Why Ap­ple In­vestors Fear a Trade War With China

The Star (St. Lucia) - - INTERNATIONAL - ---U.S. News & World Report

Ap­ple Inc. (Nasdaq: AAPL) stock is down nearly 4 per­cent in the past month as Pres­i­dent Don­ald Trump has el­e­vated his trade war with China, one of Ap­ple's largest cus­tomers. About 20 per­cent of Ap­ple's rev­enue comes from China, but an­a­lysts say in­vestors should main­tain a long-term per­spec­tive when it comes to the trade war.

The U.S. and China ex­changed new sets of tar­iffs on $34 bil­lion worth of each other's goods on Fri­day morn­ing, and it seems as though there's no end in sight to the es­ca­lat­ing trade war. China has been Ap­ple's largest rev­enue growth source in re­cent years, and Ap­ple shipped more than 41 mil­lion iPhones to China and logged $44.7 bil­lion in Greater China sales in 2017.

Some ex­perts now be­lieve that China's next shot at the U.S. could be to en­cour­age an­tiAmer­i­can sen­ti­ment and or­der boy­cotts of Amer­i­can prod­ucts, such as the iPhone. Last year, China took a sim­i­lar ap­proach to South Korean com­pany Lotte Group, which ul­ti­mately closed dozens of stores in China.

How­ever, an­a­lysts say long-term Ap­ple in­vestors should mostly ig­nore any near-term trade war volatil­ity. While Ap­ple's near-term growth prospects in China may be at risk, Loop Cap­i­tal Mar­kets an­a­lyst Ananda Baruah says Ap­ple Ser­vices could pick up the slack. Ap­ple Ser­vices rev­enue has grown by greater than 30 per­cent in two of the past three quar­ters.

"We be­lieve this mo­men­tum is struc­tural as an im­por­tant cat­a­lyst has been AAPL spend­ing in­cre­men­tal time at the coun­try level un­der­stand­ing and at­tend­ing to what in­di­vid­ual coun­try reg­u­la­tory dy­nam­ics to adop­tion are," Baruah says.

He says Ap­ple Ser­vices growth has been well­diver­si­fied ge­o­graph­i­cally, sug­gest­ing China is a rel­a­tively small piece of the puz­zle.

"Strength has been broad across the App Store, Ap­ple Pay, Ap­ple Mu­sic, iCloud, etc., as well as ge­ogra­phies, with no ge­og­ra­phy ac­count­ing for [more than] 25 per­cent of rev­enue," Baruah says.

GBH In­sights head of tech­nol­ogy re­search Daniel Ives says Ap­ple, China and iPhone as­sem­bler Fox­conn have a sym­bi­otic re­la­tion­ship that China may be un­will­ing to dis­turb.

"Given the tightly wo­ven in­te­gra­tion be­tween Ap­ple and Fox­conn in China, we be­lieve there is min­i­mal risk to this re­la­tion­ship, cost in­creases, and back­lash to Ap­ple sell­ing its iPhone de­vices within China," Ives says.

Loop Cap­i­tal Mar­kets has a "buy" rat­ing and $210 price tar­get for Ap­ple. GBH In­sights has a "highly at­trac­tive" rat­ing and $200 tar­get for AAPL stock.

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