Apple’ CEO Tim Cook sent shivers down the market last week when he announced that China's economic slowdown is affecting the company’s sales. In my opinion, the warning came just at the right time.
Today, the US and China meet to discuss tariffs, putting pressure on both parties to solve issues between them. China is a huge market for Apple, making up about 15% of its revenues globally.
That marks a dramatic change in tune from the leader of the tech giant who just under a year ago, during Apple's earnings for the first quarter of 2018, said: "Everywhere I look, I feel really good about how we're doing in China."
Cook announced that he now expects revenue for the three months ending in December to be about $84 billion, down from an earlier estimated range of between $89 billion and $93 billion.
It was the first time since June 2002 that Apple issued a reduction in its quarterly revenue forecast.
The iPhone has been Apple's main source of revenue for years, accounting for nearly 60% of Apple's total sales in the three months ending in September.
What should investors do?
The question is whether to buy, sell or hold given the weakness in the shares. 2019 started off on a bad footing given the negative data continuing to come out of China. Being at the last stage of the economic cycle this obviously creates alarm in the markets and the increased tensions between the US and China are not helping the cause.
Having said that, over the weekend, positive news came out of Trump on the negotiations between the US and China regarding trade disputes. Also, China still have further measures they can put in place to stimulate growth (and they already hinted at this in December).
We had reduced our stance on Apple from BUY to a HOLD in 2018. Given the fact that the Group kept on increasing the price of their iphones in the late stage of the cycle can be dangerous if there are signs of economic weakness. However, at today’s price, the entry point is more attractive and any measures to improve growth in China will reflect positively on the stock. It goes without saying that the large swings in the stock is also a cause of most funds holding the stock.
China and US to hold trade talks in Beijing
China and the United States will hold vice ministerial level trade talks in Beijing on January 7-8, as the two sides look to end a dispute that is inflicting increasing pain on both economies and roiling global financial markets.
Trump has said talks toward a deal are progressing well, but it is unclear if Beijing will yield to key US demands over trade imbalances, market access, and alleged Chinese abuses of intellectual property.
Conclusion
The valuation of Apple (and stocks in general) are attractive at these levels. However, further deterioration out of China will result in a revision of Price Targets lower. At this stage of the business cycle, the US elections up in 2 years and China’s economy showing signs of weakness, I am of the view that measures will be taken to stimulate growth.
If this is the case we should see prices recover from here. If no measures are taken and additional tariffs are put into place then the situation changes. (A binary event – which in the short term will result in increased volatility).
However, so far, the high volatility seen in Q418 and moving into Q119 was caused by increased negative sentiment pricing in a deteriorating scenario (moving into recession at a much faster pace) rather than the deterioration itself. Somethings which we had seen end 2015-beginning 2016 did not materialise resulting in a strong rebound in equity prices without any measures put in place.
Disclaimer:
This article was issued by Kristian Camenzuli, investment manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.