Apple's Powerful Rally: Is It Sustainable Amid China Trade Risks?
Haris Anwar | Jun 25, 2019 03:30AM ET
Apple (NASDAQ:AAPL) is showing strong resilience despite the lingering risks of the U.S.-China trade war. Its stock has risen around 11% in the past four weeks, despite slipping slightly in the last two sessions, closing yesterday at $198.58. This recent surge adds further power to the rally that's propelled shares more than 27% higher this year.
But the big question going forward is whether this bullish trend is sustainable and is the time right to bet long on Apple's stock? The risks to the maker of iPhones are many and serious in nature. The biggest among them is the disruption in the company’s massive supply-chain system — a comprehensive network of low-cost suppliers — if the U.S.-China trade dispute intensifies.
In a letter to the government last week , Apple emphasised the significant risks to its business if U.S. President Donald Trump imposes 25% tariffs on a new slate of products imported from China. The move, according to Apple, will hurt its many top-selling products, including iPhones, iPads, MacBooks, and Apple Watches.
Apple said in the letter, which was addressed to the U.S. Trade Representative, the tariffs “would result in a reduction of Apple’s U.S. economic contribution” and “global competitiveness.” The warning from Apple came just before this weekend's crucial meeting between President Trump and the Chinese leader Xi Jinping in Japan, where they will try to reach a deal on the future of trade between the world’s two largest economies.
h2 Most Exposed to China/h2Over the years, Apple has constructed a large network of suppliers in China, in order to reduce costs, making it one of the most exposed stocks to the Asian country. The tech giant employs an estimated two million people in the Apple supply-chain, in addition to a similar number of tech workers busy on the development of Apple apps. The company designs and sells most of its products in the U.S., but imports them from China after assembly.
Beyond the China risk, Apple is also in the middle of a long-term restructuring to counter a downturn in the sales of its flagship iPhones, which make up about 60% of its total revenue. The Cupertino, California-based technology giant is offering new services to over 1.4 billion users of its hardware, including a new video-subscription service, an Apple credit card, and a gaming subscription service offering access to 100-plus exclusive games.
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These challenges, no doubt, aren’t small by any standard and may continue to produce boom-and-bust cycles for Apple stock in the short-run. But, in our view, the company has all it takes to combat its three main challenges and still emerge a winner in the long-run.
The China threat: Apple is in a great position to weather this storm if both U.S. and China fail to resolve their differences and press ahead with their tariff plans. Apple has more than 1.4 billion installed user-bases, a strong global presence, and a cash-hoard of worth $225 billion. This strength will allow the company to pass on additional costs to its loyal customer base, unlike small players who may not have enough resources to remain in the game.
Retaliation: China is unlikely to target Apple in its retaliation after the Trump administration’s blacklisting of Huawei Technologies, because of Apple’s massive contribution to its economy. In a recent note to clients, Bank of America analyst Wamsi Mohan gave a low probability to a scenario where Apple gets caught up in the U.S.-China crossfire. “We view risks related to China tariffs as priced in,” he wrote. “We view the likelihood of major retaliation against Apple to be low.”
Restructuring: Apple seems to be succeeding in its plan to revive its sales growth and diversify its revenue away from iPhones. The company’s services, which include Apple Music, movie rentals and app downloads, produced 33% growth last year with sales touching $40 billion—accounting for about 15% of the company’s total of $265.6 billion.
That contribution will definitely accelerate once the company’s new line of services—- video-streaming, Apple Pay and gaming — start to chip in. According to an estimate by Morgan Stanley, the services contribution will continue to grow and could generate about 60% of Apple’s revenue in the next five years.
Bottom Line
The coming few weeks are crucial for the sustainability of the stock’s short-term rally. It’s no secret that a negative outcome from the U.S.-China trade talks will hurt high-growth technology stocks, including Apple. But any dip in Apple shares should be taken as a buying opportunity, given the company’s strong global brand, cash position, and its push to diversify its revenue.
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