President Donald Trump’s newly announced China tariffs put a real hurting on Apple’s stock price. But don’t worry, because investors think Apple will weather the storm — and advise that you hang onto your AAPL holdings for now.
Heck, you could even buy more.
Apple stock plunged 5% in trading yesterday. That essentially wiped $53 billion off Apple’s market cap. (That’s more than two times the market cap of Twitter.) The stock drop came after Trump said the United States will place 10% tariffs on approximately $300 billion of goods imported from China. This will include numerous Apple products, including the iPhone, AirPods and more.
According to renowned Apple analyst Ming-Chi Kuo, Apple plans to absorb the extra cost itself rather than passing it on to customers by raising product prices. That could be a risky strategy from an investment perspective.
How will this affect Apple earnings?
AllianceBernstein analyst Toni Sacconaghi says Apple absorbing this cost will reduce earnings by 7%. “Apple will have to calculate how much iPhone sales will decline if it passes the cost of the tariff onto consumers,” Sacconaghi said. “Anything larger than a 20% drop and Apple will be better off eating the cost of the tax itself. And ironically, there is a risk that China will also tax the iPhone as a U.S. import in retaliation.”
Meanwhile, Wedbush Securities analyst Daniel Ives thinks iPhone sales could drop by up to 8 million in the United States next year. Even if Apple swallows the costs itself, it could reduce earnings by 4% in 2020. “While Apple will be able to mitigate some of the cost increases from tariffs by adjusting its supply chain, the process is slow-going.”
So why is everyone still confident? Because Apple’s services business continues to grow. Also, evidence suggests Apple could move some manufacturing out of China in the next few years.
As a result, Sacconaghi has a “hold” rating on Apple and a $190 price target, slightly below Apple’s current valuation. Ives rates Apple a “buy,” with a price target of $245.
At time of writing, Apple is trading at $195.74.