Why Apple Inc. Stock Would Survive a Trade War

Jitters surrounding a possible trade war have created a buying opportunity for AAPL

By Luke Lango, InvestorPlace Contributor

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Apple Stock Is a Long-Term Winner, Despite Near-Term iPhone Issues

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Trade war murmurs are in the air. And that isn’t great news for Apple Inc. (NASDAQ:AAPL) stock.

Over the past week, President Donald Trump announced serious intentions to impose hefty tariffs on aluminum and steel imports in an attempt to bring jobs back to the United States. Gary Cohn, Trump’s top economic adviser who was widely seen as the last man standing in the way of tariffs being enacted, resigned from his post at the White House shortly thereafter.

Suddenly, aluminum and steel tariffs look like a done deal. Trade war fears have consequently escalated. Countries far and wide have started promising retaliatory action if the tariffs are indeed enacted. The net result would be a trade war that hurts companies with tons of international exposure.

All the while, Apple stock has dropped. Apple, which manufactures products all across the globe and sells goods to consumers on every continent, stands to lose quite a bit if the world does become immersed in a trade war.

Apple’s costs could go up quite a bit as the result of tariffs. The prices of its products globally could rise and that could have an adverse affect on demand and revenues. Margins could erode. Profits could stagnate.

But at the end of the day, Apple stock will survive these trade war jitters. Here’s why.

There are two major reasons why Apple stock will be fine, even amid trade war fears.

Why Apple Stock Will Be Fine

First: the actual cost impact to Apple will likely be very small. Because a majority of Apple products are actually manufactured outside of the United States, and the amount of aluminum and steel in such products is really not that big, Apple’s costs won’t actually shoot up that much as a result of recent tariffs.

According to Gene Munster of Loup Ventures, if Trump’s tariffs apply only to raw materials, then the only product affected is the small portion of Macs still produced in the U.S. If the tariffs apply to finished goods as well, then Apple’s Mac and iPhone costs could go up by roughly 0.2%. GBH Insights echoed this thesis, saying that the tariffs would amount to a “rounding error”, at worst. Rosenblatt Securities also doesn’t see a big cost increase coming any time soon.

Overall, then, the consensus seems to be that costs won’t go up all that much, if at all. A small cost bump seems like a rather insignificant loss relative to the billions of dollars Apple is saving thanks to a lower a tax rate and the billions more that the company is repatriating thanks to tax reform.

Second: Apple has a global brand name and ecosystem that should be able to withstand international tariffs on Apple products.

Quite simply, everyone wants an Apple product, especially in China. This seems to be true regardless of price.

Last quarter, Apple’s China revenue grew by double-digits, led by robust iPhone strength. According to management, the top 5 smartphones in Urban China last quarter were all iPhones. And this product dominance extends beyond phones. Around 70% of iPad buyers in China were new and switching tablet users. Roughly 90% of Mac buyers in China were new and switching Mac users.

That means that essentially everyone in China is switching to Apple products, and that is despite Apple products currently being as pricey as they’ve ever been. Clearly, cost doesn’t matter. Therefore, Apple demand should remain robust even if tariffs start to pop up left and right.

Bottom Line on AAPL Stock

This is a still big moat, steady growth story with big catalysts on the horizon in terms of dividend hikes, buybacks and continued ramp in the Services business. Meanwhile, AAPL stock still trades at a rather cheap 15-times 2018 earnings multiple.

A trade war won’t dent that growth narrative all that much. As such, I’m buying Apple stock on material weakness.

As of this writing, Luke Lango was long AAPL.

 


Article printed from InvestorPlace Media, https://investorplace.com/2018/03/why-apple-inc-stock-should-be-able-to-survive-trade-war-jitters/.

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