The weekend's thaw in Chinese trade talks gave export-oriented Tech stocks a lift, but even Apple (AAPL: $202, up 2% yesterday) has a lot of hard work left before the trade war wounds fully heal.
Apple is the only China-linked stock we recommend and that's because we recognize how limited its exposure to the country really is. Nobody will deny that China is the biggest phone market on the planet, but only its size makes it important to Apple. With 1.4 billion people, it only accounted for 25% of the company's revenue at its peak.
Now, however, that revenue has declined 20% through all the tariffs, currency rate impacts and tough talk about an outright embargo of U.S. consumer devices. As long as the trade war has stabilized, this is as bad as it gets. And that means a total of 5% of Apple revenue has evaporated even if the rest of the world remains tariff-free and eager to buy prestigious iPhones.
That's exactly what's happened. Over the last six months, Apples' top line has receded by 5%, which is enough to account for weakness in China. While it stings, it demonstrates that the rest of the world (6 billion people, four times as many as China) is alive and well. People in Europe and the Middle East still buy iPhones. Apple still competes for luxury customers throughout Asia.
We're still bullish on the stock for two simple reasons. First, Apple was already pivoting from Hardware to Services as the heart of its business. Phone markets were saturated and margins were deteriorating across the industry. Using the phones to deliver Payment systems and Music and Streaming Entertainment is the next stage in the company's evolution. That's where future growth will come from.
Second, while the company has taken a 5% revenue hit, the stock is down 15%. That's a serious imbalance, especially when you consider that management has plenty of cash to buy back enough stock to engineer a positive per-share earnings trend. Purely on a sales multiple basis, Apple is currently at a 10% discount. Much of that discount is due to angst around China.
And we can't help but notice that about 60-70 million iPhones in China are up for upgrades when the new models launch in October. Price points and rebates will play a big role. So will Tim Cook's design decisions. However, the trade window is open again. Apple can sell a lot of phones this year and make up for lost time. In this scenario, the 10% discount becomes a huge opportunity to accumulate a giant on the dip.