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Why China May Hurt Apple Stock More Than Many Realize

Through no fault of its own, Apple (NASDAQ:AAPL) may have a bigger and longer-lasting problem in China than many realize. And the company’s difficulties in the world’s second-biggest economy will likely have a meaningful negative impact on the iPhone maker and Apple stock for an extended period of time.

Why China May Hurt Apple Stock More Than Many Realize
Source: dennizn / Shutterstock.com

Many media outlets have reported that iPhone sales in China have dropped sharply. For example, earlier this month, a Chinese research firm estimated that iPhone sales had plunged 61% year-over-year in February. But many investors likely believe that the decline was entirely caused by the impact of the coronavirus. After all, Apple recently cited its shuttered stores in China as the key factor behind the lower-than-expected demand for its products in the country.

But an additional, more sinister force may also be at work. Specifically, the Chinese government has promoted propaganda which blames, without any basis, the U.S. for the coronavirus outbreak. According to The Washington Post:

“In recent days, run-of-the-mill mockery of the White House has taken a darker turn as the Chinese internet became inundated by the theory, subtly stoked by the Chinese government, that the coronavirus originated in the United States.”

Unfortunately, history clearly shows that even the most ridiculous propaganda, if repeated enough times, will be believed by many, if not most, people. (The ability of the Nazis to brainwash much of the German public is the most prominent example of that). Therefore, it’s reasonable to think that many people in China will believe the crazy anti-American propaganda that Beijing is circulating.

In that environment, a high percentage of Chinese consumers is very likely to have a negative attitude towards America. As a result, a large percentage of them may avoid buying the products of prominent American companies, including Apple. And since an estimated 17% of Apple’s revenue comes from China, that trend will likely have a meaningful, negative effect on the company’s results.

Further, the trend will probably last for many months after the impact of the coronavirus has disappeared. Since the outbreak has been so traumatic for so many Chinese citizens, they’re not likely to quickly forgive or forget an entity identified as the cause of the outbreak.

Apple is Likely to Be Hit Hard by a Recession

Since the iPhone wasn’t even close to accounting for 50% or more of Apple’s revenue during the last global economic crisis, we really have no way of knowing the extent to which a recession would hurt the tech maker’s results at this point.

But I would hypothesize that iPhone sales and, consequently, Apple’s results, would drop tremendously during the next recession. New iPhones now cost $700-$1,000. In the U.S., that’s a significant amount of money, even if consumers can pay it over two or three years. In other, poorer countries, of course, the same prices have even more of an impact.

During a recession, many people who are struggling economically will hold onto their iPhones as long as they possibly can. And when they have to get a new one, many consumers who are struggling financially are likely to buy one of Apple’s older, cheaper models, weighing on the company’s margins. Many others who have to buy a new phone will likely have to settle for even cheaper devices from other companies (A few months ago, I bought an LG smartphone for around $130).

Bottom Line on Apple Stock

Even before the coronavirus outbreak started, Apple was not exactly on fire. In a January column, I noted that, “the hardware giant’s operating income — which is basically its profit excluding the impact of tax cuts and share buybacks — was actually slightly lower last quarter than in the same period two years earlier.”

Now that the company may have a long-term demand problem in China, in addition to its short-term, supply problems there, the outlook for Apple is really quite dark. And with a recession looming over some countries on top of that, now is definitely not a good time to own Apple stock.

Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer. As of this writing, he did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2020/03/why-china-may-hurt-apple-stock-more-than-many-realize/.

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