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AnalysisU.S.

4 key risks that could cripple Apple’s business model

Apple is one of the largest and most successful companies in the world. Its brand and products are recognised and used by billions of people globally, and its market dominance looks set to continue for many years to come.

At the same time, no company, no matter how successful, is 100% risk-free. The risk I’m referring to is not the volatility in stock prices, but the key risks that could potentially affect a company’s business fundamentals and its ability to generate profit in the short or long term. Here are four key risks that could cripple Apple’s business.

1. Anti-trust risk

In August 2020, Epic Games — an American video game and software developer — implemented a patch in its widely popular video game, Fortnite, that allowed users to bypass Apple’s App Store payment system and purchase in-game currency directly from Epic. This meant Apple would not receive its standard 30% cut of all purchases made through the App Store. In response, Apple blocked the game from the App Store which led to Epic filing a lawsuit against Apple for antitrust and anticompetitive practices.

In September 2021, the judge ruled that Apple was not a monopoly but it can no longer prohibit app developers from pointing to other means of payment beyond Apple’s own payment systems. The implication of this ruling is that Apple potentially stands to lose its commission on in-app purchases and subscriptions if users decide to purchase directly from developers. This threat is important because the App Store is Apple’s largest revenue contributor to its Services segment.

Both Epic and Apple are appealing the case; a process that could take years to conclude. As of writing, Fortnite remains unavailable on the App Store.

2. Concentration risk

The iPhone remains Apple’s crown jewel and generates more than half of the company’s revenue. Many of Apple’s other products and services – App Store, iTunes, iCloud, Apple Watch, AirPods, Apple Pay, etc. — revolve around the iPhone. Therefore, if the iPhone is no longer successful, Apple will be in trouble.

Although it’s hard to see the iPhone being replaced right now, we only need to go back 15 years ago when Nokia was the undisputed leader in mobile phones with more than 50% global market share. Then in 2007, Apple released the original iPhone, and within a few short years Nokia lost its leadership, and the rest is history.

The smartphone is ubiquitous in today’s lifestyle, but if it is one day disrupted by a new connectivity device (augmented reality glasses, anyone?) that Apple lags in, then we could be witnessing the Nokia story all over again.

3. China supply chain risk

Apple is heavily reliant on mainland Chinese manufacturers for its supply chain. This could become a complicated issue due to the growing geopolitical tension between China and the U.S. Apple is also heavily affected by Chinese government policies. For example, China’s zero-Covid regulations and recent protests have hampered Apple’s manufacturing facilities in the country.

As this time, China also holds the lion’s share of global rare earth production. The country produces around 60% of the world’s rare earths – important raw materials which are used in the manufacture of high-end electronics and consumer technology. China remains a critical partner to Apple’s ability to produce its hardware devices at the scale it requires.

4. Cyberattacks

Cyberattacks and cybersecurity are part and parcel of the digital age, and Apple is no different. However, what makes Apple stand out as a risk in this area is that Apple (and the iPhone) has become the centre of your digital identity for its millions of users.

Apple/iPhone stores your photos, locations, credit cards, health records, passwords, and so much more. A sophisticated hacker can wreak havoc on Apple if its cybersecurity and user data is ever compromised; millions of Apple devices would be rendered almost unusable overnight. With such a risk, Apple needs to maintain a top-notch cybersecurity system to ensure that its digital infrastructure and user data are always protected.

The fifth perspective

Every company, no matter how wonderful they are, have their own set of risks. Risk (i.e., uncertainty) is unavoidable in the world of business and investing. Therefore, when investing in a company, it is important you understand the different risks it faces and whether you are comfortable with them. Every investor has different risk tolerances, and it’s important that you only invest in stocks — or anything else for that matter — that suit your risk profile.

Tan Jiunn Yi

Jiunn Yi holds a honour's degree in economics from UWE Bristol and passed the CFA Level III examinations. He believes in finding value in your investments, and has a strong interest in financial modelling, analysis, and stock valuation.

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