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Can Apple Survive a Prolonged U.S.-China Trade War?

Apple's dependence on iPhone sales has posed a major problem for the iPhone maker in the Chinese market.

Apple AAPL is caught in the crossfire of the U.S.-China trade war that is likely to linger despite recent attempts at a resolution. Certain developments earlier this week further dulled the investor outlook for the iPhone maker, bringing into focus the vulnerability of Apple’s stock price in a lingering trade war scenario.

Citi Slashes Apple’s Price Target

Financial major Citigroup C cut Apple’s price target from $240 to $200 a share on Dec 10, citing trade wars are bad for tech stocks. Apple’s stock fell 0.6% on Dec 12 as investor concerns grew over the company’s business model and its grip on the Chinese market. The stock had suffered losses in early trading on Dec 11 before closing 0.7% higher.

Citigroup also suggested Apple share prices might sink to $125 if the latter’s revenue growth slows to 2-3% annually and its gross margins fail to meet expectations. In doing so, Citi has joined an array of Wall Street firms like Morgan Stanley MS, Goldman Sachs GS, UBS UBS, Guggenheim Partners, Rosenblatt Securities and HSBC HSBC that have lowered expectations for the Apple stock.  

Shares of the iPhone maker have lost 9.8% since July 6 when the trade war commenced this year with the United States and China imposing the first round of retaliatory tariffs.

The reason behind this setback could be Apple’s over estimation of the sale of its new iPhone models such as iPhone XS and iPhone XR, which was far lower than expected, enough for the corporate giant to slash production. In addition, the price reduction on older iPhones makes them more popular in developing countries than the newer models.

China accounts for 18% of Apple’s total sales, Citi said, indicating the appalling effect of the lingering trade dispute on technology stocks such as Apple. In fact, Technology Select Sector SPDR XLK has lost 8.6% in the last six months, owing to the trade war among other factors.

China’s Ban on Some iPhones Likely to Worsen Trade War

To add to investor worries about tech stocks, a Chinese court on Dec 10 banned the import and sale of most iPhone models following a lawsuit by American chipmaker Qualcomm QCOM. Per the telecom giant, Apple benefited from Qualcomm’s chips without compensation.

Earlier this month, Canada’s detention of Huawei’s chief financial officer Meng Wanzhou on Washington’s behest wasn’t taken lightly by China. And given that product injunctions such as this are seldom granted, it’s difficult to judge if China’s decision to halt Apple product sales is a politically influenced step.

The Qualcomm ruling could be an ugly turning point as trade negotiations continue between the United States and the world’s second largest economy. If the two countries fail to reach middle ground by the end of the 90-day truce, Trump could bring the remainder of Chinese imports under the tariff umbrella.

Trouble for Apple in Chinese Market

Since Apple is a products company, with 70% of its income coming from iPhone sales, product bans in China could serve as severe blows to its revenues. This is exactly why a slew of analysts are slashing Apple’s earnings estimates.

Apple’s limited exposure to the services market has also given an edge to Chinese competitors such as Samsung, Oppo, Vivo, Xiaomi and Huawei that offer a wide range of affordable smartphones.

Given the extent of Apple’s dependence on iPhone sales, the loss of Chinese sales could prove to be disastrous. A prolonged trade war could only affect Apple’s supply chain and customer base, ensuring that the iPhone maker loses steam in China.

You can see the complete list of today’s Zacks #1 Rank stocks here.

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