3 Top Risks Making Apple More Vulnerable in Current Sale

As stock sell-offs intensify and investors rush to safety, equities are the most vulnerable part of the market, after a vigorous rally in recent months has pushed valuations to bottom-end levels during the dotcom era.

In this fix, iPhone maker Apple (NASDAQ 🙂 is more exposed than the other two technology titans in the trillion dollar market cap club – Amazon (NASDAQ 🙂 and Microsoft (NASDAQ :).

Below, we summarize three major risks to Apple stock after a strong rally saw its rise of more than 80% between March and September 1, when the current downturn began. Apple stock has fallen nearly 16% since then, closing at $ 112.82 yesterday

1. Still Too Dependent on i-Phone

One of the main reasons investors remain enthusiastic about Apple, is the company's successful drive to diversify its revenue base beyond iPhones. In recent years, Apple has proven it can use its massive customer base to unlock new areas of growth when demand for its flagship products declines.

In fiscal 2019, the company's iPhone business accounted for approximately 55% of total sales, while the services segment – which includes Apple Music, movie rentals, and app downloads – accounted for approximately 18% of sales.

Despite this, some analysts believe that the growth of the services is not strong enough to offset the decline in the hardware business.

Goldman Sachs, which lowered Apple's price target by 33% to $ 80 a share yesterday, says it doesn't believe the company's non-iPhone segments can turn Apple into a true growth company. As the analyst said about this:

"Our overall view of Apple is based on the idea that the iPhone is a very difficult task to follow, with services and wearables probably not going to be big enough to grow the business again."

The bank even compared Apple to Intel (NASDAQ 🙂 and said the company's data center operations were not enough to make up for the decline of personal computers, leading to a tough share since 2012.

2 Exposure to China

Of the megacaps technology stocks, Apple is the most exposed to the deteriorating relations between the US and China. Apple has built a large network of suppliers in China in recent years to cut costs. As a result, it has become one of the most exposed stocks to the Asian country.

The California-based tech giant employs an estimated 2 million people in Apple's supply chain, in addition to a similar number of tech workers involved in Apple app development.

The company designs and markets most of its products in the US, but imports them from China after assembly. Virtually all iPhones are made by Foxconns Hon Hai Precision Industry Co. in Zhengzhou, China, and by Pegatron at an assembly site near Shanghai.

President Donald Trump said yesterday that he intends to further diminish the US economic relationship with China by threatening to punish all US companies that create jobs abroad. He has also said he would ban companies doing business in China from winning federal contracts.

In the technological field, the Trump administration is trying to prevent China from accessing US user data on popular apps like WeChat and TikTok. The US is also in the process of denying Huawei access to US technologies and equipment.

3. High Valuation

Apple, now estimated at about $ 2 trillion, is trading at more than 31 times future earnings – the richest multiple in more than a decade.

There are many valid reasons that have fueled this optimism and prompted analysts to reassess this stock, including the belief that Apple will launch its first 5G iPhone later this year, and that the company's service revenues remain grow and diversify its dependence. away from the transactional hardware.

But now that its stock is perfectly priced, the company has little room to disappoint its investors. The sell-off of Apple shares accelerated after the Nikkei Asia Review reported on Tuesday that mass production of the company's latest line of iPhones is expected to begin in mid-September and early October. Production was due to start in late August.

The company is expected to produce about 75 million iPhones this year, which is a shortage of the 80 million phones it has ordered components for, sources told the paper. The rest of Apple's planned production could be delayed until early 2021, Nikkei said.

"In order to become more positive about Apple's stock and refute this statement, we would like to see the company deliver higher sales / EBIT repeatedly against consensus expectations, with increasing sales and earnings," the note said. Goldman Sachs.

Bottom Line

Apple is at greater downside risk than other technology giants in the current correction phase. But we think that weakness is healthy and offers investors a good opportunity to buy the company's stock at a much more attractive price.

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