When we retail investors talk about tech companies, we mean the Facebook, Amazon, Apple, Google, Netflix and Microsoft behemoths, all those data-driven consumer businesses that thrived during the Covid lockdowns and the economic changes that came with it ‒ like working from home, ordering online and idly playing with our gadgets.
These companies are not really comparable, and at the core not really Sci-Fi – they are shops and phones and entertainment, if one ignores the growing importance of cloud storage and data-driven marketing.
On our long way back from lockdowns to normalcy and to the not-so-normal, ensuing inflation, these companies, as a result, all of a sudden suffer difficulties: consumers have now other things to do, like going out or going on holidays, and less purchasing power to continue splashing out money online.
While the world still faces labour shortages, Big Tech has started to fire the workers it has so aggressively hired over the last few years in expectation of the good times to last indefinitely.
Looking at their performance, they have all suffered; none more than Twitter, which had to fire 50 per cent of its staff, but this is now Elon Musk’s problem, not ours. At the time of writing, year to date stock losses mounted: at Meta/Facebook – 16.14%, at Alphabet/Google – 27.5%, at Microsoft – 9.48% and at Amazon, a long-time holding of mine, an eye-watering -36.30%.
Amazon’s travails are very much the results of overinvestment in warehousing and logistics mandated by pandemic bottlenecks and then punished by shrinking consumer interest in goods. Its profit margin of 0.19% looks engineered and may well be an expression of painful losses.
Among our erstwhile tech darlings, one company stands out: Apple. Its shares have suffered least over the last year (-8.26%) and it still is the world’s most valuable company with a market capitalisation of US$2.4 trillion. And, with the exception of Saudi oil company ARAMCO, the world’s most profitable. With a prodigious profit margin of 25.3%, Apple earned a net income of US$100 billion.
It is a cash dispenser, while not splashing out on dividends (miserly 0.60%). It is, unsurprisingly, not cheap. With a P/E of 26, it is priced 43 times its book value and more than six times sales. In recessionary times it is a boon to not depend on advertising business but on two billion active devices creating a continuous stream of services income.
Apple is an enviously well-run company. Its manufacturing and marketing expertise are outstanding. And it takes good care of its human capital. While other tech giants had to fire all the workers they had taken on only recently (70,000 in January), Apple is adapting its workforce by merely cutting back on temps and by less rapidly replacing job leavers. Yet it has three vulnerabilities that will not go away.
Apple is already fair game in the US-China confrontation- Andreas Weitzer
Firstly, its net income is lopsided. Of the US$100bn earned in 2022, 23 billion came from services, like its exploitatively lucrative App Store, with many suppliers – and regulators – complaining about its market stronghold, or the Apple TV+ streaming services.
Nine billion were contributed by its Mac computers, 10 billion by its watches and other gadgets, nine billion came from iPods and whopping 49 billion from its iPhones. Half of Apple’s business relies on its high-margin phones. If one asked what comes after iPhones it a safe to assume nothing but another iPhone model.
Apple’s second and third vulnerabilities are intertwined: Its production as well as its reputation is highly dependent on China, intrinsically so and in a way no other company is. While competitors like smartphone maker Samsung have started to move out of China, Apple has doubled down over the years in ways that can hardly be untangled.
Almost all of Apple’s hardware is shipped out of China. It directly employs 14,000 hands in the People’s Republic, but indirectly engages more than two million Chinese ‒ those employed by subcontractors and material suppliers. iPhones are conceived in the US, but they are a very Chinese product.
In Zhengzhou, tech company Foxconn ‒ Apple’s Taiwanese manufacturing partner for 25 years ‒ runs a factory the size of a European town. In ‘iPhone City’, as it is nicknamed, 360,000 workers ‒ all of them in their 20s and younger ‒ live and work to churn out the bulk of Apple’s iPhones.
This has been a symbiotic process all along. While Apple has sent an army of technicians to China over the years, to train workers, control processes and to transfer technology (pre-Covid, Apple used to fly 50 expats per day from San Francisco to Shanghai), China has eagerly helped with subsidies, infrastructure, regulation and by forcefully recruiting Apple’s workers.
Gradually the Apple-China-biotope, consisting of material refining, component manufacturing, research, labour expertise and product development, has reached proportions that cannot be replanted anywhere. Neither India nor Vietnam, hampered by power failures and logistics and transport hiccups, is a match for China’s determination to remain the high tech powerhouse of the world.
For Apple to relocate its fine-tuned Chinese operations has become impossible. Even if it tried, as it does now with its cheaper handsets or some assembling and packing operations, almost all of its phone’s components would have to be shipped from China.
Like the whole of the US, covering its manufacturing deficits and debt financing for decades with China’s self-serving help, Apple is a product of globalisation. Economists like Treasury Secretary Janet Yellen try to persuade us that globalisation is merely reshaped, not undone.
For the sake of resilience and security we change some partners, relocate some businesses to ‘friendlier’ shores, but will remain open to free trade regardless. To believe this, one has to convinced that the decoupling promoted by the Biden administration, the bans on advanced electronic exports to China and the assault on Chinese enterprises like smartphone maker Huawai and EV producers are just a lot of noise and not to be taken at face value.
Such perfunctory belief in the supremacy of trade over politics is underestimating America’s resolve to keep China low. And it underestimates also China’s capabilities to strike back. What if it decides to give Apple some of the medicine the US has prescribed for Huawai?
Apple’s vulnerability became apparent last Christmas, when sales of the new iPhone 14 were halted because the iPhone City was paralysed by lockdowns and workers striking against harsh government Covid measures.
What seems absurd today may nevertheless happen. Apple CEO Tim Cook is now a regular guest on Capitol Hill, questioned by lawmakers on both sides of the isle about his plans for near-shoring and friend-shoring and how to end his umbilical China dependence. Even right-wing journalists question Cook’s opinion on the mistreatment of Chinese minorities and his dealings with the ‘enemy’.
As retail investors we have to judge how Apple’s vulnerabilities will play out and how much they will hurt our shareholdings. Warren Buffet has sold Taiwan Semiconductor Manufacturing Corporation stock ‒ only a few months after he had bought them, which is unusual for a long-term investor like him ‒ but added to his Apple holdings.
While TSMC, the world’s most advanced semiconductor manufacturer, is threatened by possible Chinese military intervention, Apple is already fair game in the US-China confrontation.
Should we sell? My guess is that any assault on Apple ‒ or Taiwan for that matter ‒ will be such a seismic upheaval, that a drop in the share price of each of them is the least problem we’ll have.
Andreas Weitzer is an independent journalist based in Malta.
The purpose of this column is to broaden readers’ general financial knowledge and it should not be interpreted as presenting investment advice, or advice on the buying and selling of financial products.
andreas.weitzer@timesofmalta.com