President Trump’s trade war with China reached a peak last week when he imposed tariffs of 125% on Chinese imports. Beijing responded with tariffs on American goods of also 125% and said that at these levels, there was no need to respond any further to U.S. actions because trade between the two countries was effectively dead.
This was a disaster for Apple (AAPL). While its manufacturing has dispersed beyond China over the years as tensions between the two countries grew, the tech giant still heavily relies upon its factories there for much of its production, especially for its bread-and-butter iPhone. AAPL stock plunged 23% in the aftermath.
The iPhone, which makes up 51% of Apple’s $391 billion in annual revenue, is primarily sourced from China. A recent Wall Street Journal report noted the tariffs would add about $300 to the $550 the smartphone’s hardware already costs. With the new iPhone 16 Pro retailing for around $1,100, the increased costs could severely damage sales if it pushed its price closer to $2,000.
Apple said it planned to shift much of its manufacturing to its plants in India. Although India was also hit with higher tariffs, the 26% import levy is more manageable. While Apple typically makes about 25 million iphones in India, 10 million of which are for the local market, if it diverted 100% of those phones to the U.S., it would be able to make up about half of domestic demand.
It was clearly going to be an untenable situation for the tech stock, which is already suffering from sales softness. Higher costs and diverting product from markets would exacerbate an already bad situation, which is why AAPL shares tumbled.
However, Trump just threw Apple a lifeline. He announced this weekend that he would exempt smartphones, computers and some other electronic devices from "reciprocal" tariffs he impose, including the 125% duties imposed on Chinese imports.
Technology represents a major component of U.S. imports every year. While total imports is around $4.1 trillion annually, electronics, generally, represents some $486 billion, about 12% of the total, with computers accounting for $140 billion and smartphones, $41 billion, most of which come from China.
While the carveout negates some of the rationale for having this tariff war in the first place, the administration says that tech companies like Apple, Nvidia (NVDA), and even Taiwan Semiconductor Manufacturing (TSM) are either reshoring or onshoring manufacturing to the U.S., so it is necessary to give them the opportunity to make the transition without undermining their ability to do so.
Apple alone has committed to spending and investing $500 billion in the U.S. over the next four years. So now that Apple has been given this reprieve, does that make its stock a buy? Should you buy the tech stock at this discounted level?
AAPL was one of the Magnificent 7 stocks that has been carrying the stock market forward, but it has lost a quarter of its value from its peak in late December as concerns about slowing sales grew.
Its dominance, of course, stems from Apple’s integrated ecosystem – iPhones, Macs, services like iCloud, and emerging AI ventures – all intertwined with one another, that make switching to competitor products more difficult and results in stickiness with users.
Despite physical products still representing the lion’s share of revenue, services have become the second largest and fastest-growing portion of the business. Sales totaled $96.2 billion last year, up almost 13% from 2023, and is Apple’s most profitable segment with gross margins of 75%.
Services sales were up another 14% in Q1 and Apple, despite iPhone sales declines, still generated $36.3 billion in net income., up 7% year-over-year. It all points to Apple still being a fantastic business.
Valuation is arguably its biggest problem. Even with the pullback in its stock, AAPL goes for 31 times trailing earnings, 7 times sales, and more than 30 times the free cash flow it produces.
Wall Street forecasts earnings growth will slow to 9% annually for the next five years, just 60% of the 15% growth it enjoyed over the last five years. Yet analysts do still assign AAPL stock a buy rating and have a $240 per share price target on it, implying 21% upside from current levels.
While Trump’s life preserver eliminates, at least temporarily, one of the major headwinds Apple faced, I’d prefer a much bigger discount on the stock before buying in.
