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Quantifying just how much the trade war could hurt Apple

Key Points
  • The recent uptick in trade hostilities between Washington and Beijing could threaten Apple's bottom line in 2019, Credit Suisse warns clients.
  • Every 5% drop in China sales costs Apple 15 cents in EPS, the firm estimates.
  • China represented 20% of Apple's revenue and operating profit in 2018, Credit Suisse says.
  • "We're more concerned with potential 'second derivative' impacts on local demand and implications of a further escalation," analyst Matthew Cabral writes.
Tim Cook, chief executive officer of Apple Inc., listens during an American Workforce Policy Advisory board meeting with U.S. President Donald Trump, not pictured, in the State Dining Room of the White House in Washington, D.C., U.S., on Wednesday, March 6, 2019.
Al Drago | Bloomberg | Getty Images

The uptick in trade hostilities between Washington and Beijing could threaten Apple's bottom line in 2019 if the soured relationship impacts demand for iPhones in China, Credit Suisse warned clients.

For every 5% drop in Greater China sales, Apple's earnings per share should fall about 15 cents, according to analyst Matthew Cabral.

"While Apple's products largely fall outside the scope of current US tariffs on Chinese goods, we're more concerned with potential 'second derivative' impacts on local demand and implications of a further escalation from here," Cabral wrote in a note to clients. "We are not adjusting our estimates at this time, but see downside risk from a prolonged escalation in trade tensions."

Apple produces popular products like the iPhone and iPad through Taiwanese manufacturer Foxconn in China, where it has also been trying to market its latest luxury mobile offerings. But the Chinese market, though a key growth area for Cupertino, California-based Apple, has proven less than reliable amid renewed trade anxieties.

Apple's stock fell 6.9% over the week ended May 10, its worst in 2019, five days after President Donald Trump said on Twitter that he would increase tariffs on $200 billion of Chinese goods. (It was up 2.3% on Tuesday.) The stock, often viewed as a China trade bellwether, remains down more than 13% since the president's May 5 tweet and more than 21% since its 52-week high notched in October.

"Greater China represented ~20% of Apple's revenue and operating profit" in 2018, Cabral said. "Indeed, Greater China was the primary driver of Apple's disappointing C4Q results with revenue declining 27% y/y as the Chinese economy decelerated and nationalistic sentiment may have shifted consumers away from iPhone toward more domestic brands."

And while Apple's products have yet to feel direct pressure from the Trump administration's levies, the tit-for-tat tariff battle could bring CEO Tim Cook's predictions of weaker iPhone sales in China to fruition.

Cook warned in January that a weaker Chinese economy could dampen Apple's financial results, underscoring slower revenue "primarily in Greater China" and noting that the overseas iPhone replacement cycle was "not as strong" as expected.

Though Apple's stock rallied about 15% in the months following Cook's warning, it's retraced a fraction of those gains in May, posting declines in nine of the last 14 sessions as investors worry about the company's increasing reliance on China.

When Apple reported strong first quarter results at the end of April, Cook credited the company's China prospects as a catalyst. Cook also told CNBC that part of the company's strength in China was thanks to the Trump administration's trade negotiations.

"I believe that the trade relationship — I don't mean the tariff, I mean the tone — is much better today than it was in the November-December time frame. That affects consumer confidence in a positive way," Cook said on April 30. So lack of progress — or worse — could keep shareholders on edge.

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