Trade War Concerns Are Mounting for Apple Inc. Stock

Apple stock - Trade War Concerns Are Mounting for Apple Inc. Stock

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Two weeks ago, Apple Inc. (NASDAQ:AAPL) looked like it might be headed toward a $1 trillion market capitalization. Apple stock touched an all-time high above $183 on March 13, following a rally of more than 20% from brief early-February lows. Since then, however, AAPL stock has dropped about 10%, and its market capitalization has retreated back toward $850 billion.

Two culprits have driven the decline. A weak broad market — the S&P 500 fell 6% last week — has been one cause. Fellow mega-cap tech plays like Facebook Inc (NASDAQ:FB) and Alphabet Inc (NASDAQ:GOOGL,NASDAQ:GOOG) have pulled back as well. But the imposition of tariffs on China by President Donald Trump is another key factor pressuring Apple stock.

The risks are two-fold. Apple obviously sells into the Chinese market — and any retaliatory efforts from Beijing could impact those sales. But Apple also sources from China — and tariffs could increase Apple’s costs and/or disrupt its supply chain.

So far, the risks aren’t enough on their own to dispel the bull case for Apple stock. But combined with my long-running concerns about iPhone “commoditization,” they represent another reason why I don’t believe Apple stock is nearly as cheap as it looks.

Consumer Risk to Apple Stock

The most obvious risk to Apple is that Beijing will put up barriers between Chinese consumers and U.S. companies. As Barron’s reported last week, major consumer-facing companies like Apple, Nike Inc (NYSE:NKE), and Starbucks Corporation (NASDAQ:SBUX) potentially could face the biggest challenges.

For Apple, Greater China is a key market, representing nearly 20% of fiscal 2017 revenue, according to the 10-K. (That figure does include Taiwan, who presumably would not be impacted by any tariff, but likely represents a tiny portion of the Greater China total.)

And the timing for Apple couldn’t be much worse. The company has struggled in the Chinese market of late: Revenue in the region dropped nearly 24% over the last two years, albeit with some effect from a stronger dollar. But in the first quarter, revenue rose 11%, better than consensus expectations. Per the Q1 conference call, the top five smartphones in urban China that quarter all were iPhone models.

Even with iPhone sales weak before the last two quarters, Apple was making progress with its services business in the country, with revenue growing in fiscal year 2017, according to the 10-K. Given the importance of services overall to Apple stock, that progress is important. Any disruption in terms of either hardware or software would present a headwind to growth in China. And with that revenue roughly one-fifth of Apple’s total — and that market obviously key going forward — that’s a material issue for Apple stock.

Supplier Risk to Apple Stock

The potential impact on the supply side is difficult to decipher — but could still be significant. Apple, of course, sources phones from the country through its partnership with Foxconn Technology Co.

But in terms of components, most come from Korea and Japan, through suppliers like Samsung, Toshiba, and SK Hynix. Still, were the Chinese government so inclined, it could at the least pressure Apple from a regulatory standpoint. Foxconn already has dealt with illegal student labor and other issues. Beijing could also impose tariffs on those components ahead of their assembly in China.

As many analysts have pointed out, in this day and age, it’s difficult to tell exactly from where products come. (Indeed, the iPhone itself may impact the calculations of the U.S.-China trade deficit.) At the moment, the risk to Apple from a supply-and-cost standpoint looks minimal. But if a trade war spirals out of control, that may not be the case.

Does the Case for Apple Stock Change?

With AAPL now off 10% from its highs, some of the potential risk here is priced in. At this point, it’s probably unwise to rush to judgment on the potential effect — particularly since China hasn’t yet reacted to the imposed tariffs.

But there’s a reason why Apple CEO Tim Cook himself is calling for calm on both sides. Some 20% of Apple revenue — and one of the world’s two largest consumer markets — is potentially at risk. And there’s no telling how this all may play out. There’s a reason the broad market seems a little spooked right now. Apple investors should be as well.

As of this writing, Vince Martin has no positions in any securities mentioned.

 


Article printed from InvestorPlace Media, https://investorplace.com/2018/03/trade-war-concerns-mounting-apple-inc-aapl-stock/.

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