Why To Sell Apple Now Before Trade War Gets Too Hot

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Why To Sell Apple Now Before Trade War Gets Too Hot

Apple Inc. (AAPL), whose future appeared bright just a month ago as its value hit almost $1 trillion, now faces becoming a key victim of the trade war between the United States and China. According to Barron’s, HSBC Global Research suggests that investors consider selling shares in Apple, one of the most reliant U.S. tech companies on the Chinese market, before the trade war inflicts a possibly severe reduction in profits.

How The China Trade War Could Crush Apple’s Stock

  • iPhone maker generates up to 18% of its revenue, and an even larger share of its profit from China
  • Chinese consumers opting for cheaper, local brands
  • Trump’s threat to ban Huawei from selling in the U.S. could lead to Apple boycott from Chinese consumers
  • Every 5% decline in China sales equates to $0.15 in reduced EPS, per Credit Suisse

Source: Barron’s, CNBC

Chinese Consumers Shift to Local Brands

As trade tensions rise, a new wave of volatility has entered the market, wreaking havoc on US equities with the most exposure to the Asian market.

Apple shares soared 37% this year until early May, powered by the bull market and confidence about Apple’s future. However, the company’s stock has dropped roughly 10% in the previous month, compared to a 2.4% drop in the S&P 500 index.

Before the trade war, Apple was already experiencing a significant downturn in worldwide iPhone sales. This slowing might increase. According to HSBC Global Research analyst Erwan Rambourg, Apple produces up to 18% of its sales and an even higher portion of its profit in the mainland. “US-China trade discussions have remained a cloud,” he said in a recent Barron’s article. “An increase in US-China trade tensions is expected to have an effect on Chinese demand… There is a danger that customers in China would speed the migration to smartphone alternatives by favoring local companies.”

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A 25% tax on the remaining Chinese imports would force Apple to raise its pricing or reduce its profitability. Higher costs would affect its sales in China’s major market, as customers would choose cheaper local products.

Trump’s War Against Huawei

According to Wedbush, according to Barron’s, the danger of local competition in China might also rise if President Trump chooses to continue with plans, which have been temporarily postponed, to prohibit China telecom giant Huawei from selling goods to U.S. corporations. If the prohibition is enacted, Chinese customers may abandon the American hardware firm.

Despite the fact that Apple shares are down significantly from their 2019 highs, they were up more than 2% on Tuesday on reports that the US would provide temporary exemptions to the export blacklist against Huawei.

According to Credit Suisse analyst Matthew Cabral, for every 5% fall in China sales, Apple’s profits per share would be reduced by $0.15. According to CNBC, China generated 20% of Apple’s top line and operational profit last year.

Looking Ahead

Meanwhile, Apple bulls remain optimistic about the company’s transition away from hardware and toward software and services. Earlier this year, the smartphone manufacturer unveiled new ventures like as its gaming subscription service, Apple TV+, and other digital services. According to a previous Investopedia post, several market observers, like Piper Jaffray, believe Apple’s service division is now worth more than its hardware company. That type of optimism might disappear rapidly if the trade war between the United States and China persists.

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