Shares of Apple have fallen more in May than the
—and now even some bullish analysts are starting to worry about more downside.
Major U.S. indexes were up early Tuesday, following a dramatic pullback yesterday, as investors held out hope for a trade deal between the U.S. and China.
stock (AAPL), however, is still down 6.8% in May—about 3 percentage points more than the S&P 500—even after gaining 0.7% to $187.07 Tuesday morning.
Investors are watching closely for signs of how the negotiations are doing—and attempting to calculate the effects a failure might have on stocks. Apple, a Dow Jones Industrial Average component, is seen as especially vulnerable if new tariffs are enacted on Chinese imports, since the company relies heavily on manufacturing there. In a note, JPMorgan analyst Samik Chatterjee, who maintained an Overweight rating on Apple stock said some of the pullback appears to be an “overreaction”—but that doesn’t mean it is necessarily over.
Chatterjee on Tuesday estimated that Apple would need to raise iPhone prices by as much as 14% to offset the effect of tariffs if it wants to maintain its margins. That could mean the iPhone XS would cost $1,142 instead of $1,000, according to Chatterjee’s math.
But Chatterjee, who maintained a $235 price target that is higher than FactSet’s $214 average on Apple stock, thinks the company may just take a hit to profits rather than do so. if it does, he wrote, it could lead to a 14% hit to earnings per share. “Apple,” he wrote, is “more likely to absorb the cost headwinds.”
There’s a good reason for that: Raising prices could hurt sales, Bank of America Merrill Lynch analyst Wamsi Mohan noted Tuesday.
“If Apple were to raise prices the result would likely be some demand destruction that is harder to quantify,” Mohan wrote. “Every 1 million units of iPhone demand destruction would drive EPS lower by $0.04, so demand destruction of 10% would equate to about $0.20 in EPS headwinds.”
Apple and other companies could move toward more domestic manufacturing to combat trade concerns and benefit from legislation favoring U.S. production.
“The world is changing with China and India jockeying to become larger influencers with over a billion in population each and aspirations to grow and overtake the U.S. in many areas including fields like Artificial Intelligence,” Mohan wrote on Tuesday. “There are many motivations for increasing the manufacturing presence in the U.S.”
Trade isn’t the only reason Apple is in the news. On Monday, the Supreme Court ruled that consumers can sue the company over its requirement that apps used on its products be sold through its App Store, though it didn’t rule on the validity of the claims made by the consumers who’d sued.
Some high-profile companies, including
(SPOT)—which has challenged Apple in Europe over similar issues—and
(NFLX), are pushing back against what they consider impediments to their business caused by Apple’s rules.
The possible effect of “the imposition of tariffs on all hardware products and the potential modest losses from the lawsuits suggest that there could be more downside on Apple shares in the near-term were sentiment around U.S.-China trade talks to worsen further,” Chatterjee noted.
Email David Marino-Nachison at firstname.lastname@example.org. Follow him at @marinonachison and follow Barron’s Next at @barronsnext.