Shares of tech giant Apple Inc. (NASDAQ: AAPL) are trading 4% lower in early market today after it disclosed plans to slow production plans for its latest lineup of iPhones due to slower demand.
Apple informed suppliers to pull back efforts to increase the assembly of its iPhone 14 product line by six million units in the second half of 2022. Apple will now produce 90 million handsets in this period which is similar to the year-ago period.
According to experts, demand for higher-priced iPhones is stronger than for entry-level versions. So, Apple might shift production capacity from lower-priced devices to premium models. Given the pullback, Apple stock is now down 19.5% year-to-date, while the tech-heavy Nasdaq Composite index has declined by 31.5% in 2022.
Apple is wrestling with a weak macro environment
Analysts at investment banks such as Morgan Stanley (NYSE: MS) did not lower volume forecasts despite this news. However, Bloomberg Intelligence analyst Anurag Rana expects weak demand from Europe and China could negatively impact iPhone sales in the next 12 months.
Prior to the launch of the iPhone 14, Apple hiked sales projections and expected shipments to rise by 7% year over year.
There are several headwinds impacting the largest tech stock in the world. China, the largest smartphone market globally, is in the midst of an economic slump. In fact, iPhone 14 device sales in the first three weeks of availability slumped 11% compared to the year-ago period, according to a note from Jeffries.
A strong U.S. dollar and red hot inflation rates are also expected to lower consumer spending in major markets. Add in interest rate hikes and fears of a recession, and we can see why Apple stock is close to bear market territory in 2022. A report from IDC also expects global smartphone sales to fall 6.5% to 1.27 billion units.
The report states, “The supply constraints pulling down on the market since last year have eased and the industry has shifted to a demand-constrained market. High inventory in channels and low demand with no signs of immediate recovery has OEMs panicking and cutting their orders drastically for 2022.”
What next for AAPL stock price and investors?
While the iPhone accounts for more than 50% of the total revenue for Apple, the company continues to diversify its revenue base. The upcoming holiday season will be a key driver of AAPL stock price in the near term.
Deloitte forecasts holiday sales to rise by 5% year over year, while e-commerce sales are projected to rise at least 12.8% in the last quarter of 2022.
Consumer spending gains pace during this period and might boost Apple’s sales in the next 12 months.
Further, Apple’s Services now account for almost a quarter of sales and is the company’s fastest-growing segment. Apple’s Services sales accounted for less than 16% of sales in Q4 of fiscal 2021 (ended in September).
The Services business includes several subscription verticals such as Apple Music, Apple Care, Apple TV+, and Apple Arcade. A subscription business enables companies to generate steady cash flows across business cycles.
Analysts tracking AAPL stock expect sales to rise from $366 billion in fiscal 2021 to $412 billion in fiscal 2023. Its adjusted earnings might expand from $5.61 per share to $6.46 per share in this period.
So, AAPL stock is priced at 22.6x forward earnings, which is quite reasonable. It's also trading at a discount of 25% compared to consensus price target estimates.