The tech-heavy NASDAQ 100 actually hit an all-time high on Wednesday despite weakness in its largest component, Apple Inc. (NASDAQ:AAPL). Apple stock still could suffer from a potential trade war.
So far, the market seems to have shrugged off fears about a potential trade war between the U.S. and China. The Dow Jones Industrial Average has struggled, falling for eight straight sessions, but broader market indices have held up.
In fact, Apple stock has pulled back about 5% after touching an all-time high earlier this month. A stock that seemed headed toward a long-awaited $1 trillion valuation instead seems a bit more risky at the moment, given concerns about the company’s exposure to rising tariffs.
So it’s worth considering what the effect of a trade war might be on Apple and on Apple stock. At the moment, given the fluidity of the situation, investors can do little more than guess. Of course, that alone might be the problem at the moment.
Is a Trade War on the Way?
The problem with trying to evaluate the impact of a trade war on Apple stock is that’s far from clear what a trade war actually might look like. At the moment, it looks reasonably dicey.
The U.S. has threatened an incremental $200 billion on tariffs in addition to a previous $50 billion matched by China. What happens from here is anyone’s guess.
China could retaliate with more tariffs of its own. It could pressure U.S. based businesses in the country. That could include Apple.
Of course, either country could back down. Intellectual property protection is a core U.S. concern, and China could take some steps toward assuaging fears on that front. Back-channel negotiations could lead to the tariffs being paused and ultimately rescinded.
It’s important not to overreact at this point, but there is real risk. It’s not a coincidence that the iShares MSCI China Index Fund (NASDAQ:MCHI) has pulled back 13% from late January highs.
Is Apple Stock Exposed?
If a trade war does come, Apple has significant exposure. The iPhone itself, given that it is assembled in China, could be subject to tariffs. And as James Brumley pointed out this week, there are conflicting reports as to whether the iPhone has received an exemption.
Would a tariff necessarily harm iPhone sales? That, too, is not clear. After all, phones made by Samsung and other manufacturers that use the Alphabet Inc (NASDAQ:GOOGL,GOOG) Android platform could have some exposure as well.
Indeed, with supplier Foxconn building out a U.S. presence, Apple could perhaps move more of its supply chain into the U.S. (albeit with higher labor costs).
But Apple does have a number of pressure points. Notably, over 20% of Apple’s trailing twelve-month revenue comes from China. And after two years of declining sales in that country, recent strength has been a big driver of the optimism toward Apple.
Sales in China rose 21% year-over-year in Q2, driving a beat that calmed fears about weak iPhone X sales.
China is a key market for the iPhone. The U.S. market is pretty much saturated, leading to worries that longer replacement cycles will eventually lead to declining revenue. Europe isn’t much better, and Apple has struggled in India.
Whether the government actively decides to affect Apple’s business or anti-American sentiment hits sales, the growth story for Apple takes a hit if China weakens. And there is a risk of that happening even if, here too, it’s a bit too early to jump to conclusions.
Is Apple Stock a Buy?
So far, the risk of a trade war seems unlikely to change investors’ opinion on Apple too much. Apple bulls see a stock that is still too cheap, even near all-time highs and one that prices in any risk in China.
For Apple skeptics like myself, the news adds to the risks that create a very real bear case for Apple stock at some point. Without China, it’s going to be tough for Apple to grow beyond its Services division, and even at a muted earnings multiple, some level of growth looks priced in.
But for now, even with a modest decline of late, investors still seem pretty confident in Apple. Time will tell whether the looming trade war can shake that confidence.
As of this writing, Vince Martin has no positions in any securities mentioned.