Apple Inc. (AAPL), whose future seemed promising just a month ago as its market value surpassed $1 trillion, now runs the possibility of suffering significant losses as a result of the U.S.-China trade conflict. According to Barron’s, HSBC Global Research advises investors to consider selling their shares in Apple, one of the U.S. tech companies most reliant on the Chinese market, before the trade war causes a possible severe decrease in its profitability.
How The China Trade War Could Crush Apple’s Stock
- Up to 18% of iPhone maker’s sales and even more of its profit comes from China.
- Chinese buyers choose local, more affordable brands
- Chinese customers may boycott Apple if Trump follows through on his promise to prevent Huawei from selling in the United States.
- According to Credit Suisse, every 5% decrease in sales in China results in a $0.15 reduction in EPS.
Source: Barron’s, CNBC
Chinese Consumers Shift to Local Brands
A fresh wave of market volatility has arrived as trade tensions rise, impacting American equities with the most exposure to the Asian market.
Through early May, the shares of iPhone manufacturer Apple rose 37%, propelled by the bull market and hope for the company’s future. But compared to the S&P 500 index, which saw a reduction of only 2.4% over the last month, the company’s shares have dropped by about 10%.
Before the trade spat, Apple was already experiencing a significant decline in worldwide iPhone sales. That slowing may quicken. Erwan Rambourg, an analyst at HSBC Global Research, notes that Apple derives up to 18% of its sales and an even greater portion of its profits from the mainland. According to a recent analysis by him, published by Barron’s, “US-China trade discussions have continued to be an albatross.” “An increase in trade conflict between the US and China is expected to affect demand in China… There is a chance that customers in the Chinese market would speed up their transition to smartphone alternatives, especially if they choose local companies.
Apple would either increase its pricing or see a decline in profitability if there was a 25% tax on the remaining products from China. Price increases would reduce sales in the important Chinese market as customers would select less expensive local products.
Trump’s War Against Huawei
According to Wedbush, citing Barron’s, if President Trump chooses to go through with his temporarily postponed intentions to prohibit China telecom giant Huawei from selling equipment to American firms, the prospect of domestic competition in China might also grow. If put into effect, the restriction may cause Chinese customers to avoid the American hardware manufacturer.
Even though Apple’s stock has fallen significantly from its 2019 highs, it increased on Tuesday when it was announced that the United States will temporarily lift Huawei’s export ban.
According to Credit Suisse analyst Matthew Cabral, Apple’s profits per share would be reduced by $0.15 for every 5% decrease in China sales. He mentions that, according to CNBC, China contributed 20% to Apple’s top line and operational profit in the previous year.
Apple bulls, on the other hand, are still optimistic about the company’s decision to concentrate on software and services rather than hardware. The smartphone manufacturer introduced additional ventures earlier this year, including Apple TV+, a gaming subscription service, and other digital services. According to a previous Investopedia article, some market observers, like Piper Jaffray, believe that Apple has changed so much that its service business is now worth more than the hardware company. If the U.S.-China trade war persists, that level of optimism can go rapidly.
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