Apple AAPL shares have tumbled 16% in May, far below the S&P 500’s roughly 5% decline on escalating trade war fears between the U.S. and China. Now, some on Wall Street are worried that the tech giant’s sales in China will fall even further amid already tough times for iPhone sales.
Several analysts have voiced their concerns about a larger downturn in China for Apple as the trade war battle rages on. UBS analyst last week cut their 12-month price target on AAPL from $235 per share to $225 on the back of trade war headwinds, slowing iPhone demand, and more. “We believe a slightly lower multiple is prudent given soft smartphone market and ongoing US/China trade issues,” UBS analyst Timothy Arcuri wrote in a note to clients.
Earlier this week, Citi analysts lowered their Apple price target from $220 to $205. The firm said that they think Apple’s sales in China could be hurt as consumers look for other smartphone options, of which there are many. Plus, Citi said that its research shows that the iPhone has already become a less desirable brand image in China. “China represents 18% of Apple sales which we believe could be cut in half,” Citi said.
Apple stock opened at $177.95 per share on Thursday, down roughly 24% from its 52-week intraday trading high of $233.47 per share. Over that last three years, investors can see that Apple stock has still greatly outpaced the S&P 500 and giants like Facebook FB, although it has now fallen far behind Amazon AMZN.
Trade War Impact?
As of now, Apple is relatively “safe” from President Trump and his administration’s decision to increase tariffs from 10% to 25% on $200 billion worth of Chinese products because the iPhone isn’t on the list. Trump has also threated additional duties on what would amount to nearly all Chinese exports to the U.S. Meanwhile, China has promised retaliation and the broader market has grown more restless over the past month as uncertainty mounts on a deal that had seemingly been priced in already.
Apple assembles most of its iPhones in China and works with a large number of American suppliers. But even if Apple and its suppliers aren’t directly impacted, China could target Apple with duties and call for boycotts of its products in an economy full of less expensive, Chinese smartphone options from the likes of Xiaomi and Huawei.
Revved-up trade war worries could hardly have come at a worse time for Apple. Apple’s revenues slipped 5.1% last quarter and 4.5% in the first quarter of its fiscal 2019. More specifically, second-quarter revenue in Greater China tumbled 21.5% from the year-ago quarter to $10.22 billion. This did mark an improvement from Q1’s 27% drop off in the world’s second-largest economy that includes Hong Kong and Taiwan.
Apple and CEO Tim Cook have known for years that the firm needs to expand beyond its iPhone business. This has become more paramount as iPhone sales fall. Last quarter, iPhone sales tumbled over 17%—worse than Q1’s 14.9% decline—and account for over 53% of total sales.
Cook has tried to focus on Apple’s growing services business, which includes its Spotify SPOT competitor Apple Music and will likely soon feature its long-awaited streaming TV platform that Apple hopes can compete alongside Amazon Prime, Netflix NFLX, Hulu, and Disney DIS.
With that said, Apple’s app store remains a huge source of revenue. Jefferies estimates that the company’s app store will account for roughly $15.4 billion of an anticipated $31.3 billion in total Services revenue in fiscal 2019. Therefore, investors need to pay close attention to any antitrust cases that might come against Apple based on its app store business practices after the U.S. Supreme Court earlier this month essentially opened the tech powerhouse up to consumer lawsuits based on anticompetitive complaints.
Looking ahead, our current Zacks Conesus Estimate calls for the company’s adjusted full-year 2019 earnings to dip 3.6% to $11.48 per share. Meanwhile, the company’s fiscal year revenue is projected to fall by 3.3% to hit $256.93 billion. Peeking further ahead, AAPL’s 2021 EPS figure is expected to surge nearly 11% above our current year estimates on the back of 4% higher revenue.
Apple’s mixed earnings estimates revision activity helps it earn a Zacks Rank #3 (Hold) at the moment. The company is also a dividend payer that buys back large numbers of shares. In the end, Apple is likely to remain a powerhouse for years to come and its iPhone slowdown and Chinese setbacks could already be priced into the stock. Still, it might be best to see AAPL stock bounce back a bit before buying.
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