Shares of Apple AAPL have sunk over 10% in May on the back of renewed U.S.-China trade war worries, which could soon impact the iPhone giant. Plus, the U.S. Supreme Court recently set up the possibility for consumers to sue Apple on the basis of anticompetitive practices in its widely popular app store.
Trade War Impact?
Apple is currently safe from President Donald Trump and his administration’s decision to increase tariffs on $200 billion worth of Chinese products. Trump last Friday officially increased tariffs to 25% from 10% as the world’s two largest economies try to navigate toward a trade war resolution. Since then, the Chinese government has announced that it will impose tariffs on $60 billion worth of American products in retaliation.
Apple currently remains mostly in the clear as the iPhone isn’t on the list of $200 billion worth of Chinese-made products that face higher tariffs. With that said, Trump also threated to impose a 25% tariff on an additional $325 billion in Chinese imports that haven’t previously been targeted by duties. “Build your products in the United States and there are NO TARIFFS!” Trump wrote Friday on Twitter.
Clearly, any new tariffs are still just threats at the moment. Yet, investors should understand just how important China is to the firm. Apple assembles most of its iPhones in China and works with a large number of American suppliers. Plus, China could target Apple with duties and call for boycotts of its products in a market that is already full of many less expensive, Chinese smartphone options from the likes of Xiaomi and Huawei.
Last quarter, Apple posted adjusted Q2 2019 revenue of $58.02 billion. This marked a 5.1% downturn from the year-ago period and a larger decline than Q1’s 4.5% drop. More specifically, revenue in Greater China tumbled 21.5% from the year-ago quarter to $10.22 billion. This did mark an improvement from last quarter’s 27% drop off in the world’s second-largest economy that includes Hong Kong and Taiwan. Overall, Greater China accounted for roughly 18% of Apple’s total quarterly revenue.
On top of that, iPhone sales tumbled over 17% to hit $31.05 billion and account for over 53% of total sales. Last quarter, iPhone revenue fell 14.9%. Clearly, Apple investors need to watch out for any updates on how the latest round of tariffs between the U.S. and China might impact the firm. For example, Morgan Stanley MS analyst Katy Huberty predicted that a 25% tariff on the iPhone could create a $160 price hike on the iPhone XS. If Apple didn’t pass the costs onto consumers, it could cause AAPL’s earnings to slip 23% in 2020.
App Antitrust Case
To make up for slowing iPhone sales and a pullback in Greater China, Apple and CEO Tim Cook have focused on its Services business. This division is highlighted by the company’s Spotify SPOT competitor Apple Music and will likely soon feature its long-awaited streaming TV platform that Apple hopes can compete alongside Amazon AMZN Prime, Netflix NFLX, Hulu, and Disney DIS. The iPhone giant also recently showed off its $9.99 per month magazine-heavy news service, a new Apple credit card in partnership with Goldman Sachs GS, and a subscription-based gaming offering called Apple Arcade.
With that said, Apple’s app store remains a huge source of revenue. In fact, 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, the U.S. Supreme Court’s recent ruling in a 5-4 opinion on Monday, May 13, to allow lawsuits against Apple regarding its app store business model could spell trouble.
Justice Brett Kavanaugh wrote the decision, which stressed the Supreme Court was not taking a position on the merits of the lawsuit itself, but instead said it could proceed based on prior antitrust precedent. “The consumers here purchased apps directly from Apple, and they allege that Apple used its monopoly power over the retail apps market to charge higher-than-competitive prices,” Kavanaugh wrote.
The court essentially opened Apple up to consumer lawsuits based on anticompetitive complaints. Apple currently requires all app offerings be sold exclusively through its app store, where it typically takes a 30% cut. The company also takes 15% from subscriptions sold through the app store after one year—down from the initial 30%. This has caused companies such as Netflix to encourage customers to purchase its app in other locations. Furthermore, the lawsuit complained about Apple’s price points, which must end in “99 cents.”
It is unclear exactly what will come next for Apple, but the news caused AAPL shares to tank Monday. Investors should note that Apple’s Services sales climbed 16% last quarter to reach $11.45 billion and account for nearly 20% of total quarterly revenue. This, however, came in below Q1’s 19% Services expansion.
Looking ahead, Apple’s adjusted full-year earnings are projected to slip 3.6% on the back of a 3.3% revenue decline, based on our current Zacks Conesus Estimates. But new tariffs could eventually impact Apple, and any changes to its app store business could eat into profits.
Shares of AAPL closed regular trading hours Tuesday up 1.58% to $188.66 per share, which represented a roughly 19% downturn from their 52-week high. Apple is currently a Zacks Rank #3 (Hold) based, for the most part, on its mixed earnings estimate revision activity. With all that said, Apple is still dividend payer that is poised to remain an industry giant for years to come—and its next game-changing product could always be in the pipeline.
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