The world’s most valuable company, Apple Inc (NASDAQ: AAPL), is facing a challenge.
The production of its iPhone 14 Pro and 14 Pro Max are being negatively impacted amid COVID disruptions at an iPhone assembly plant in Zhengzhou, China.
Apple has issued a press release on this and said that the facility is operating at a significantly reduced capacity currently.
As a result of that, the company now expects lower 14 Pro and 14 Pro Max shipments and longer customer wait times.
While the negative headlines dominate the news, we have seen some selling pressure on Apple’s shares, leading to a decline of 9% during the first six trading days of November.
The near-term selling pressure could persist but here are five reasons why long-term investors should buy Apple stock during this market weakness.
1. Apple’s active installed base of devices reaches all-time high
While a lot has been discussed during Apple’s latest Q4 fiscal year earnings, investors should pay attention to the active installed base of devices.
That number has just reached an all-time high for all of its major product categories.
In January this year, Apple’s active devices reached 1.8 billion globally. Apple counts a device as active as long as it has engaged with an Apple service within the past 90 days.
Sources: Apple Inc’s Financial Results, ProsperUs
During the earnings call, Apple’s CEO, Tim Cook said this:
We reached another record on our installed base of active devices, thanks to a quarterly record of upgraders and double-digit growth in switchers on iPhone.
This reflects the strength of Apple’s ecosystem.
Given Apple’s customer loyalty, this double-digit growth in switchers on iPhones is positive news as it shows that more people are jumping into the Apple ecosystem.
2. Strong sales of Mac reinforce Apple’s ecosystem
Apple reported strong sales of Mac during the Q4 FY2022, reinforcing the resilience of Apple’s ecosystem.
Sales of the Mac jumped by a staggering 25% year-on-year (yoy) to hit an all-time high of US$11.5 billion.
This was driven by the launch of the MacBook Air, with its new M2 processor – which has 18% higher CPU performance for the equivalent power consumption.
The strong performance was also driven by the delayed sales from the previous quarter due to some of the supply chain issues faced by the company.
Nonetheless, the strong demand for the Mac coincides with the strong numbers for its iPhone user base.
Given Apple’s closed and tightly-integrated ecosystem, consumers that switch to the iPhone will also have the tendency to look into a Mac for their day-to-day PC and laptop needs.
Source: Apple’s Q4 FY2022 Earnings, ProsperUs
3. Demand remains strong for Apple’s iPhone 14 Pro
There were some initial data that showed lacklustre demand for Apple’s iPhone 14 models, especially the iPhone 14 and iPhone 14 Plus.
However, Trendforce data indicated that demand for iPhone 14 Pro, the high-end model of the iPhone 14 line-ups, were stronger than initially expected.
While the supply disruptions could impact the overall sales for the iPhone, it reflects the resilience of Apple’s products in spite of the rising inflationary environment.
4. Apple’s services revenue gradually gaining momentum
Another key area of growth is Apple’s services revenue, which made up 19.8% of Apple’s total revenue in FY2022.
According to Apple’s CFO, Luca Maestri, there were some areas of weakness, such as digital advertising and gaming on the App Store.
However, management was happy with the engagement with its Services.
The weaker demand for digital advertising is reflected as growth in services moderated to 4.98% in Apple’s Q4 FY2022.
One of the key areas that attracted me to Apple’s services business segment is the growing subscription number.
According to Luca Maestri, there are 900 million paid subscriptions on Apple’s platform, which is double what it was three years ago.
Apple’s services division achieved over US$78 billion in revenue during fiscal 2022, a new record and up 14% yoy.
It is currently already the size of a Fortune 50 business on its own and has nearly doubled during the last four years.
Downside risks remain with China factor
The near-term and long-term challenges for Apple remain with its reliance on China.
The company is known for the resilience of its supply chain but given the COVID-Zero policy in China and the fragile US-China relations, Apple’s exposure to China is its biggest downside risk.
In the near term, this will continue to affect Apple, but the company is already gradually moving some of its production to India.
Since 2017, Apple has already started to assemble smartphones in India and has plans to make India a key manufacturing hub by 2025.
Another concern is Apple’s reliance on its China business. The iPhone is popular in China but the deteriorating relations between the US and China could affect some of this demand.
Nonetheless, it would be unfair to punish Apple for its success in China and I believe that the company has shown that it is capable of navigating through these challenges.
Given the potential in its services revenue, the resilient brand name, its integrated ecosystem and sustainable demand, I believe long-term investors will find the reward of buying into Apple stock to be worth the near-term risks.
Disclaimer: ProsperUs Investment Coach Billy Toh doesn’t own shares of any companies mentioned.
