AAPL

Apple Stock: Bear vs. Bull

In 2022, economic challenges led the Nasdaq Composite index to plunge 33% over 12 months. The sell-off led to countless tech and consumer-reliant companies suffering steep stock declines. However, Apple (NASDAQ: AAPL) remained one of the few companies to outperform the market, with its shares falling a somewhat more moderate 26.8% in the same period.

The tech titan's reputation as a reliable buy has led it to amass the largest market capitalization in the world at $2.4 trillion. As a result, there are a lot of bull arguments for Apple's stock. However, before adding the company to your portfolio, you should also be aware of its faults. Here are the bear and bull cases when it comes to Apple's stock.

Bear: Apple's reliance on China

Towards the end of 2022, a spike in COVID-19 cases in China led to production strains in factories, with Wall Street questioning Apple's reliance on the country for manufacturing, particularly for its iPhones. In fiscal 2022, the iPhone accounted for 52% of Apple's total revenue. So when it was revealed that Foxconn (or Hon Hai Precision Industry), which produces about 70% of all iPhones, could suffer production declines of up to 30% amid pandemic restrictions, Apple's stock fell almost 14% between Nov. 1 and Dec. 31 of last year.

The company's stock has since recovered 16% year to date as production has returned to over 90% capacity, and Apple has made moves to exit China in the coming years, increasing production in countries like India. In fact, Bloomberg revealed on March 3 that Foxconn plans to invest $700 million in the South Asian country as it works to speed up manufacturing for Apple products.

While it is promising that Apple is taking the necessary steps to move production out of China, there is still a looming threat to its chips. The company's sole chip supplier for all its products is Taiwan Semiconductor Manufacturing Company, the biggest chip manufacturer in the world, with over half of theglobal marketshare.

As a result, the increasing threat that China could invade Taiwan puts a crucial part of Apple's business at risk. However, the upside is that TSMC is currently building semiconductor factories in Arizona, with chip production scheduled to begin in 2024. Additionally, Apple CEO Tim Cook confirmed in December 2022 that the company would be buying chips from the Arizona plant.

Bull: A past of reliable growth and a bright digital future

Apple may have put too many eggs in China's basket. However, it's positive that the wheels are in motion to rectify the situation. Meanwhile, its dominating position in tech means it has the cash to invest heavily in diversifying its production, decrease its reliance on China, and continue funding its growth. As seen in the table below, as of Dec. 30, Apple reported the most free cash flow among the five biggest names in tech.

Chart showing Apple's free cash flow beating several tech peers' since early 2022.

Data by YCharts

Apple's stock has risen 234% over the last five years, and 892% in the past decade. The continuous growth has come alongside annual revenue, which has climbed 48% to $394.3 billion since 2018, with operating income soaring 68% to $119.4 billion. The company is home to immensely popular products and services that have produced nearly unparalleled brand loyalty.

In addition to improving its product manufacturing, Apple is swiftly expanding its digital services business, its second-largest segment, which will diversify its revenue and allow it to lean less on products. Subscription-based platforms such as Apple Music, TV+, iCloud, and more saw revenue in the company's services segment rise 14% year over year to $78.1 billion in fiscal 2022, double the iPhone's growth. The services segment's profit margin also came in at an impressive 71.7%, compared to products' profit margin of 36.3%.

Apple's current dependence on China is concerning. However, it's taking the necessary steps to improve the problem going forward, and it has the funds to do so. Meanwhile, its booming services business only strengthens its long-term outlook. As a result, the bulls win this one, with Apple's stock an excellent long-term investment.

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Dani Cook has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and Taiwan Semiconductor Manufacturing. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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