Apple (AAPL) has a vital obstacle to surpass before it heads into the holiday shopping season. On December 15, the US is set to levy a 15% tariff on Chinese goods worth $160 billion. The main products in this basket of goods will be laptops, smartphones, and consumer electronics.
The US technology sector, which hasn’t yet felt the real pinch of the US-China trade war, will now face the music. Citing a December 8 note by Wedbush analyst Daniel Ives, Fox Business stated, “The tariffs are a ‘potential gut punch’ to the sector and remain a ‘lingering hurdle’ for tech stocks to go higher into year-end.” The analyst also stated that Apple is one company that would be deeply affected by the next round of tariffs.
December 15 tariffs are a roadblock for Apple
Citing Ives, TheStreet said in a note on December 3, “‘Apple has the most to lose/gain from the December 15 line in the sand.’ That’s because 40% of iPhone sales are in the U.S., making them vulnerable to tariffs.” Ives also thinks that any increase in cost would hurt market demand. In a previous email, he told TheStreet, “Demand destruction would be roughly 8% of all iPhones expected to be sold in 2020.”
Apple needs the US and China, as they’re its most important markets. It’s at a critical juncture wherein it wants to redeem its stalling iPhone business via strategic pricing. The company’s Wearables segment has immense potential, but the new tariffs could stifle its growth. This market is a fiercely competitive one, and pricing makes all the difference. The tariffs are a lose-lose situation for Apple. It could lose market share if it passes a price hike on to consumers, but if it absorbs the levies, its bottom line will take a hit.
Trump on the next round of tariffs
Earlier this month, US President Donald Trump said that he might want to postpone the trade deal with China until the 2020 presidential election, noted CNBC. This intensified uncertainty and sent the market into panic mode. Commenting on the deadline of the deal, Trump said, “I have no deadline, no.” However, on December 5, he sounded upbeat about the deal. According to Reuters, he said, “We’ll have to see, but right now we’re moving along. We’re not discussing that, but we are having very major discussions. On December 15th, something could happen but we are not discussing that yet. We are having very good discussions with China, however.”
China hopeful of a trade deal before the deadline
China is hopeful about striking an agreement ahead of this weekend’s deadline. Today, Trump is likely to discuss the possibilities with renowned trade advisers, according to Reuters. As per Reuters, Chinese commerce ministry spokesman Gao Feng said, “The two sides’ economic and trade teams are maintaining close communication.” As an act of goodwill, China confirmed last Friday that it would remove some import tariffs on US soybean and pork, noted Reuters.
Apple could be exempted from the tariffs
Last month, Trump visited Apple’s Foxconn facility in Austin, Texas. During the visit, he said that he would “look into” tariff exemptions for Apple. Apple CEO Tim Cook has always opposed the tariff levies and has been pushing hard for Apple’s exemption. He’s met with Trump on several occasions to convince him that Apple will lose ground to Samsung if the tariffs are imposed.
Hence, Wall Street believes that Apple could be exempted from the tariffs thanks to Cook’s rapport with Trump. Even Ives believes “an exemption for Apple on iPhone production will likely be in the cards,” indicated Fox Business.
In the long run, Apple should be unaffected
Apple stock has rallied more than 74% year-to-date to close at $270.77 on Wednesday. Analysts are hopeful the stock will head north of $300 amid stupendous growth in the Wearables and Services segments.
However, the ambiguity surrounding the tariff deadline could restrain AAPL’s bull run this year. TD Ameritrade’s Shawn Cruz told TheStreet, “There’s limited upside for Apple in the near future based off just the trade deal alone.” However, if there is a delay in the tariff imposition, Cruz expects Apple to benefit. “[Apple] will [enjoy a move up] to the extent that they just get dragged higher, but I wouldn’t expect them to be a stellar outperformer,” he noted.
We feel that tariffs will have a limited impact on Apple stock—and mostly in the short term. In the long term, Apple stands to gain, as the company isn’t just about hardware. Its Services segment is also crucial to its growth, and that segment remains unscathed by tariff impositions.
We’ll be closely watching the developments slated for the weekend. As Trump said, “Something could happen.” Stay tuned for more.