Apple (NASDAQ:AAPL) will be hit hard by weakening international currencies. This is particularly true when it comes to China’s impact on Apple stock. While the U.S. and China prepare for tough negotiations in their trade talks, there is a significant risk that China’s currency will further weaken, which could hit AAPL in turn.
Bloomberg reported that the White House is concerned about possible currency manipulation during its trade talks. A weaker Yuan increases the price of products bought by consumers in their local currency. This has led to weaker demand for AAPL products in China in the current cycle. At the same time, Apple can face further regulatory bottlenecks in the country, which would hurt its overall results.
Apple Stock and The Strengthening Dollar
The USD-Yuan exchange rate went from 6.95 in early January 2017 to a low point of 6.26 by March 2018. This is an inverse ratio, which means that a lower number indicates strength in Chinese currency vis-à-vis the dollar. On the other hand, a rapid rise in this number, as seen in the last few months, means that the Chinese currency is weakening against USD.
Apple converts its Chinese revenue from Yuan to USD when it reports its earnings. A stronger Yuan or weaker dollar increases the dollar value of the revenue made by AAPL in China. Similarly, a weaker Yuan or stronger dollar reduces the dollar value of the revenue made by AAPL in China.
Currently, the USD-Yuan exchange rate is close to 7. If tariffs and rhetoric further escalate, we could see the exchange rate move to 7.2 or 7.3. The U.S. dollar is also increasing in strength against the Euro. The dollar showed a steep decline against the Euro throughout all of 2017. This has helped Apple in showing better year-over-year comparison data in 2017 and early 2018 because the reported dollar value has been higher. And by extension, this has also helped AAPL stock.
Europe contributed $62.4 billion of revenue out of a total of $266 billion — 24% — in the last fiscal year for Apple. Greater China contributed $51.9 billion or 19.5% to total revenue. Together, these two regions have a higher contribution to Apple’s total revenue base than the Americas.
One of the reasons for the strengthening of dollar is the recent trade tariffs pushed by the Trump administration. This has caused a flight to safety toward the U.S. dollar. Another reason is the expected interest rate trajectory of the Federal Reserve.
In the past few months, almost all the major currencies in the world have weakened against Dollar. The Euro has seen a decline of 8.6%, the Yuan has declined by 9.6% and the Indian Rupee has declined by 10.2%. A weaker currency forces Apple to increase the price of the product in the domestic market, which could hit Apple stock hard in the months ahead. And we can see this pain in all international markets.
The recent base model of the iPhone XS Max is selling at RMB 9599 in China. Last year, the iPhone X was sold at RMB 8388. Hence, there has been a 15% increase in the price of the iPhone in terms of the Yuan. The actual increase in terms of the Dollar has been only 10% from $999 to $1,099. Emerging markets like India have also seen a significant decline in their local currency, which has reduced the demand for AAPL products.
Part of a Larger Issue for AAPL
The currency swing in the Yuan is part of a larger trade issue. If push comes to shove, we could see other actions by the Chinese administration on U.S. companies. Apple is the biggest foreign brand in China and it has already faced some regulatory hurdles in China when there were issues between the U.S. and Chinese government. In 2014, Apple’s launch of iPhone 6 was delayed in China, which was believed to be due to ongoing problems between the two governments.
If the trade issue is not resolved in the next couple of weeks, AAPL stock could again face a big problem. Apple is already facing substantial competition from Chinese OEM manufacturers like Huawei, Oppo and Xiaomi, which are increasingly targeting the mid-tier pricing of $400 to $600 in China. This leads to lower demand for Apple’s entry-level smartphones. It also hurts the resale value of higher-end phones by Apple.
The Bottom Line of AAPL Stock
The better economic climate in the U.S., flight to safety in the Dollar and Fed rate increases will keep bolstering the strength of the Dollar. AAPL stock has received significant tailwinds in 2017 and early 2018 due to a weaker dollar. However, now that the Dollar is getting stronger, we could see much more muted results from Apple. Apple has not shown any sizable increase in unit shipments in the current iPhone cycle. Most of the revenue growth was propped up by ASP growth.
The ASP is already sky-high, which limits the potential of future growth in this metric without hurting unit shipments. Hence, a much stronger dollar at this moment will end up being a big headwind for the company and Apple stock. If the trade rhetoric continues to increase and the Dollar continues to strengthen, we could see a big bearish sentiment toward Apple stock in the short term.
As of this writing, Rohit Chhatwal did not hold a position in any of the aforementioned securities.
