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Apple Stock Is Still Facing a Ticking Trade War Time Bomb

Wayne Duggan

Apple (NASDAQ: AAPL) stock got a 4.2% bump on Tuesday. The catalyst was a note from the Office of the United States Trade Representative that a new 10% tariff on imported Chinese-produced cell phones would be postponed.

Apple Stock Still Faces a Trade War Time Bomb

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While investors cheered the news,  Apple stock still has major risk associated with the ongoing trade war.

Investors should understand that the new Dec. 15 tariff deadline is likely now a hard line in the sand.

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The Tariff Threat to Apple Stock Is Real

Headline risk is a tricky thing for an investor. Sometimes the headlines in the media are real issues that affect the real value of a company. Other times, they are just clickbait that spooks traders in the near term. But when it comes to the U.S. trade war with China, the threat to AAPL stock is very real.

“If Apple passes through the 10% tariff to consumers, we could see a hit to iPhone demand by roughly 6 million to 8 million iPhones in the US based on our analysis over the next 12 months based on our overall unit forecast of 185 million iPhones globally for FY20,” Wedbush analyst Daniel Ives said in a note.

Ives estimates the postponed tariffs could lower AAPL stock’s annual earnings per share by as much as 55 cents, which would be a more than a 4% drop.

Apple relies on China so much that trade war fears have prompted the company to consider moving production elsewhere. Unfortunately, Ives says Apple is so reliant on China that the best it could theoretically do is move up to 7% of its iPhone production to India and/or Vietnam over an 18-month stretch.

Trump Won’t Postpone Again

There’s no question the tariff delays on iPhones is good news for AAPL stock investors. Just don’t expect another postponement come December.

President Donald Trump has made the trade war with China a centerpiece of his administration. Trump has also branded himself a master negotiator.

On Aug. 1, Trump tweeted that he would be implementing new 10% tariffs on the remaining $300 billion in Chinese goods not already included in existing U.S. tariffs. In response, China devalued its currency to 10-year lows versus the U.S. dollar.  It also said it would be halting all purchases of U.S. agricultural goods.

Yesterday, less than two weeks after Trump’s initial 10% tariff tweet, the U.S. Trade Representative tweeted an extensive list of exceptions to the Sept. 1 tariffs. That long list of exceptions looks a lot like backpedaling on the part of Trump.

“Tell me why Xi [Jinping] should not continue to wait out The World’s Greatest Negotiator, who keeps ‘dealing’ with himself?” Kynikos Associates founder and managing partner Jim Chanos said on Tuesday.

Chanos isn’t the only one who sees the delays as weakness on the part of Trump. Regardless of where you fall on the political spectrum, Trump is not likely to stand for being seen as weak. Come December, AAPL investors shouldn’t count on another exemption or postponement.

AAPL Stock Needs a Trade Deal

Apple stock got a boost on Tuesday, and there’s no question a tariff delay is good news. However, the 4.2% gain was probably a bit much given how little has actually changed. Hence why AAPL gave back most of that gain on Wednesday. Yes, the new iPhone lineup due out in September may now be exempt from tariffs. But Tuesday’s news is only bullish assuming a trade deal is reached by the end of the year.

“If this tariff situation does not cease after further negotiations or exemption, ultimately Apple will have no choice but to pass this incremental $75 to $100 per smartphone to US consumers during the course of 2020, which would throw a wrench into the upgrade cycle,” Ives said.

If not into the 2019 upgrade cycle, it will throw a wrench into the potentially bigger 2020 5G iPhone upgrade cycle.

There’s also another important event happening in 2020, and China is likely emboldened by Trump’s latest concession. Chinese President Xi Jinping knows he doesn’t have to outlast Trump indefinitely. If China can endure the fallout from a trade war long enough to see Trump lose the 2020 election, it can simply negotiate a trade deal with the incoming administration.

In the meantime, investors should expect China to lean into the trade war as hard as it can stand to try to inflict economic pain on the U.S. ahead of the election.

Apple needs a trade deal by Dec. 15, which seems unlikely at this point. In that sense, Tuesday’s tariff postponement is simply delaying the inevitable for AAPL stock.

As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.

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