Apple Stock Could Lose Big in a Trade War With China, Morgan Stanley Says - Barron's

Apple Photograph by Hector Retamal/AFP/Getty Images

President Donald Trump’s increased tariffs on $200 billion worth of Chinese goods would deeply impact Apple (ticker: AAPL), jacking up iPhone prices that would threaten to dampen demand and cut into the tech giant’s fiscal 2020 earnings per share.

That’s the warning in a Thursday note from Morgan Stanley analyst Katy Huberty, who has done the math and concluded that tariffs would raise the cost of an iPhone XS by some $160, significantly raise Apple’s cost of goods sold, and ultimately slice 24% off its fiscal 2020 EPS forecast of $12.67.

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“Apple has one of the most significant exposures to Chinese exports to the U.S.…given final assembly for many of its consumer devices is located in China,” wrote Huberty, who maintains a $240 price target on Apple shares. (Apple’s stock was down 3% at $193.19 in trading on Friday.)

A tariff would blunt recent momentum Apple has built in China after it cut prices there. During its latest earnings call this month, Apple Chief Executive Tim Cook said, “There is an improved trade dialogue between the U.S. and China and from our point of view this has affected consumer confidence on the ground there in a positive way. And so I think it’s a set of all of these things and we certainly feel a lot better than we did 90 days ago.”

Apple experienced a bounceback in iPhone sales in China toward the end of March after it cut prices there, reversing a slide earlier in the year, Cook said.

Cook warned investors in a January letter that severe economic conditions in China weighed on iPhone sales in 2018. China is key to Apple. Roughly 20% of its revenue comes from the region, most of it via sales of iPhones.

An increase in tariffs would adversely affect a wide range of Apple products, including iPhone, Apple Watch, AirPods, Apple Pencil, and peripheral devices, the company warned in a September letter to the U.S. trade representative. Apple didn’t offer an estimate then of how much the tariffs would increase its costs.

Apple stock has dropped 2.1% to $195.73, while the Dow Jones Industrial Average has fallen 155.65 points, or 0.6%, to 25,672.71, the S&P 500 is off 0.6% at 2853.86, and the Nasdaq Composite has fallen 0.8% to 7845.84.

Write to Jon Swartz at jonathan.swartz@dowjones.com

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