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Like many in the tech industry, Apple (NASDAQ:AAPL) has been impacted by the tougher macro environment in 2022. Year-to-date, investors have seen a negative total return of 24% from Apple shares, amid concerns about Continued supply chain disruptions and growing risk of an economic hard landing in the year ahead.
Despite the challenges, Apple seems well prepared for a comeback in 2023. And here are three compelling reasons.
End in view of the disruptions linked to Covid-19
Disruption of supply
Supply issues caused by Covid-19-related disruptions and an industry-wide semiconductor shortage continued to impact Apple’s ability to meet customer demand for its products in 2022. Other issues could still arise, as Apple warned in November over lower shipments of iPhone 14 Pro and iPhone Pro Max, following Covid-related labor shortages that disrupted production at the main iPhone assembly plant of Foxconn in Zhengzhou, China.
But in an effort to improve supply chain resilience, Apple is diversifying its supply chain beyond China. With more production shifting to India and Vietnam and increased purchases from the United States, Taiwan and elsewhere, the company will be better protected against localized manufacturing risks in the future, as well than against trade and geopolitical tensions.
Supply issues are not yet resolved, but the end is clearly in sight. As chipmakers ramped up production to meet demand, silicon-related supply constraints have already eased significantly over the year. The iPad and MacBook Pro supply position, which had been significantly constrained for most of 2021 and the first half of 2022, has also improved significantly since then.
Additionally, with China now moving away from its zero Covid policy, pandemic-related supply disruption issues may soon disappear. Things could get a bit worse in the short term as rising infections temporarily exacerbate existing supply issues and Covid-related labor shortages. In the longer term, however, the benefits will accrue, as the abandonment of strict social controls and unsustainable “closed-loop” manufacturing operations will ultimately lead to a lasting improvement in the supply situation.
Resumption of request
The same could be said for the demand side. In the short term, consumer spending will be hit as people across China choose to stay home either because they are sick with Covid or because they are trying to avoid catching the virus. However, after a few months, a return to normal should eventually lead to a recovery in economic activity and, in particular, an increase in consumer spending.
We have seen the same pattern across the world as other countries have abandoned their strict Covid containment strategies and learned to live with the virus. Pent-up demand and improved consumer confidence, driven by better job security and increased employment opportunities, would likely lead to a pickup in Apple’s sales growth in China as well.
Demonstrating recent depressed demand, Apple’s sales growth in Greater China, which includes Hong Kong and Taiwan, slowed to just 9% in the year through September 24, 2022, from 70% in 2021. This was largely attributable to macroeconomic factors, as Apple strengthened its market share in its most important market – high-end smartphones. In the $600+ smartphone space, its market share has grown to 70% in China in the second quarter of 2022, up from 58% in the first quarter, according to data from market research firm IDC.
And while a recovery won’t be noticeable until the second half of 2023, it’s important to remember that investor sentiment generally improves before the temporary disruption subsides – as investors are likely anticipating a recovery before that. does actually happen.
Service Revenue Opportunity
iOS Services and Apple TV+
Although product sales drive the vast majority of revenue, it’s clear that services are becoming increasingly important to Apple’s growth.
Of course, the desirability of services is inextricably linked to the size of its user base – things from the App Store and other related services just can’t sell well unless people switch from time on corporate devices. But that doesn’t mean services revenue won’t continue to outpace product sales – as demand for digital content, sold through its App Store, Apple Music and other digital content stores, is expected to hold up well in a growing market. .
Services is also a higher margin business – Apple generated a gross margin of 71.7% on services in 2022, compared to 36.3% for devices. Going forward, recent price increases on Apple Music, TV+ and its One package will likely drive revenue growth and further margin improvements in the coming quarters. These price changes were only announced at the end of October and have not yet been published in its latest financial results.
On the other hand, competitive and regulatory risks, particularly those related to its App Store, constitute a potential headwind. The proposed EU Digital Markets Act could force Apple to open up distribution of apps on iOS devices.
However, the potential impact on Apple’s bottom line would likely be limited, as the proportion of users choosing to purchase products from other sources is expected to be very low. As we can see from Android users, who can already install apps outside of the Google Play Store, only a small minority of users actually choose to take advantage of the additional competition, due to network effects, security issues and persistent behaviors. This reflects a “winner takes all” market that demonstrates the value of scale in attracting customers and developers.
Advertising & Fintech
Beyond that, Apple is looking to tap into the growth of other services. It has a growing presence in the mobile advertising market – Apple Search Ads on its App Store is a relatively new entrant with great potential. Its advertising business experienced particularly strong growth, at a time when its competitors were negatively impacted by the introduction of its privacy changes last year, namely Apple’s Application Tracking Transparency Framework. And going forward, there’s room for more advertising space in many of its iOS apps, such as Music, Books, Fitness and Podcasts, as well as its Apple TV+ streaming service.
Apple is also exploring growth opportunities in financial technology (fintech). Apple Pay, its mobile payment service, is currently its biggest success, but its ambitions don’t stop there. The company partnered with Goldman Sachs to launch Apple Card in 2019 and plans to launch Apple Pay Later – a buy-it-now, pay-later (BNPL) service that directly competes with Klarna (KLAR), To affirm (AFRM) and after-payment.
The global fintech market is expected to grow at a compound annual rate of approximately 25% over the next five years and reach a market value of approximately $324 billion by 2026.
Improved margins
Finally, improved margins are another reason to raise Apple. The company’s leading margins are a testament to the strength of its brand and its loyal customer base. This gives the company an element of revenue visibility that other companies simply don’t have.
And such is Apple’s wide moat that the company enjoys strong pricing power – which it continues to provide for its gross margin. This allowed the company to raise prices not only for services, which was discussed above, but also for its products. Higher prices for its iPhone 14 devices were seen in a number of markets outside of the US and China as the company sought to offset stronger dollar FX headwinds.
| Gross margin | 2022 | 2021 | 2020 |
| Some products | 36.3% | 35.3% | 31.5% |
| Services | 71.7% | 69.7% | 66.0% |
| Total | 43.3% | 41.8% | 38.2% |
Source: Apple’s Annual report 2022
Apple’s gross margin increased 150 basis points over the past year to 43.3%. This reflects stronger margins for products and services, as well as a favorable shift in revenue mix towards higher-margin services.
Widening margins benefit Apple’s bottom line because it allows earnings growth to outpace revenue growth. This combined with the benefit of stock buybacks, which reduces Apple’s stock count and further increases its earnings per share.
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