Apple (AAPL)

Some welcome news for Apple (AAPL) on the iPhone production front.

On Tuesday, the Chinese authorities called an end to the Covid lockdown in Zhengzhou – also referred to as iPhone city – home to Foxconn’s major Apple production hub.

This is no doubt a positive development in what Wedbush’s Daniel Ives says has been a “horror show” for Apple’s iPhone production.

The analyst reckons that over the past month, production has been operating at around 20%-30% of capacity, the result of which has been a “massive, unprecedented iPhone shortage globally,” which heading into the Christmas holidays is obviously far from ideal.

While the disruptions hit around 3% of the iPhone 14’s production initially, the shortages rose to ~5% last week and now account for around 10%+ of total units, and depending on Foxconn improving production, could potentially rise further over the coming month.

On the plus side, Apple does not lack demand for its flagship product and Ives estimates consumer demand is currently outpacing supply by a ratio of 3:1, yet he notes that a plethora of Apple stores, retailers, and online channels are “looking empty handed for most iPhone 14 Pro models until at least early to mid January.”

The big problem for Apple here, is that it is merely a spectator, watching the “China train wreck with minimal options on the table for now.”

While a heavy penalty from the Street for the production woes is unlikely, the saga nevertheless raises “major strategic questions” around the future of Apple’s production in China.

“What happens next Christmas?” asks the analyst. “Does Apple start to look more to India and Vietnam for iPhone production?”

Ives believes there’s a real possibility Apple will have to put forth major strategic changes, the zero Covid policy and the events of the last month having been the “straw that broke the camel’s back for Apple in China.”

“Our bullish thesis on Apple is demand driven which is very firm,” Ives summed up, “although these brutal supply shortages in the near-term remain a clear overhang for the stock to navigate.”

All in all, Ives rates AAPL shares an Outperform (i.e., Buy), while his $200 price target suggests shares will add 36% over the coming year.

Ives’ thesis gets robust backing from his colleagues; with 24 Buys vs. 4 Holds, the analyst consensus rates the stock a Strong Buy. The shares are expected to generate 12-month returns of ~22%, given the average target currently stands at $180.48.