Will The US/China Trade War Impact IPhone Sales?
While the US/ China trade war rages on, analysts are debating the impact on one company in particular. Apple (AAPL – Research Report) recently released a filing with the US Trade Representative on the proposed US tariffs of $200 billion on Chinese goods. The filing revealed how Apple saw the tariffs impacting a “wide range” of goods including the Apple Watch, AirPods, Beats, and other smaller product lines.
But the iPhone cash cow was notably absent from the list. As was the iPad. “Our concern with these tariffs is that the U.S. will be hardest hit, and that will result in lower U.S. growth and competitiveness and higher prices for U.S. consumers,” Apple said.
Bear in mind the iPhone made up about two-thirds of Apple’s $229 billion in revenue in the most recent fiscal year. Meanwhile, the products referred to in the filing are estimated to account for only about 5% of Apple sales in FY19. So what are the experts saying about Apple’s exposure to China tariffs? Especially when it comes to one of its most lucrative products… let’s take a closer look now:
Look out Apple!
Charter Equities’ Edward Snyder sees economic weakness in China as likely the biggest impact of the trade war on Apple.
“China’s heavy dependence on exports to the U.S. makes the trade war an asymmetric fight that is punishing China’s economy more than the U.S.’s (if at all)” the firm’s managing director writes. “China’s already seeing an impact on economic growth which, if it continues, will undercut domestic demand for all goods, including iPhone XS.”
“This is the most likely impact to Apple, the extent of which won’t be known until mid-December when the fans have gotten their fill of the new phone and demand shifts to the larger base of subscribers.” He sees punitive actions on specific companies as highly unlikely, especially with China trying to lower- rather than escalate- tension.
But something else more troublesome is keeping the analyst up at night: “The trade war could affect iPhone sales, but we believe there are other more important factors impacting unit sales which have nothing to do with China.”
Most worryingly, Snyder believes the demand for high-end smartphones is reaching saturation point. According to the analyst, high-end smartphone unit sales have been stagnant for several years now, a trend evident in both Apple and Samsung’s results. Raising prices to capture more value from premium subscribers boosted iPhone revenue over the last 12 months, but unit volumes were down 1% y/y after being flat in 2017 and down 5% in 2016.
“Absent some major Steve Jobs-like innovation, we expect sales to atrophy over the next several years. If Apple doesn’t move into the mid-tier, it will probably see a sustained decline in units” Snyder warns.
Loup Ventures’ Gene Munster
“We believe, beyond 2 years, these tariffs will go away”, writes Loup Ventures’ managing partner Gene Munster. If passed, he estimates just under a 1% negative impact on Apple’s FY19 profits from the lower profitability of the AppleWatch and AirPods.
“More importantly, the filing appears to have triggered a renewed challenge from President Trump for Apple to move more production from China to the U.S” Munster adds.
Interestingly, the analyst notes that Apple remains in good standing with the Trump administration. The company has committed to a $350 billion investment in the US over the next 5 years.
Einhorn’s Fund Cashes Out
However, for hedge fund billionaire David Einhorn (Performance Profile) enough is enough. His Greenlight Capital fund has now exited Apple completely. “We ultimately sold because our differentiated thesis from 2011 has become consensus,” Einhorn told investors. “We are somewhat worried about Chinese retaliation against America’s trade policies.”
The sale of around $40 million of Apple stock took place on August 31, at a price of $228/ share. Bear in mind that the fund had already massively reduced its position by 78% in Q2 (around 486,000 shares).
“At the end of the day, [David] made some money and wants to bank his winnings here. I don’t think the substance of what he said has much merit, around the China stuff; that’s a small part of it,” Gene Munster said in reaction to the news.
What about Services?
Top Morgan Stanley analyst Kathryn Huberty (Track Record & Ratings) is more focused on Apple’s Services revenue. Sensor Tower data that showed Sept-quarter App Store net revenue was $3.6 billion, missing the firm’s $3.8 billion estimates.
“We see China as the biggest near-term risk”, the analyst wrote.
Ultimately, however, while China presents “a near-term overhang, we see limited downside to near-term estimates and remain bullish on the long-term sustainability of services growth.”
She has a Buy rating on the stock with a $247 price target (13% upside potential). “Apple has the world’s most valuable technology platform with 1.3Bn active devices, and is well positioned to capture more of its users’ time in areas such as video, augmented reality, health, autos, and home”, the Morgan Stanley analyst concludes.
Overall consensus
Taking a step back, we can see that the outlook for AAPL is currently a cautiously optimistic Moderate Buy. This is on top a price target of $240 (9% upside potential). Out of 29 top analysts polled in the last three months, 19 rate the stock a Buy, and 10 a Hold. Apple’s shares are currently up 30% year-to-date- and 200% on a five-year basis.
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