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Apple staunching sales declines in China just as trade war heats up

Analysts are working to figure out how to think about Apple Inc.'s future in China during a week that included better-than-feared results in the region from the iPhone-maker followed by a new tariff announcement from the White House.

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Apple on July 30 reported quarterly sales in China of $9.16 billion, down 10.4% sequentially from the March quarter. While the double-digit drop was significant, it was much narrower as compared to a year ago, when Apple's revenue in the country fell 26.7% to $9.55 billion between the March and June quarters. Several analysts said Apple's improving condition in China highlights the overall strength of the company's business model and positions the company to deliver strong returns going forward.

On ​Aug. 1, however, investor confidence in the tech giant was shaken after President Donald Trump said he would impose a 10% tariff on $300 billion of Chinese goods, effective Sept. 1. Trump further warned that the rate of the new tariffs could rise to 25% and "well beyond" depending on how trade talks go.

Shares in Apple closed on Aug. 1 down 2.16% at 208.43 apiece, erasing the gains the stock had seen after its July 30 earnings report.

Though Apple products have not been included on previously imposed tariff lists and the company could still apply for exemptions for the various devices Apple manufactures in China — including iPhones, iPads, Mac laptops and Apple TV — the company previously warned in a June letter that the proposed tariff list for the latest $300 billion in products included "all of Apple's major products."

Moreover, in July, Trump denied Apple a tariff exemption related to Mac Pro computer parts made in China. In a July 26 tweet about the decision, he said, "Make them in the USA, no Tariffs!"

Though the escalating U.S.-China trade war has resulted in several news outlets speculating that the company may consider shifting some of its production outside of China to Southeast Asia, Apple CEO Tim Cook recently urged against placing "a lot of stock" in those rumors, saying that the "vast majority of our products are kind of made everywhere."

Given the ongoing trade tensions, it is likely in Apple's best interest to begin shifting its production and reliance away from China, said Rick Pendergraft, founder of independent investment research firm Pendergraft Research.

"The more a company relies on China for the greater percentage of its earnings, that obviously has to be a greater concern for anybody," Pendergraft said in an interview.

While it remains unclear how the new tariffs will impact Apple's exports out of China, Apple executives noted that there is a wide range of factors contributing to the company's improving sales within China.

Speaking during an earnings conference call, Apple executives pointed to a recent move from the Chinese government to reduce smartphone taxes. Moreover, Apple is also implementing more generous trade-in programs for its iPhones.

"When you look at it, each of our categories — iPhone, iPad, Mac, Wearables, Services, everything — improved sequentially [in China during the June quarter]," Cook said.

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Greater China remains Apple's third-largest market, behind the Americas and Europe.

"If there is a China slowdown, clearly no one told [Tim Cook] about it," Evercore ISI analyst Amit Daryanani wrote in a July 30 report.

Wedbush Securities analyst Daniel Ives in a July 31 research report raised his price target on Apple shares to $245 from $235, while reiterating his "outperform" rating, saying he considers Apple's slight rebound in China to be one of the most important aspects of the company's earnings.

The recovery represents a "major feather in the cap" for Apple that should drive the stock "to new highs" in 2019 and beyond, the analyst added.

"While China remains a wild card in terms of how quickly iPhone demand will ramp in this key region, we believe the stage is now set for Cook to put his finishing touches on what will be a defining comeback and chapter in his legacy and Apple's future heading into fiscal year 2020," Ives wrote.

Likewise, Gene Munster, a managing partner at venture capital firm Loup Ventures, said Apple's turnaround in China was among the "most impressive" components of its earnings results.

Apple on July 30 reported consolidated net sales for the fiscal 2019 third quarter came to $53.81 billion, up 1% year over year from $53.27 billion in the comparable 2018 period. The S&P Global Market Intelligence consensus estimate had called for total revenue of $53.42 billion in the quarter.

Net income for Apple's fiscal third quarter came to $10.04 billion, or $2.18 per share, down from $11.52 billion, or $2.34 per share, in the prior-year quarter. The S&P Global Market Intelligence consensus EPS estimate for the June quarter was $2.10 on a GAAP and normalized basis.

The company expects fiscal fourth-quarter revenue between $61 billion and $64 billion.