- Apple stock is down over 10% since it announced its latest earnings report last month.
- The stock has been caught up in the bearish wave which has engulfed US markets following Donald Trump's presidential win.
- The new presidential candidate's policy view on tax, import duty and H1-B visas could hurt Apple meaningfully.
A bearish wave seems to have engulfed the technology sector ever since Donald Trump was announced the winner of the 2016 US Presidential elections. Leading tech stocks including the likes of Apple (NASDAQ:AAPL), Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOGL) have all been caught in this storm, recording losses ranging from 4% to 8% in a matter of 5 trading sessions. In recent posts, we covered the impact of the US presidential election on Facebook, Amazon and Alibaba. We today look at the impact on Apple. What exactly are the issues which Apple could face? Should Apple stock investors be worried?
First, The One Big Positive
This is probably the one and only issue where Cupertino and Donald Trump agree on. With Apple lobbying for a tax break for cash repatriation for several years now, the company would be extremely pleased with the fact they will finally get a tax break under the 45th President of the United States. Trump has often been quoted that he will push for a cash repatriation at a 10% tax rate. With over $216B in overseas cash, Apple will be the biggest beneficiary of a tax break for cash repatriation. But well, that's where the positives of a Trump presidency probably end for Apple Inc. and its investors. Let's now take a look at the issues which Apple inc. might face. (See also: Why Apple Inc. (AAPL) Stock Is A Strong Buy Now)
Higher Import Duties
The second issue which has spooked Apple stock investors has been Trump's vociferous calls for a higher import tax on goods imported from China. So, how much did Trump mean by higher? Well, according to a post on NYTimes, Trump stated that he would tax incoming products from China at a 45% tax rate. Quoting the president-elect from the source:
"I would do a tax. and the tax, let me tell you what the tax should be … the tax should be 45 percent"
So, what are the chances of Mr. Trump actually implementing these import duties? Given what his word has proved to worth, the only answer is 'uncertainty.' Nobody is really sure if President Trump will actually follow through on these threats given the fact that such a move could hurt many US MNCs operating in China or exporting to China. The Chinese government will, in all likelihood, retaliate strongly if the new President-elect actually chooses to follow through with his ideas. As per a report from China's state-run Global Times:
China will take a tit-for-tat approach then. A batch of Boeing orders will be replaced by Airbus. US auto and iPhone sales in China will suffer a setback, and US soybean and maize imports will be halted. China can also limit the number of Chinese students studying in the US.
But will the new President really carry through with these threats and wage a trade-war against China, the biggest trading partner of the US? Well, a paragraph from the same Global Times report summarizes the powers of the US President with respect to import tariffs.
To impose a 45 percent tariff on imports from China is merely campaign rhetoric. The greatest authority a US president has is to impose tariffs of up to 15 percent for 150 days on all imported goods and the limit can only be broken on the condition that the country is declared to be in a state of emergency. Other than that, a US president can only demand a tariff increase on individual commodities.
Given the harsh response of the Chinese government and the authority of the US president, a 45% import tariff on imports from China looks extremely hard for Donald Trump to pull off. Well, Donald Trump will not be the first President who will attempt a trade war. Soon after Barack Obama took office, the US effected a 35% import tariff on Chinese tires. The Chinese responded with an import tariff on US Chicken and auto parts. The result was huge losses for both US as well as China. Guess what? That was the last time the Obama administration tried their hand at a trade war with China.
Availability Of High Skilled Engineering Talent
The next issue which has found a place in discussions centered around the US elections and Silicon valley has been the issue of 'H1-B' visas or work permits. With Silicon valley companies among the largest employers of H1-B visa holders, restraint in issuing these visas could limit Silicon Valley's access to top-notch engineering talent. However, with the chances of a higher import tariff looking minute, the H1-B visas should be less of a worry for Apple, given that it outsources its manufacturing to Chinese contract manufacturers. And for now, those jobs aren't coming back. As per CNN, Apple's former boss, the late Steve Jobs, suggested a change in 'America's lackluster education system' to bring back manufacturing jobs to the US. And Tim Cook agrees with his predecessor. "There has to be a fundamental change in the education system to bring back some of this [labor]," he said in an interview with AllThingsD. In short, these jobs aren't coming back to the US anytime soon. (See also: Samsung Losses Are Yet To Benefit Apple Inc. (AAPL) Stock)
The bottom line is that Apple stock and its investors will continue to be defined by how well its products continue to perform. As long as the company is able to churn out products which are wanted by millions of people, the money will keep coming into the coffers. At a forward valuation of 11.8x its FY 2017 EPS estimate, Apple stock is attractively priced in comparison to its 5-year average earnings multiple of 13.6x. Based on rate at which the New Macs and latest iPhones are flying off the shelves, Apple looks well positioned to beat analysts estimates in the year ahead. Given the difficulty in implementing import tariffs and the high probability of a tax break on cash repatriation, I think Apple Inc. will walk out with more positives than negatives once we emerge from this election-induced market correction. Investors with a long-term horizon should load up on AAPL stock, as the market will play catch up once the buzz on the US elections is past us.
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