2 Positive(ish) Takes on Apple and China After G-20 Trade Ceasefire
Apple Inc. (NASDAQ: AAPL) is perhaps the number-one technology company that will win if a trade truce between the United States and China comes to pass. The problem with this last weekend’s truce at the G-20 in Japan is that there is really nothing permanent, no agreement at the core of intellectual property transfers, and it may all come unglued without notice in the weeks or months ahead. In short, this is a ceasefire rather than an outright end of the conflict. Obviously, last weekend’s news may remove a near-term risk for Apple while leaving long-term risks in place.
24/7 Wall St. has tracked two differing opinions about just how good the weekend’s announcement really was for Apple. One is from Merrill Lynch and the other from Wedbush Securities. While both are implied “Buy” ratings, there are some key differences in the reports.
Wedbush’s Daniel Ives has an Outperform rating and the same $235 price target on Apple. He noted that Apple has become the “poster child” for the U.S./China trade battle: “it all came down to if the Trump-Xi meeting would result in not going forward with the $325 billion in additional China tariffs that would have struck at the core of the tech ecosystem with Cupertino front and center.”
Ives believes that this takes away the biggest risk on the Apple story, for now. It eliminates roughly $2.00 worth of earnings per share risk that likely would have vanished had it resulted in increased costs on the iPhone. Ives noted on Apple’s reliance on China:
We continue to believe that Apple does not look at diversifying production outside of China (e.g. Vietnam, India) going forward IF the current negotiations stay on track on the threat of the $325 billion tariffs staying pure noise and not becoming a reality. While demand issues continue to not be ideal for Apple in China (although we believe the company saw a rebound this quarter vs. the prior few quarters), with roughly 60 million to 70 million iPhones in China coming up for an upgrade opportunity over the next 12 to 18 months this region remains a linchpin of growth for the Apple story. From a scenario perspective, we believe a resolution to the China tariff situation could add between $20 to $25 per share to Apple’s stock over the coming months in our opinion, as this would take away the dark cloud currently shadowing the stock… we believe this weekend’s developments out of the G20 starts to remove the albatross around Cook’s neck which remains the China trade war situation. Taking a step back, there is still more wood to chop ahead for Apple and Cook around seeing a rebound in iPhone demand globally and continued strength in its services business which we believe is key to the overall valuation, however we are incrementally more positive on the stock following developments from the G20 meeting on the tariff front.
Merrill Lynch has a Buy rating on Apple with a $230 price objective. The firm’s Wamsi Mohan remains positive but trimmed Apple’s earnings expectations based on slower App store revenues. His earnings targets went down to $11.68 per share from $11.74 for 2019, to $13.20 from $13.28 in 2020 and to $16.15 from $16.24 in 2021. Mohan noted that while the growth in China App store revenue was 23% annualized in April, its growth declined to 19% in May and then to just 5% in June.
Mohan does view the G-20 trade truce as a positive development as it keeps Apple’s prices unchanged and also delays an immediate need to shift manufacturing and supply chain out of China. More on slowing App store sales was noted as follows:
Given the slowdown in global App store revenue growth during the quarter, and the incremental FX headwinds on non App Store China demand we lower our estimate for F3Q19 (June quarter) services growth to 16% y/y, from prior 18% y/y. We also lower our estimate for Apple Services revenue growth for the Sep quarter (F4Q19) to 17% y/y, from prior estimate of 21% y/y. We reiterate our Buy rating on a strong capital return program, long-term strong growth forecast for Apple services, and potential new products.
Apple shares opened up 2.65% at $203.17 on Monday, but the shares were last seen trading up about 2.2% at $202.22. That’s not bad news at all, but it means that the morning pop hasn’t yet been greeted by extra enthusiasm.
The stock has a 52-week trading range of $142.00 to $233.47, and the consensus target price from Refinitiv was $212.03.