Everyone loves Apple Inc. (NASDAQ:AAPL). There is a reason the world-renowned producer of mobile communication and media devices is pushing $950 billion and is every analyst’s clear favorite to surpass the $1 trillion market cap barrier. However, the market is the market and forces beyond the adoration of the people and Apple’s direct control are threatening to affect what has been a period of unprecedented market success in the last two months.
This chart shows just far the company has come in the last year:
A bit of context…
Apple has dealt with the design of top-class mobile and media products since its inception in 1976 by Steve Wozniak, the late Steve Jobs, and Ronald Wayne. The company has successfully expanded its not just business presence but its operations to other regions such as Europe, Japan, India, the Middle East, Africa as well as China which currently is the cause of worry for its stakeholders.
Earlier in the year, the news that Warren Buffett’s holding conglomerate, Berkshire Hathaway, had upped its stake in the firm by a massive 23% to 165.3 million shares boosted the price to a new all-time high of $180.48. By the start of June 2018, the stock had traded at a new high of $191.7 and has barely dropped since
Trade Tensions Between US & China
With the strains in the relationship between the U.S. and China increasing and the possibilities of a trade war rising rapidly, Apple Inc,’s investors are getting worried because of the company’s massive exposure to the consumer market within China.
With rumors concerning the possible industries and companies that may take the largest hits, Apple has a number of times been mentioned as one of the firms with the largest exposure. In just the previous fiscal year, close to twenty percent of the firm’s income came from China to which it shipped well over forty million iPhones to the country. Besides this, Apple has a major physical footprint in the nation, having no less than 40 retail locations across China including its Apple Music services and App Stores scattered across the place. In addition, Foxconn in China assembles its iPhones.
Although the smartphones may not be levied, concerns remain that the trade tensions could affect Apple’s suppliers, leading to production delays. There is also a possibility that the Chinese authorities China could completely ban Apple’s services, something that the authorities have done in the past. This occurred as recently as 2016 when Apple’s iBook Store and iTunes Movies service was shut down, which could lead the country to use this as an opportunity to support and enable its local smartphone companies such as Huawei and Xiaomi at Apple’s expense. Both companies have already made inroads on Apple consigning it to being the fifth highest seller of mobile handsets in the country.
Just last week, Trump delivered on his promise by signing off on tariffs. According to the US Trade Representative’s Office, the list of products getting levied cuts across 1,102 separate lines, including sectors such as robotics, automobiles, communications technology, industrial machinery, aerospace and information among others. The collection of these tariffs will is set to commence by early July.
In response to this move by the government of the U.S., China issued a terse statement stating that it would strike back soon. The duties to be levied on American goods are to be of an equal scale and equal strength to those levied by the U.S, although the list may not be as exhaustive.
In 2017, Apple Inc. reported revenues of $229 million, a relatively stable figure when compared with income from previous years. Keeping up with this trend, the company had revenues of $61.1 million in 1Q2018.
Although this figure amounted to a 30% dip in revenue, the unusually high revenue of $88.3 million in 4Q2017 is traceable to sales of iPhone X along with increased number of gifts and purchases characterized by the end-of-year period.
The stability continues with the cost of sales of $37.7 million equaling a characteristic near 60% cost of sales to revenue ratio. Other costs such as sales, general and administrative expenses were recorded at $4.2 million while research and development cost $3.38 million during the quarter. Even with additional income, operating income, for the quarter was recorded at $15.89 million, while the net income for the year was $1386million.
The statement of financial position reveals that the firm is quite highly geared. On its books, its total debt is worth an estimated $241 million, leading to stable debt to equity ratio of 1.79. It also has a liquidity ratio of 1.29, which can be considered acceptable for its industry.
It is hoped that the conflicts are resolved as soon as possible as the decisions made by the Chinese authorities could cut as much as 20% of Apple Inc.’s revenues.
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Disclosure: We have no position in AAPL and have not been compensated for this article.