China Bans Apple
On Sept. 7, 2023, it was reported by The Wall Street Journal and Reuters that China has banned the use of iPhones at government agencies and for any government business. At the same time, Huawei launched their new Mate 60 Pro phone, which is reportedly competing with 5G smart phones, and made with domestic chips. How much of an impact could the ban have on Apple’s sales and profitability?
U.S./China Trade Tensions and Chip War
U.S. technology companies have sold a lot of products in China over the last two decades. However, over the past five years, the relationship has gotten more complicated, with both the U.S. and China restricting sales and banning certain companies and products. The U.S. blackballed Huawei in 2018. China banned Micron Technology in May of this year.
As I mentioned in my Artificial Intelligence blog, Nvidia warned in their 2Q 2023 earnings call that the current U.S. chip restrictions will negatively impact their Chinese sales in the future, which accounts for 22% of the company’s revenue, unless the roadblocks are eased or removed. With 19% of Apple’s sales coming from Greater China, will China’s new restrictions on iPhones use be a problem for Apple? Is this a preview of more severe actions to come?
Investors responded to the news by selling. Apple shares dropped almost 3% on Thursday, Sept. 7, 2023. The share price stabilized on Friday. However, that could be as a result of Apple buybacks. The company leads the S&P500 in share repurchases. Apple repurchased $18 billion worth of shares in the most recent quarter, and had $94.6 billion remaining in authorized share repurchases, as of July 1, 2023. Apple bought back over $90 billion in stock over the last two years, with a 5-year total of $417 billion.
Apple’s CEO Tim Cook hasn’t made a statement on the Chinese ban yet. However, if the new anti-Apple policy starts to impact revenue, Cook will be forced to make an announcement to that effect. The last time that happened, the stock sank by 10% in one day.
U.S. China Trade Tensions were Hot in 2018-2019
This isn’t the first time that China news has hurt Apple. In the March 2019 quarter, Apple’s revenue in Greater China dropped by -21.5%, from $13.024 billion in 2018 to $10.218 billion. Total revenue slipped by -5% year over year, largely as a result of the disappointing sales in China.
Before the earnings report was released, Tim Cook, the CEO of Apple, published a letter to investors on January 2, 2019 warning that the quarter was going to be disappointing. He wrote, “We did not foresee the magnitude of the economic deceleration, particularly in Greater China… We believe the economic environment in China has been further impacted by rising trade tensions with the United States.” Investors sold immediately after the announcement. The 10% correction amounted to a one-day plunge of $74 billion. At today’s $2.74 trillion valuation, a 10% nosedive would cost Apple investors $274 billion.
Global Smart Phone Sales
One thing that Tim Cook failed to mention in his January 2, 2019 letter was that Apple’s iPhone had slipped to 3rd in global smart phone shipments in the 2nd quarter of 2018 (source: IDC.com), behind Samsung (#1) and Huawei (#2). Chinese smart phones were a lot more affordable than Apple’s and were on fire with sales in China and Europe. (I visited England during that period, where a great deal of people used Huawei smart phones.)
December 2018: The Worst December Since the Great Depression
Another interesting thing that this event teaches us is that Apple does curtail buybacks in times of uncertainty. December of 2018 saw the worst drop in the S&P500 since the Great Depression, with losses of -9.18%. Apple ceased its buybacks that December, and the entire market plunged.
Apple is Currently #2, with 16% Global Market Share (by Units)
In the 2nd quarter of 2023, iPhone was back to #2, behind Samsung with a 20% global market share. As you can see in the chart below, Huawei is not ranked in the top six smart phone companies.
The U.S. Declares War on Huawei
Huawei and Apple have been in an all-out war for the smart phone consumer, not just in China, but in Europe and other Asian countries as well. After Huawei surpassed iPhone sales (by units) in the 2nd quarter of 2018, there were a series of very aggressive actions taken by the U.S. (presumably at the request of Cook). Before the year was out, on December 1, 2018, Huawei’s CFO Meng Wanzhou was arrested in Canada on U.S. charges of wire fraud. (The U.S. Department of Justice dismissed all charges against Wanzhou on Dec. 1, 2022.) Huawei products were banned in the U.S., and the U.S. put pressure on European allies to ban Huawei (without much success at the time). Then the U.S. banned certain chips and U.S. technology in China. Those combined efforts took Huawei out of the running in smart phone sales… until now.
On the same day that China banned Apple smart phones for government officials, Huawei dropped their Mate 60 Pro smartphone for presale. With chips made by China’s top chipmaker, Semiconductor Manufacturing International Corp, the phone is able to compete with 5G speeds, according to Bloomberg’s Technology editor Vlad Savav.
U.S. industry experts were shocked. US representative Mike Gallagher, chair of the U.S. House of Representatives committee on China, reportedly wants to ban all technology exports to Huawei and SMIC, according to Reuters. He believes that the Chinese chip breakthrough could not have been achieved without hijacking banned U.S. technology.
Clearly, the U.S./China Chip War is showing signs of heating up, rather than cooling off.
Apple Forecasts for 3Q 2023
Apple’s second quarter 2023 revenue was down -1.4%. Revenue in Greater China was actually 7.9% higher, with sales at $15.758 billion compared to $14.604 billion a year ago. During the August 3, 2023 earnings call, Apple CFO Luca Maestri expected the Sept. 2023 quarter’s revenue “to be similar to the June quarter.” However, that would be a -9.3% drop from the prior year, and that is before any impact on the new ban of iPhone in Chinese government agencies.
Analysts are concerned that the Chinese government ban, combined with the release of Huawei’s new Mate smart phone with 5G speeds, will slice deeply into Apple’s holiday sales. While it may take time for Huawei to build their European market share back up, the biggest roadblock to Huawei sales in China could be the speed at which the company is able to fulfill their orders.
The iPhone accounts for about half of Apple’s sales.
The trouble with lower revenue forecasts is that Apple’s stock currently has a price-earnings ratio of 30. (Average P/E is 17.) Should a company with a net profit of under $100 billion be worth $2.8 trillion?
Email firstname.lastname@example.org with Apple Stock Report Card in the subject line, if you’d like an updated Magnificent 7 Stock Report Card.
Apple has $166 billion in cash and marketable securities and is pre-authorized to repurchase $94.6 billion in shares. (Total debt is $109 billion.) The company can repurchase its own stock and keep it buoyant, even if investors get spooked that the U.S./China tensions and the new ban on the iPhone in government offices are going to have a hefty impact on earnings. Apple let its stock drop 30% in the pandemic, between Feb. 19 and March 23, 2020. The share price then rallied, after the Federal Reserve and Treasury promised their bailout packages.
There are too many moving parts in the macro economy to predict with any certainty which way the stock will go. However, what we do know is that:
It’s tempting to want to just Buy & Hold, particularly when you see how high Apple has soared since the bottom of The Great Recession. However the 30% nosedive in 2020 and the escalating trade war with China argues for a more prudent plan. If you are an Apple investor who has never considered capturing gains, it’s a good idea to learn what a diversified plan with regular rebalancing can offer. Having the right amount invested, with a capture gains strategy, keeps you in the game with a time-proven strategy, while protecting your wealth, so that you can sleep easy at night no matter what happens with the U.S./China chip war or trade tensions, or the smart phone battle between Apple and Huawei.
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Natalie Wynne Pace is an Advocate for Sustainability Financial Literacy & Women's Empowerment. Natalie is the bestselling author of The Power of 8 Billion: It's Up to Us and is the co-creator of the Earth Gratitude Project. She has been ranked as a No. 1 stock picker, above over 835 A-list pundits, by an independent tracking agency (TipsTraders). Her book The ABCs of Money remained at or near the #1 Investing Basics e-book on Amazon for over 3 years (in its vertical), with over 120,000 downloads and a mean 5-star ranking. The 5th edition of The ABCs of Money and the 2nd edition of Put Your Money Where Your Heart Is were released in 2021. Follow her on Instagram.
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Natalie Pace is the co-creator of the Earth Gratitude Project and the author of The Power of 8 Billion: It's Up to Us, The ABCs of Money, The ABCs of Money for College, The Gratitude Game and Put Your Money Where Your Heart Is. She is a repeat guest & speaker on national news shows and stages. She has been ranked the No. 1 stock picker, above over 830 A-list pundits, by an independent tracking agency, and has been saving homes and nest eggs since 1999.