower-end models such as the iPhone 14 and iPhone 14 Plus is, in my opinion, extremely disappointing.
Demand has dropped significantly in recent weeks for the iPhone 14 Pro and Pro Max, while demand for the iPhone 13 Pro and Pro Max has remained stable. This is a concerning trend, even for high-end vehicles, as demand appears to be lower than the previous year.
The Implications of Declining Demand for Near-Term Results
Demand for the low-end iPhone 14 has been feeble, but demand for the high-end iPhone 14 Pro and iPhone 14 Pro Max has been significantly higher. While this increases the average selling price for the September and December quarters, I believe the significant supply of low-end iPhones poses a concern for the second half of 2022 and 2023. This risk is represented by Apple missing on units as they reduce the production of low-end models. In reality, Apple just revealed that it will scale back plans to raise iPhone 14 output by 6 million units. Instead, it will produce the same amount of units as last year, with a goal of 90 million handsets for the time being.
While I believe Apple will move production attention from low-end handsets to high-end handsets, there is a danger that the iPhone 14 low-end models will continue to underperform in terms of unit sales, causing production volumes to fall even further than projected.
As a result, I believe there is relatively little upside to the unit prediction of 48 million in September and 83 million in December. Early data indicate that demand is declining post-launch. According to Visible Alpha, there is a bigger risk to the production consensus numbers for the second half of 2022 and the calendar year 2023, which are now at 84 million and 244 million, respectively. The greater risk, in my opinion, would be the 244 million units for the calendar year 2023, as there is a potential that low-end manufacturing will continue to be lowered in the future as demand weakens.
China’s Weakening Is Still a Short-Term Headwind
There are some concerning signs for Apple’s iPhone business in China, which deals with several internal issues. In July, smartphone shipments in China fell by 31%. While this is mainly due to a shortage of new models, I believe the fall in smartphone shipments also indicates rising difficulties for iPhone demand in China, at least in the short term.
This is because China’s economy appears to be faltering, as Covid-19 restrictions and lockdowns in cities throughout China impacted demand in July. This, in my opinion, will likely continue to create softness in the near term as China maintains its zero covid policy. While the apparent impact of the zero-covid policy approach and city lockdowns is lower foot traffic in malls and Apple stores, the indirect effect is taking a significant toll on the Chinese economy.
Recently, retail sales in China fell in the third quarter, implying decreasing consumer mood, and for Apple, this could mean lower demand for high-end iPhone models.
The Macroeconomic Environment Is Deteriorating
The global macroeconomic climate is becoming increasingly unclear and bleak, as the global economy appears to stagnate and central banks worldwide raise interest rates to combat rising global inflation. The IMF continues to see global issues that will jeopardize GDP predictions in the short future.
While Apple’s goods can be considered to be crucial in today’s digital environment, the company is not immune to a global macro slowdown. Apple, in particular, may see users less eager to shift handsets and hold on to current handsets for a longer time during difficult economic conditions, as well as a trade down from higher-priced and high-end iPhone models to lower-end versions. If demand for Apple’s products decreases more than projected as the global economy continues to deteriorate, the stock price will be revised downward.
Demand From China
China is a crucial market for Apple as the next growth driver due to the country’s relatively low penetration and increasing prosperity. Consumer mood in the country is currently low due to strict covid 19 laws, a crackdown on the IT sector, and problems in the real estate sector. As a result, I believe that demand in China is one of Apple’s biggest concerns. It may fall dramatically as the country’s economy deteriorates due to the numerous challenges it faces today.
Loss of Market Share in Smartphone Markets
I continue to believe that Apple has one of the best and strongest competitive moats in the world, owing to its strong brand reputation worldwide and their commitment to being at the forefront of technical innovation. The concern remains that Apple must continue to innovate to maintain its leadership position. While many other smartphone companies exist in low-end and high-end markets, these players now lack Apple’s brand recognition and equity. However, if Apple’s competitors develop superior features or software, Apple’s current dominant position in the industry may be jeopardized.
Apple Stock Is a Hold
To summarize, Apple continues to confront near-term challenges as uncertainties and risks grow. Demand for the recently released iPhone 14 variants, both low-end and high-end, has dwindled. This could indicate that demand is generally declining as customers grow more cost-conscious as the global economic situation deteriorates. There is a chance that Apple will limit manufacturing if the low-end iPhone 14 models continue to disappoint. In China, Apple faces the possibility that demand for its products may diminish in the short future as the Chinese economy suffers from zero-covid regulations and the influence of the technology and real estate sectors on the Chinese economy.
While there is a potential downside in the near term and increased chances that unit predictions may fall short of expectations and Chinese demand will collapse, I give a neutral rating to Apple stock since it continues to look positive in the long term. Apple continues to benefit from its strong brand name, high worldwide demand, superb managerial execution, and long track record of success.
Featured Image- Unsplash @ einfachlaurenz
