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Apple Investors Should Buckle Up for a Bumpy Ride

Danny Vena, The Motley Fool

It's a stressful time to be an Apple (NASDAQ: AAPL) investor these days.

After recovering most of its losses from late last year and briefly retaking its $1 trillion market cap, Apple stock has been getting another beatdown of late. The trade war between the U.S. and China hit an impasse in early May, and President Trump raised the stakes by increasing tariffs from 10% to 25% on $200 billion worth of Chinese exports. Apple was already dealing with an economic slowdown in China, and these latest trade developments only made matters worse.

The news briefly helped push Apple stock into bear market territory. Just in May, the stock is down about 11.4%. As of Tuesday's close, it was down 20.1% from an all-time high of $233.47 set intraday back in early October. 

Let's look at how these factors are affecting Apple and what it means to investors.

Representations of flags from US and China in fire and smoke

The trade war between the U.S. and China is taking a toll on Apple stock. Image source: Getty Images. 

The trade war takes its toll

There's little doubt investors have grave concerns about what effect the increased tariffs will have on Apple. HSBC analyst Erwan Rambourg recently cut Apple's price target for the fourth time since December, citing increased tensions related to the trade war and the how Chinese consumers will perceive U.S. brands like Apple. Greater China accounts for about 18% of Apple's sales, according to the analyst, so further sales declines in the region could lower Apple's revenue even further.

Then there is the recent report from Morgan Stanley that estimates the recently imposed 25% tariff could add as much as $160 to the cost of the iPhone XS. iPhones are assembled entirely in China. With the additional import levy falling on the iPhone maker, the cost will have to either be passed on to customers, in the form of higher prices, or absorbed by Apple, taking a toll on the bottom line.

China's economy and Apple's performance

Apple's sales during the first half of fiscal 2019 were down 5% year over year, with nearly all the decline attributable to falling sales in China. On the conference call to discuss the Q1 results, Apple CEO Tim Cook called out "economic weakness" in greater China as the biggest contributor. He pointed to "the magnitude of the economic deceleration" and said the country's most recent GDP rate was the second worst in the past 25 years.

Cook said Apple's entire year-over-year revenue decline in the first quarter was "driven by performance in Greater China." But he noted that the company saw those conditions moderate in the last weeks of the March quarter, leading to speculation that there were better days ahead.

What to do with the news

Not everyone is espousing doom and gloom for Apple. Quint Tatro of Joule Financial invoked Warren Buffett, saying that investors need to be "greedy when others are fearful." Tatro said Apple is a "great company" and that "when it gets hit like this, you want to be a buyer." 

Recent history suggests these issues are temporary. Apple investors have endured these types of declines before, and the stock has always coming roaring back. 

For instance, in mid-2015, an economic slowdown in China stoked fears among the country's investors, and the Shanghai Composite fell more than 20% in just five days, eventually falling 30%. Since China is one of the company's biggest markets, investors worried about what these events meant for the future of Apple and went diving for cover. That caused the stock to lose as much as 10% in a single day, and it eventually traded down more than 30% from its peak. 

So if this worry over events related to China sounds familiar, it should. And the aftermath of that situation should also be somewhat reassuring. Apple quickly regained its highs, and much, much more.

The two factors having the greatest impact on the company -- the economy in China and the trade war -- will eventually be resolved, and Apple stock will almost certainly rebound.

But for the near future, it would be wise for Apple investors to buckle up.

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Danny Vena owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.