Investors used to be optimistic about Apple in the trade war
While Apple’s stocks have been unmistakably suffering this month from the US-China trade war, its prospects were not always so gloomy. When the Trump administration initially declared sweeping tariffs on China, it exempted Apple in order to assuage the appetites of voracious American iPhone consumers. In fact, last week, the stock was still trading on a P/E ratio 14.6 forward Wall Street profit estimates, which was below the forward P/E multiple on the Dow Jones (of 15.7 times) and the S&P 500 (of 17.2 times).
Yet with a second round of tariffs on the horizon, Apple’s prospects are not so sunny. Especially after May 17, when the Trump administration banned Huawei from purchasing the American components it needs to manufacture its products (for allegedly aiding Beijing in espionage), the risk of Chinese retaliation is heavy on Apple’s shoulders.
China is key to Apple’s sales and revenue
It cannot be stressed how important Apple’s operations in China is to its sales and revenue. In the past fiscal year, $51 billion of Apple’s sales came from China, deeming the country Apple’s third biggest region, only behind the Americas and Europe. Moreover, Apple relies on China for about a fifth of its revenue.
Analysts are drawing up estimates for how much damage China could inflict with retaliatory policies. As Huawei struggles to replace its American parts with self-manufactured ones, Apple is China’s next likely target if Beijing continues to pursue its “tit-for-tat” strategy. While analysts at Goldman Sachs believe that a ban on Apple product in China is still unlikely at this point, such a ban or “some other restriction on Apple products” could dent Apple’s earnings by 29%. What’s more, China does not have to ban production directly to cut into Apple’s supply chain. China could pursue other methods such as a ban on rare-earth metals or promoting nationalist sentiment among consumers.
Optimism for Apple’s immediate recovery is fading
The biggest problem Apple faces today is that the key factor which could trigger all of these looming risks–international trade policy–is surrounded by so much uncertainty. As of now, the next opportunity for a Trump-Xi dialogue is at the upcoming G20 Summit in Osaka in late June. Even then, it is not certain that such a dialogue will exist or that it will be ameliorative.
These questions up in the air have definitely thrown Apple on a downwards slope. Goldman Sachs has lowered its target price for Apple to $178 a share. This estimate seems appropriate seeing that the stock has dropped about 10% in May, and about 20% from its highs in October 2018. Yahoo Finance’s Scott Gamm pronounced that its stock is officially in bear market territory.
So is Apple hitting bottom anytime soon? Are we nearing the end of its turmoil? The answer is “probably not.” Erin Gibbs, equity chief investment officer at S&P Global Market Intelligence, tells Yahoo Finance that with so much uncertainty surrounding “fundamental catalysts” such as trade, there is “definitely more room for Apple to go down.” In short, with such a key part of its sales essentially being held hostage in one of the fiercest trade wars of this decade, Apple’s stocks can be predicted to continue to fall victim to this unrelenting uncertainty.