Apple’s profit could plummet if China bans iPhones

Apple Inc.’s earnings could fall 26% in its 2020 fiscal year if China bans sales of the iPhone, according to Cowen, the latest firm to paint a dramatic picture of the tech giant’s risk in the event that trade tensions between the U.S. and China deteriorate further.

While Wall Street has fretted over Chinese demand prospects for the iPhone for months, the issue has gained urgency after the Trump administration blacklisted Huawei Technologies Co., raising the prospect of reprisals. Earlier this month, Wedbush called the Huawei ban a “Fort Sumter moment,” with Apple the “poster child” for trade uncertainty.

Shares of Apple were little changed on Tuesday, compared with a 0.6% rise in the S&P 500 Information Technology Sector. Apple is coming off a three-day drop, and shares have declined more than 15% from a peak earlier this month.

Cowen analyst Krish Sankar wrote that an iPhone ban represented an “extreme case” scenario for how the trade war could play out, adding that the more likely outcome was that Apple would see a “material but manageable” hit to earnings.

“Apple’s iPhone, iPad, and Mac systems are at risk of experiencing demand destruction due to collateral damage from the sales ban to Huawei,” Sankar wrote. The perception that Huawei is being “unfairly punished” could lead Chinese consumers “to retaliate as patriotism leads them to support domestic brands while products and services from U.S. companies fall out of favor.”

This view was echoed by Citi, which on Tuesday cut its price target on the stock to $205 from $220, seeing “a slowdown of Apple iPhone demand in China as China residents shift their purchasing preference to China national brands.” Apple’s 12% market share in the country could be “cut in half,” analyst Jim Suva wrote.

Cowen is not the only firm to calculate that earnings could potentially fall more than 20% if retaliatory measures escalate. Morgan Stanley wrote that earnings could fall by about 23% in a worst-case trade scenario, while Goldman Sachs estimated a drop of 29% if China banned Apple products.

Both China and the iPhone are central to the Cupertino, California-based company. According to data compiled by Bloomberg, Apple derived nearly 20% of its 2018 revenue from China, while the iPhone accounted for more than 60% of its total 2018 revenue.

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Apple’s profit could plummet if China bans iPhones