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Apple will weather the latest tariff threat, so buy the pullback, major analysts say

Key Points
  • "Expect Apple to absorb tariff impact and prioritize market share, implies -8% EPS headwind," J.P. Morgan said.
  • "We ultimately believe if fully absorbed this tariff would negatively impact FY20 EPS by roughly 4% and be a clear overhang on numbers," Wedbush said.
Apple CEO Tim Cook attends the annual session of China Development Forum (CDF) 2018 at the Diaoyutai State Guesthouse in Beijing, China March 26, 2018.
Jason Lee | Reuters

While Wall Street analysts are scrambling to assess the fallout of the latest in the U.S.-China trade battle, Apple is once again caught in the crossfire. Last week, President Donald Trump announced a new 10% tariff on $300 billion worth of Chinese goods to go into effect on September 1.

A fear of further trade escalation sent chipmakers, retailers, and Apple lower on Monday. Since last Thursday's announcement, shares of the tech giant are down 9%.

The trade threat is only going to add to Apple's iPhone woes, analysts say.

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"Do you pass along the tariff in the form of a price hike or do you eat it or ultimately, some combination of both," Bernstein analyst Toni Sacconaghi said on CNBC's Squawk Alley on Monday.

"That's a tactical decision that Apple has to make," he said.

Other analysts said it was pretty clear what Apple would do.

"We believe Apple is more likely to absorb all the tariff impact and not raise prices on iPhone shipments and other hardware devices into the US, which we estimate will lead to a ~300 bps headwind to iPhone margins," J.P. Morgan analysts said.

But analysts from Bank of America said whatever Apple decides will be "manageable" and noted it was a good entry point for investors.

"In the broader context of the tailwinds that AAPL has we view this as a relatively small amount over the next several quarters and would use the pullback as an especially attractive opportunity to buy shares of Apple," the analyst said.

Here's what else analysts are saying about the tariff impact on Apple:

J.P. Morgan- Overweight rating

"Expect Apple to absorb tariff impact and prioritize market share, implies -8% EPS headwind. We estimate a price increase of around 6% is required to absorb the impact of a 10% tariff and maintain gross margin dollars, although still implying a modest ~180 bps to Product gross margins. However, we believe Apple is more likely to absorb all the tariff impact and not raise prices on iPhone shipments (roughly 35% of total) and other hardware devices into the US, which we estimate will lead to a ~300 bps headwind to iPhone margins."

Cowen- Buy rating

"The risk of import tariffs impacting US consumer demand for China made smartphones and other electronics goods has risen once again with the latest commentary from the US calling for a 10% tariff on the final $300B tranche of China made goods starting on Sep 1st and potentially rising to 25% by the end of 2019. Assuming smartphones, tablets, smart watches, and computer systems are not categorically excluded from the final $300B tranche, we expect there will be material impact to Apple hardware product earnings as US product demand represents approx. 14% of total company EPS."

Bank of America- Buy rating

"We view the risk to earnings around $0.50-$0.75 per year, which is manageable in the broader context of a multi year tailwind...In the broader context of the tailwinds that AAPL has we view this as a relatively small amount over the next several quarters and would use the pullback as an especially attractive opportunity to buy shares of Apple."

Wedbush- Outperform rating

"We ultimately believe if fully absorbed this tariff would negatively impact FY20 EPS by roughly 4% and be a clear overhang on numbers. If Apple passes through the 10% tariff to consumers we could see a hit to iPhone demand by roughly 6 million to 8 million iPhones in the US based on our analysis over the next 12 months based on our overall unit forecast of 185 million iPhones globally for FY20."