Is It Time to Drop Apple Stock Amid Supply Chain Chaos?

  • Apple (AAPL) relies on China for manufacturing of more than 90% of its products.
  • This is already causing the company a major earnings hit thanks to fresh Covid-19 lockdowns in China.
  • Geopolitical expert Peter Zeihan warns Apple's China supply chain problems are about to get much worse.
AAPL stock - Is It Time to Drop Apple Stock Amid Supply Chain Chaos?

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Apple (NASDAQ:AAPL) is one of America’s most well-known brands. Its familiar logo can be found on phones and other devices in virtually every corner of the world. However, there’s a dirty little secret for AAPL stock.

Apple does almost none of its manufacturing of iPhones and additional products in the United States or other developed countries. Rather, this is virtually all outsourced to China. In past years, this has been a profitable — if at times controversial — arrangement. However, Apple’s reliance on Chinese labor may now become the company’s Achilles’ heel.

Ticker Company Current Price
AAPL Apple $132.94

Expert Warns of iPhone Shortage

Author, futurist and geopolitical expert and Peter Zeihan has called out Apple for its failure to secure its supply chain. In a recent discussion, Zeihan criticized Apple for failing to build any new supply chain capabilities in North America unlike companies like Intel (NASDAQ:INTC) or Texas Instruments (NASDAQ:TXN). Instead, Zeihan said that: “Apple is going the other direction. They’ve never diversified, they keep concentrating way more [in China]. They’ve taken no intermediate steps to mitigate the problems that are coming.”

This led Zeihan to issue a stark warning. He said that: “I could see the entire Apple ecosystem disappearing for four or five years until such time that the supply chain can be rebuilt somewhere else.” What’s that mean in practical terms? Zeihan continued, saying: “If you have an Apple iPhone I hope you like it because I don’t think you’ll get another one anytime soon. It’s just not going to happen.”

Is Zeihan overstating his case? Before you answer, consider that he astutely predicted back in 2014 that Russia would invade Ukraine by the year 2022, leading his star to rise in international relations analysis this year.

Now, he believes that China’s inability to manage Covid-19 mixed with its dour demographic picture and structural economic imbalances will lead to the collapse of manufacturing capabilities in that country. Zeihan sees China as a difficult-to-govern state with rapidly declining institutions and economic dynamics that will make it challenging for multinationals such as Apple to reliably procure goods from there going forward.

Apple Taking Steps Toward Diversification

A recent Wall Street Journal report noted that Apple is considering some modest moves toward spreading out its supply chain. Right now, the report noted, Apple does more than 90% of its manufacturing in China. This has placed it at extreme risk given the mounting geopolitical tensions involving the U.S., China and Taiwan. Also, there have been reliability concerns in China, including a long series of power outages last year that greatly hampered manufacturing.

In addition, the fresh round of Covid-19 lockdowns in China have created considerable direct risk to Apple, which could have been avoided if it had assembled a more robust supply chain. Apple warned that it could see a sales hit of at least $8 billion this quarter due to renewed Covid-19 restrictions.

To that end, Apple is reportedly looking at other alternatives such as Vietnam and India to house some of its manufacturing capabilities. But, if experts like Zeihan are right, it may be too late for Apple to safeguard its manufacturing set-up. It will take years to truly pivot the supply chain away from China. Meanwhile, the existing problems could keep getting worse for the electronics giant.

Bottom Line on AAPL Stock

Apple has long been one of the world’s greatest beneficiaries of globalization. The rise of one global marketplace has allowed Apple to source incredibly cheap labor to put together its iPhones and tablets. Meanwhile, the growing consumer class in emerging markets has made it possible for Apple to sell tons of phones in China, India, Latin America and so on.

However, these forces now appear to be running in reverse. Countries such as Russia are dropping out of the global trade system entirely. Meanwhile, China is looking like an increasingly less reliable partner for American manufacturers. And if experts such as Zeihan are right, the issues with China are about to get a lot worse in coming months and years.

This all could expose Apple to substantial risk on both the revenues and costs side of the ledger. If AAPL stock were cheaper, perhaps these risks would be more balanced out. However, shares still go for 24 times forward earnings, which is hardly cheap for a mature company with modest growth prospects. Given Apple’s heavy reliance on China, it seems best to steer clear of AAPL stock until there’s more clarity about that country’s handling of Covid-19 and its economic prospects going forward.

On the date of publication, Ian Bezek held a long position in TXN and INTC stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.


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