Apple Inc. (AAPL), whose future looked bright only a month ago as its valuation approached nearly $1 trillion, now risks becoming a major casualty of the U.S.-China trade war. HSBC Global Research recommends that investors consider dumping shares of Apple, one of the most dependent U.S. tech giants on the China market, before the trade war inflicts a potentially sharp decline in its profits, per Barron’s.

How The China Trade War Could Crush Apple's Stock

  • iPhone maker generates up to 18% of its revenue, and an even larger share of its profit from China
  • Chinese consumers opting for cheaper, local brands
  • Trump’s threat to ban Huawei from selling in the U.S. could lead to Apple boycott from Chinese consumers
  • Every 5% decline in China sales equates to $0.15 in reduced EPS, per Credit Suisse

Source: Barron’s, CNBC

Chinese Consumers Shift to Local Brands

As trade tensions escalate, a new wave of volatility has entered the market, hitting U.S. stocks with the greatest exposure to the Asian market.

Shares of iPhone maker Apple skyrocketed 37% this year through early May, fueled by the bull rally and optimism about Apple's future. But the company's shares have fallen nearly 10% over the last month, compared to a decline of just 2.4% for the S&P 500 index.

Apple already was facing a major slowdown in global iPhone sales before the trade conflict. That slowdown may accelerate. HSBC Global Research analyst Erwan Rambourg points out that Apple generates up to 18% of its revenue and an even larger share of its profit from the mainland. “US-China trade talks have continued to be an overhang,” he wrote in a recent report, per Barron's. “Escalation in US-China trade tension will likely impact demand in China...There is a risk that in the Chinese market, consumers accelerate the shift to smartphone substitutes notably by going to local brands.”

A 25% tariff on the remaining goods from China would lead Apple to either lift its prices or lower its profitability. Higher prices would hurt its sales in the key Chinese market as consumers choose cheaper domestic brands.

Trump's War Against Huawei

The threat of local competition in China could also increase if President Trump decides to proceed with plans, now temporarily delayed, to ban China telecom giant Huawei from selling products to U.S. companies, according to Wedbush, per Barron’s. If implemented, the ban could prompt Chinese consumers to spurn the American hardware company.

Though Apple shares are down sharply from their 2019 highs, they were up more than 2% on Tuesday on news that the U.S. will grant temporary exemptions to the export blacklist against Hauwei.

Credit Suisse analyst Matthew Cabral estimates that for every 5% decline in China sales, Apple will see $0.15 shaved from its earnings on a per share basis. He notes that China contributed 20% to Apple’s top line and operating profit last year, per CNBC.

Looking Ahead

Meanwhile, Apple bulls remain upbeat regarding the company’s shift away from hardware to focus on software and services. Earlier this year, the smartphone maker announced new businesses like its gaming subscription service, Apple TV+, and other digital services. Already, some market watchers, including Piper Jaffray, estimate that Apple has transformed so much that its service business is now worth more than the hardware business, per an earlier Investopedia story. That kind of bullishess could fade quickly if the U.S.-China trade conflict continues.