Market Overview

Apple Averted An iPhone Fiasco With Phase 1 Trade Deal

Apple Averted An iPhone Fiasco With Phase 1 Trade Deal

The standoff in the U.S.-China trade talks has continued to haunt the financial markets for a while now. Stocks with significant exposure to China have been see-sawing amid conflicting reports concerning a resolution.

With some clarity emerging with the clinching of a Phase 1 deal between the U.S. and China, the broader market and these stocks are likely to get a reprieve.

Apple Inc. (NASDAQ: AAPL), which is reliant on China both as a production base and market for its products, is feeling the pinch, although the stock hasn't reacted much to the uncertainty.

Apple shares have been on a tear this year, with the rally getting stronger since the stock dropped down to a medium-term support around $170 in early June. Much of the upside came on the back of the product momentum following the launch of the iPhone 11.

After having gained about 75% in the year-to-date period, the stock is currently in record territory.

Despite the resiliency of Apple shares, there is no denying of the fact that trade tensions impacted the company's fundamentals.

Numbers Confirm The Hit

Sales of Apple's flagship product – the iPhone – fell year-over-year in China for the second straight month in November, the CNBC reported, citing Credit Suisse analyst Matthew Cabral said.

iPhone shipments in China fell 35.4% in November, adding to the 10.3% decline in October, the analyst said, inferring the data from estimates provided by the Chinese Ministry of Industry and Information Technology.

Since the launch of the iPhone 11 line-up, sales have declined 7.4%, translating to a 17.5% drop in China iPhone revenues, the analyst was quoted as saying.

For the fiscal year ended Sept. 2019, Apple's revenues from Greater China, which include Hong Kong and Taiwan as well, fell 16% year-over-year to $43.68 billion. The company attributed the decline to lower iPhone net sales, partially offset by net sales of Wearables, Home & Accessories and Services.

Apart from the trade tensions that simmered, competition from domestic rivals was also responsible for the weakness.

Huawei was a major beneficiary, as Chinese customers switched allegiance after the U.S. ban on Huawei whipped up patriotic fervor. The company also pushed its products by heavily incentivizing them.

Averting a Tariff Disaster

If not for the trade deal, which averted imposition of further tariffs by the Dec. 15 deadline, Apple would have been pushed to the brink, having had to mark up its iPhone prices by anywhere between $70 and $150 per unit, analysts say.

A 15% tariff would have hiked the U.S. iPhone costs by about $70, Cabral said.

Tariffs could have inflated iPhone prices by about $150 during the critical holiday season, the Bloomberg reported, citing Wedbush analyst Dan Ives.

"If this tariff went through it would have been a major gut punch for semi players/Apple and could have thrown a major wrench into the supply chain and demand for the holiday season," Ives was reported to have said.

Imposition of tariffs would have placed Apple in a Catch 22 situation. If prices were left intact, tariffs would have shaved 4% off its earnings per share in 2020, and alternatively, if prices were hiked, demand would have shrunk by 6-8% in 2020, Ives said.

At least for now, Apple can heave a sigh of relief and focus on company-specific factors rather than worrying about geopolitics.

At last check, Apple shares were rallying 0.94% to $274.01, off the intra-day of $274.80 reached earlier in the session.

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