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Apple (AAPL) unveiled its iPhone 15 yesterday, in what’s been an annual ritual for the company for many years now. The event is closely followed by not only Apple fans, but also the investing community. New features of the iPhone 15 are getting all the attention today – and rightly so, considering the product’s appeal to millions of consumers, as well as its importance for Apple’s earnings.
However, investors should also be mindful of some significant risks that the world’s most valuable company faces – some of which became all the more apparent as it unveiled the iPhone 15.
3 Key Risks Apple Investors Should Watch Out For
Apple has a diversified revenue model, and along with product sales, it generates revenues from the high-margin services business. However, iPhone revenue still accounts for about half of the company’s sales.
The company relies on “switchers” who migrate from other platforms like Android – as well as “upgraders” who upgrade from an earlier iPhone model - to support revenue growth. As such, Apple needs to come up with an exciting product every year to entice the upgraders to shell out more money to buy the latest iPhone.
However, over the years, the newer iPhone versions have largely featured incremental changes. As Ben Wood from CCS Insight told the BBC, “It reflects just how refined the iPhone and Watch devices are and how tough it has become to deliver truly disruptive updates every year."
To be sure, Apple has a long history of coming up with innovative products. However, there is always the risk of a new iPhone iteration failing to entice buyers - which could then apply pressure to the company's earnings.
1. Antitrust Issues are a Risk for Tech Majors
Like its fellow Big Tech peers, Apple also faces antitrust issues – especially in the European Union (EU). The company pivoted to a USB-C charger in the iPhone 15 in an apparent bid to meet EU requirements. The BBC article probably best sums up the dilemma for Apple by saying the company was “forced to ditch” the Lightning charger to make way for the universal USB-C charger.
Incidentally, Apple is also preparing to allow EU users to install third-party app stores on their iPhones as it strives to comply with the region’s Digital Markets Act. Antitrust issues remain among the most potent risks for tech majors, and they're among the reasons Amazon (AMZN) stock has underperformed its peers over the last couple of years.
On a related note, X (formerly Twitter) offered a 37.5% discount to Blue subscribers if they bought a monthly subscription on the web instead of app stores. While not many app developers would have the wherewithal to take on Apple and Alphabet (GOOG), a vocal minority has been speaking out against the hefty fees that these companies charge. While App Store fees are a source of handsome recurring revenues for Apple, it's a massive hit for app developers' revenues.
2. U.S-China Tensions Are a Risk for Apple
Given the geopolitical situation, U.S.-China tensions are only expected to increase in the coming years. Apple and Nike (NKE) are among the most popular U.S. brands in the world’s second-largest economy, and China accounted for about a fifth of Apple’s revenues in the fiscal year 2022.
Rising U.S.-China tensions are among the major risks for Apple, which was quite evident earlier this month when Apple shares sold off on reports of China banning state employees from using iPhones. While China has now clarified that it did not ban iPhones, it kept a sword hanging over the company by referencing “security incidents related to Apple's phones.”
The communist nation is usually quite sensitive about data, and forced ride-hailing company Didi to delist from U.S. markets within months of its IPO. On a related note, the country even barred Tesla (TSLA) cars from military complexes, apparently over spying concerns.
3. Apple’s Supply-Chain Reliance on China
Apple’s supply chain is reliant on China, just like many other U.S. companies. The COVID-19 pandemic and China’s zero-COVID policy highlighted the risk of over-relying on one country – no matter how cost-efficient it is to source from there.
Apple has begun diversifying its supply chain, and has increased sourcing from Vietnam and India, but the transition has been slow. The company might need to strike a fine balance - it cannot shift supplies from China easily, given the country’s manufacturing ecosystem as well as the repercussions that ditching China might have on its business in the country.
Another risk that Apple faces is from Chinese smartphone companies. Huawei’s Mate 60 Pro is already being dubbed the “Chinese iPhone 15.” As Apple faces increased competition in China, growing U.S.-China tensions might simultaneously hurt the brand’s perception in that country.
Sales of smartphones have already been tepid amid the global macroeconomic slowdown, and even as iPhone sales have held up relatively well, the company is also not immune from the slowdown.
Overall, while Apple still looks like a good buy for long-term investors given its ever-increasing installed base of devices, its rich valuations don’t make it a compelling short-term buy.
On the date of publication, Mohit Oberoi had a position in: AAPL , AMZN , NKE , GOOGL . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
