Apple: trading down | Financial Times

Apple: trading down | Financial Times

President Donald Trump’s unexpected plans for a 10 per cent tariff on a further $300bn of Chinese imports is a one-two punch for Apple. China makes Apple’s iPhones and buys them. Tariffs threaten fragile improvement in both areas.

Apple shares have fallen 4 per cent since the announcement was tweeted. But concerns about the future of the iPhone were already apparent in the share price. The company trades at a relatively low forward earnings multiple for a tech company. On an enterprise value basis — excluding the $211bn in cash it holds — Apple is valued at 12 times expected earnings before interest taxes depreciation and amortisation.

This may be why Apple prefers to talk about its plans for Hollywood deals and gaming. Yet the company’s performance still depends more on iPhones than anything else. Around the world there are more than 900m iPhones in use. Sales account for almost half of Apple’s total revenue.

This is why earnings published last week were so well received. Apple boss Tim Cook has spoken in the past of problems in China but this time he announced mainland sales were growing once again. Apple relies on China, Hong Kong and Taiwan for about a fifth of its sales. Demand helps iPhones. Revenue of $26bn may be 12 per cent lower than the previous year but this is an improvement on the 17 per cent fall reported in the previous quarter. Apple is forecast to sell 185m iPhones in 2020. If the trade war does not interfere, then up to 70m of those sales could come from Chinese consumers ready to upgrade their devices, according to analysts at Wedbush Securities. 

On the supply side, Apple might have started to produce earphones in Vietnam but China is still responsible for iPhone manufacturing. If tariffs come into effect, costs will have to be passed on to buyers and demand will dip. Apple hit the top of its own price ceiling when it launched a $1,000 phone last year.

US tariffs could be political bluster. The US president suggested a 25 per cent tariff a few months ago that has not materialised. Plus Apple can lobby for exclusions. But the presidential tweet is a reminder that the US/China trade fight still hangs over Apple whether it talks about it or not.

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