The U.S. – China trade war has escalated again, with China indicating that it would impose a new round of retaliatory tariffs, after the U.S. said that it would impose tariffs of 10% on Chinese imports worth $300 billion starting from September 1. President Donald Trump responded to the new round of tariffs, asking U.S. companies “.. to immediately start looking for an alternative to China.” Following the news, Apple stock, (NASDAQ:AAPL), lost over 4% in Friday’s trading, as the company not only counts on China as a manufacturing base but also as a sizable market for its products. An escalation of the trade war could impact the company’s revenues while inflating costs. In this analysis, we take a look at the worst-case scenario for Apple stock if the trade tiff between the two countries isn’t resolved. The grey charts represent our base case and the blue charts represent our downside scenario.
View our interactive dashboard analysis How Apple Could Be Impacted As China-U.S. Trade Tiff Re-Escalates
Impact On Apple’s 2020 Revenues
While Apple’s Chinese business has been declining, the Greater Chinese market, which includes Hong Kong and Taiwan, is still expected to account for over 15% of Apple’s revenues in FY’19. If the trade war escalates, the Chinese government could make it more difficult for Apple to operate in China, via regulatory pressures and taxes. Chinese customers, who already have an increasing preference for low-priced devices from local vendors, could also resist the iPhone and other Apple products due to anti-American sentiment. Things can change quite quickly in the Chinese smartphone space. For instance, Samsung’s market share fell from close to 20% about five years ago to under 1% currently and this indicates that there is a possibility that Apple could see a swift decline. Under our scenario, we estimate that Apple’s Greater China revenues could decline to $15 billion in 2020, from our base case of $41 billion, if the trade war mounts.
Impact On Apple’s Net Margins & EPS
Apple relies heavily on China for the assembly of its products. While the value add in the country may be limited, it forms a crucial part of Apple’s supply chain and disruptions due to the trade war could increase Apple’s costs. Separately, the U.S. has imposed tariffs of 10% on multiple Chinese goods, effective on September 1, although the tariff on cell phones and laptops is postponed to December 15. If the government doesn’t rethink these tariffs, it’s possible that Apple’s costs in the U.S. will rise. We think it’s unlikely that Apple will be able to raise pricing to compensate, meaning that margins will shrink. Under our scenario, we estimate that 2020 net margins will fall from our base case of 21.2% to 20%, with EPS coming in at $10.80 versus the base case of $12.70.
Apple Stock Could Fall 15% In Our Downside Scenario
If we assume that Apple’s P/E multiple remains the same at about 16x, we estimate that its stock price could decline by 15% in our downside scenario, to about $170 per share, from the base case of $202 per share.
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