|This Is a ‘Critical’ Time for Apple in China, Analyst Says|
By David Marino-Nachison
June 14, 2019 3:15 p.m. ET
A timely resolution to U.S.-China trade tensions could add $25 to the price of Apple stock within months, according to new research.
Apple stock (AAPL) was recently down less than 1% to $192.74 as the S&P 500 was about flat. Wedbush analyst Daniel Ives late Thursday reiterated an Outperform rating on the shares, calling China “the major swing factor” for the company’s shares.
That’s partly because of trade—but also because investors are watching for signs that Chinese demand is improving, Ives wrote.
The back story. Apple stock is up about 20% in 2019. They’ve risen in June after ending a monthlong run-up in April, with China being one of the most important ongoing themes.
On one hand, there’s demand. The year began with warnings of disappointing iPhone sales in China, and while a focus on services subsequently revitalized the shares, investors decided to sell in May following its latest release of quarterly results.
Then there’s trade. Apple relies on China for much of its manufacturing, so as the U.S. and China continue to talk of widening tariffs and measures it’s made the company a kind of poster child for the economic effects of the countries’ strained relations.
The G-20 summit, scheduled for later this month in Japan, could see a cooling-off—or more or the same.
What’s new. June marks the winding down of Apple’s fiscal third quarter.
“We believe the June quarter has been tracking ‘in line with expectations’ around China iPhone demand, which has seen a modest rebound from softness seen in the December/March quarters,” Ives wrote. “That said, it’s a ‘nervous environment’ across the supply chain, with the semi space seeing clear uncertainty.”
That’s a reference to the latest news out of chip maker Broadcom (AVGO), shares of which were recently down 6.4% to $263.63 as it lowered its full-year sales guidance, surprising Wall Street.
“With China representing roughly 20% of all iPhone upgrades over the next 12 to 18 months, with our estimation that 60 million to 70 million iPhones in China are currently in the window of opportunity, this is a critical time for Apple to solidify its key installed base in the region.”
What’s next. Ives has a $235 price target, above FactSet’s $211 average, on Apple’s stock.
“We believe if a resolution to the China tariff situation comes to a head starting with G-20 talks in a few weeks this would add between $20-$25 per share to Apple’s stock over the coming months,” Ives wrote. “This would take away the primary China risk, which is a dark cloud over the stock now.”
It isn’t clear that Chinese President Xi Jinping and President Trump will meet in Japan, which could prolong uncertainty—at the least. If negotiations go south, leading to tariffs that lead Apple to move manufacturing elsewhere, the company could take a 10%-15% hit to earnings over “the next few years,” according to Ives.
Email David Marino-Nachison at firstname.lastname@example.org. Follow him at @marinonachison and follow Barron’s Next at @barronsnext.