Apple (AAPL) announced last Wednesday that it would not comply with a court order to help the Federal Bureau of Investigation obtain data from the San Bernardino shooter’s iPhone. Naturally, investors might find themselves wondering whether Apple’s resistance poses any threat to AAPL stock.
But how real is that threat?
AAPL vs. the FBI: The Background
The FBI is having difficulty cracking the phone since there’s a feature on the iOS which may delete all data on the device after 10 failed login attempts, and the system is designed to force a delay between failed login attempts in order to thwart hackers.
The FBI is asking AAPL to create custom firmware that would disable the auto-erase function and remove this delay. The FBI then hopes to try to crack the iPhone using brute force: trying every possible combination until they find the right one.
Apple refused, arguing that creating such firmware would jeopardize the privacy of hundreds of millions of iPhone users. The problem is that this software, which would be able to unlock iPhones, could always fall into the wrong hands. Criminals could use the firmware to access the private conversations, photos, financial and health information of iPhone users. On Monday, Tim Cook released another letter, reiterating his stance and equating this firmware with “a master key, capable of opening hundreds of millions of locks.”
Most companies wouldn’t disobey a court order from a federal judge and risk stiff legal penalties under ordinary circumstances. Why is AAPL doing so now?
If Apple were to follow the court order and deliver such software to the FBI, this would weaken the brand’s somewhat strong reputation for privacy and security. Apple devices are generally more expensive than their Android equivalents, but are also seen as more secure.
This is an understandably difficult situation for AAPL and Tim Cook. The tech giant is facing political pressure, with U.S. presidential candidates calling on Apple to help decrypt the phone, and U.S. Senator Tom Cotton (R-Arkansas) slammed AAPL for valuing “a dead ISIS terrorist’s privacy over the security of the American people.”
The People Favor Apple
Sentiment online appears to favor Apple. Netizens appear to lean towards Tim Cook’s view, and many are rushing to the defense of Apple on Twitter (TWTR). On Twitter, there were 9 times more posts agreeing with Cook than disagreeing. According to opinion polls, the public was split on whether AAPL should cooperate.
Some, including U.S. presidential candidate Donald Trump, have threatened a boycott of Apple products in response to Apple’s noncompliance. Ironically enough, Trump posted that tweet from an iPhone.
This backlash seems unlikely to pose a serious threat to Apple’s revenue — and therefore much of a threat to AAPL stock either — as surveys have consistently shown that Apple enjoys greater brand loyalty than competitors like Samsung do. The number of customers loyal enough to pay higher prices for iPhones over the years, yet willing to switch brands at the drop of a hat when AAPL takes a firm stance like this, probably isn’t material.
The Feds Should Proceed Carefully
The government has every incentive to tread lightly with Apple and resolve this matter quietly; the firm is a behemoth. Apple’s sales last year totaled $233.7 billion, larger than the economy of Finland or Ireland. With a market capitalization north of $520 billion, Apple is the most valuable corporation in America.
AAPL stock is widely held, being in millions of Americans’ portfolios in one manner or another, and representing some 2.7% of the total market capitalization of US stock markets. Additionally, Apple supports hundreds of thousands of U.S. jobs. The Feds will more likely be handling Apple with kid gloves than slamming down a mailed fist.
Bottom Line
Expect AAPL stock to be unaffected by this case. The stock doesn’t appear to have much downside, since the firm has shed some $120 billion in market capitalization in recent months as sales have dipped for the first time in over a decade.
Shares have hit some resistance in the $90s; the firm’s price/earnings ratio is only 10, about half that of the S&P 500, and Apple stock is trading 26% below its 52-week high. If AAPL falls, it won’t be because of customers switching as a result of the FBI case — after all, even the Donald can’t get off his iPhone.
At the time of this writing, the author did not hold any of the aforementioned securities.
