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Chip Shortage Creates Buying Opportunity in Apple Stock

The global chip shortage is forcing Apple (NASDAQ:AAPL) to cut iPhone production by as many as 10 million units, according to Bloomberg. The AAPL stock price is down 5.8% in the last month.

Apple (AAPL) logo on building
Source: pio3 / Shutterstock.com

That means it’s time for you to buy Apple stock. A 10 million unit cut would amount to about 5%, based on past years’ sales. Production was estimated at 218 million units as recently as 2018. It’s not a huge cut.

It’s also likely temporary. Before you look to buy some rival phone maker, note that Apple gets two-thirds of the industry’s profit. The production cut, assuming it happens, just means some people will wait for their phones, and pay premium prices for them.

Tight Ecosystem Fuels AAPL Stock

Apple has always used a closed, proprietary business model. This has been the case since the 1970s and the Apple II. It lost the PC market in the 1980s because it couldn’t keep up with demand, the way the OEMs around Microsoft (NASDAQ:MSFT) could. I was covering the industry at the time. While the Macintosh was a superior product, customers waited five years for a PC with a graphical user interface that worked.

What changed the equation in the 21st century was China. China could produce as many iPods, then iPhones, as Apple could sell. Apple’s price still gives it just 14-16% of the global market, but it has half the U.S. market. That’s where the profits lie.

Apple’s control over its ecosystem is behind its profitability. Companies selling phones based on Alphabet’s (NASDAQ:GOOGL) Android go through distribution channels. Apple has full control over its channel, and resellers don’t undercut its pricing. Then there are services like the App store, which represented 21% of revenue in the most recent quarter. That’s nearly all profit. Apple is regularly able to take about one-third of its revenue to the net income line.

Missing the Boat

Apple shares have been under pressure since the unofficial end of the summer. So has the rest of the tech sector. Shares are down 10.1% since Labor Day while the sector, using a proxy of the Technology Select Sector SPDR Fund (NYSEArca:XLK), is down 5%. AAPL stock is likely to go lower in the near term.

But as CNBC analyst Jim Cramer points out, that’s a buying opportunity. Great companies like Apple seldom go on sale, and they don’t stay on sale long. Selling now is likely to mean missing the turn.

The turn could come as early as next week. Apple has a Macintosh event scheduled for October 18. Apple is boosting its profit margins on the Mac line by switching from Intel (NASDAQ:INTC) chips to silicon it designs. By designing its own silicon Apple can also unify the PC and phone product lines, one operating system to rule both the desktop and the mobile markets.

But what Apple bears are hanging their arguments on has nothing to do with what’s going on in Cupertino. It’s more about rising interest rates, which creates competition for investor money.

A better argument might be found in the U.S. government and its antitrust push. Apple won most of the argument in its suit with Epic Games. But the suit did open new arguments for both the government and future litigants.

The Bottom Line

During my 43-year journalism career I have watched many tech companies fail, not just those in competitive markets but in dominant positions.

When I began my life as a reporter, IBM dominated the market. Apple itself had big problems through the first half of the 1990s, until the late Steve Jobs returned it to glory. Microsoft stock went nowhere for a decade while it was under a Justice Department consent decree.

Leaders fail when they stop focusing on the market and turn their attention inward. It’s office politics that kills them. It could happen when CEO Tim Cook retires and a battle for control erupts.

But it’s not going to happen over a supply chain glitch. Only watch today’s headlines if you don’t own Apple.

On the date of publication, Dana Blankenhorn held long positions in MSFT, INTC and AAPL. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Living With Moore’s Law: Past, Present and Future available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.


Article printed from InvestorPlace Media, https://investorplace.com/2021/10/chip-shortage-creates-buying-opportunity-in-aapl-stock/.

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