As the trade war escalates, Apple Inc. (AAPL) shares are selling off at an alarming rate. The tech giant, which relies on China for almost 20% of its sales, plummeted by over 5% on August 5. The decline came after China responded to Trump’s tariff threats by allowing the Yuan to fall and suspending U.S. agricultural purchases. The 10% tariffs would be imposed on $300 billion worth of Chinese exports that had previously avoided duties.
Many investors are concerned that tariffs would cause AAPL to raise the prices of the iPhone and other products as well as affect shipment forecasts. However, one top analyst says not to worry. TF International Securities analyst, Ming-Chi Kuo, said on August 5, “Apple has planned ahead for the protracted trade war and should be able to offset the costs even with higher import costs.”
Is this enough to reassure investors of Apple’s standing given the uncertain economic climate?
Is AAPL Prepared for Tariffs?
The biggest question that investors want answered is whether or not APPL will take on the 10% tariff on assembled iPhones imported from China? Or if the cost will get passed on to consumers.
The company already assumes the cost of all tariffs placed on certain iPhone and iPad cases imported from China. However, additional tariffs could cause earnings and margins to take a massive hit.
One analyst, Toni Sacconaghi, calculated that if AAPL eats the full cost, its earnings will drop 7% with margins also declining by 1.5 percentage points. “Apple will have to calculate how much iPhone sales will decline if it passes the cost of the tariff onto consumers. Anything larger than a 20% drop and Apple will be better off eating the cost of the tax itself. And ironically, there is a risk that China will also tax the iPhone as a U.S. import in retaliation,” the Bernstein analyst said on August 5. He gives AAPL a Hold rating and $190 price target, suggesting 2% downside.
If AAPL increased prices, Wedbush analyst, Daniel Ives, predicts iPhone sales will fall by 6 to 8 million in the U.S. next year. However, if the company absorbs the costs, it could cut Apple's earnings by 4% in 2020. “While Apple will be able to mitigate some of the cost increases from tariffs by adjusting its supply chain, the process is slow-going,” he said on August 2. Despite his warnings, he keeps a Buy rating and price target of $245, suggesting 27% upside potential.
To avoid the price hike of products sold in the U.S., Apple will have to increase manufacturing outside of China. While Apple designs its products in the U.S., they are assembled primarily in China. The company does manufacture a small number of iPhones in India, but that facility alone wouldn’t be able to match the amount produced in China. AAPL plans to combat this by expanding production to additional countries such as Vietnam. According to current analyst estimates, iPhone production outside of China could increase to 25% by 2020.
Kuo claims that if Apple reaches this figure, it will be able to meet the demand from the U.S. market after two years. “The negative impact on Apple are limited and temporary because the profit from service business is growing, and non-Chinese production locations will gradually increase,” he said on August 5. The analyst adds that the company’s brand image and relationships with suppliers could improve if it eats the tariff costs.
Other Analysts Weigh In
Other top analysts tell investors to also buy AAPL during the pullback.
J.P. Morgan is one of the firms advocating on behalf of the tech company. “Expect Apple to absorb tariff impact and prioritize market share, implies -8% EPS headwind. However, we believe Apple is more likely to absorb all the tariff impact and not raise prices on iPhone shipments (roughly 35% of total) and other hardware devices into the US, which we estimate will lead to a ~300 bps headwind to iPhone margins," said Samik Chatterjee on August 5. The analyst kept his Buy rating and $239 price target, suggesting 24% upside.
On August 5, Merrill Lynch analyst, Wamsi Mohan, said whatever Apple decides to do will be manageable and noted that now is a good entry point for investors. “In the broader context of the tailwinds that AAPL has we view this as a relatively small amount over the next several quarters and would use the pullback as an especially attractive opportunity to buy shares of Apple,” the analyst said. He maintains his Buy rating and $240 price target, indicating 24% upside.
The Bottom Line
The Street is cautiously optimistic on the tech stock despite trade tensions. AAPL has a ‘Moderate Buy’ analyst consensus and a $222 average price target, suggesting 15% upside potential.