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Is Apple’s share price fortified against possible Chinese trade revenge?

The US Department of Commerce’s move to put Huawei on a restricted trade list earlier this month is raising concerns that China may respond by preventing US companies, such as Apple [AAPL], from conducting business throughout the region, escalating the already tense trade discussions between Washington and Beijing.

As the US’s largest smartphone maker, Apple appears to be in the direct line of fire if China were to retaliate. Meanwhile, the company’s business in the region is already struggling from falling iPhone sales and supply chain issues. So far, Apple's share price has traded relatively flat this week, despite having opened Wednesday's trading session 1.4% down.Apple 1-year share price performance, CMC Markets, 30 May 2019 

 

Cross Research’s Shannon Cross believes there’s potential for a boycott of US products in China. “There could be a movement in China to support national champions,” she told Bloomberg.

Such a move could see Apple’s earnings sink by almost a third, Goldman Sachs analyst Rod Hall wrote in a client note last week. Similarly, firms including Cowen and Morgan Stanley have also predicted the tech company’s earnings could slump more than 20% if retaliatory measures escalate.

China is Apple’s third largest market in terms of revenue, after the Americas and Europe, however that’s been slowly falling in recent months. Despite the company slashing iPhone prices across the region, second quarter results revealed a 21% drop in total sales from the same quarter a year earlier.

 

Market cap$822.07bn
P/E ratio (TTM)15.03
EPS (TTM)11.89
Return on Equity (TTM)49.13%

Apple share price vitals, Yahoo finance, 30 May 2019

 

CEO Tim Cook expects further price adjustments in China alongside lower taxes on the iPhone, as well as on the trade-in and financing deals Apple offers to help recover dwindling sales, he said during Apple’s most recent earnings call.

 

Services and Wearables businesses key to growth 

Beyond China, Apple has performed well in affluent Asian markets such as Japan, South Korea and Singapore, where its pricey iPhones, which make up more than half of the company’s total revenues, are more readily affordable. 

Investors are also looking to Apple’s services business to fuel growth amid the slowing iPhone sales, as the company begins to diversify. Across Apple’s services, which include the App Store, Apple Music, iCloud and Apple Pay, revenue and paid subscriptions are soaring. 

According to Cook, the firm’s wearables business – which includes the Apple Watch, AirPods and Beats – is now about the size of a Fortune 200 company, as revenues jumped nearly 50% in the most recent quarter. 

50%

Jump in wearables revenue in Apple's MRQ

With barely any competition in this area besides Fitbit, a $1.4bn company whose sales and market value has tanked in the past year, Apple’s wearables business will likely be a strong growth prospect going forward, especially as it looks to roll out augmented reality glasses. 

As the world’s second largest smartphone maker, Huawei would benefit if the Chinese government effectively banned its biggest competitor. However, CEO Ren Zhengfei told Bloomberg that he’d “be the first to protest” against any such move. “Apple is my teacher, it’s advancing in front of us. As a student, why would I oppose my teacher? I would never do that,” he said.

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