The Supreme Court is reviewing a lawsuit against Apple entailing the right consumers have to sue Apple over apps purchased from the App Store. Additionally, Apple is facing potential tarrif headwinds. How will this impact the company?
Analysts reach to Apple Lawsuit
An interesting lawsuit being reviewed by the Supreme Court relates to whether consumers, who purchase Apps from Apple’s App Store, have the right to sue Apple. Apple argues that it is just a conduit connecting App developers with consumers. The App Store is a two-sided marketplace that facilitates a transaction between different groups (developers vs. consumers). It is the developer who sets the price, and sells the App, so Consumers directly deal with the App developer. On the other hand, the lawsuit contends that Apple is able to use its market presence to unfairly raise prices of Apps. By limiting users to buying Apps only from its App Store, deciding which Apps can be sold, and having influence on the price at which Apps are sold, Apple becomes the entity with which consumers deal with. The lawsuit contends that consumers indirectly pay for the 30% commission that Apple charges developers via higher App prices.
RBC Capital Markets
Given sustained datapoints around soft iPhone demand from supply-chain and others, we think its prudent to adjust estimates lower, especially as it relates to Mar-qtr and beyond. While AAPL stock has substantially corrected (down 21% since the company reported vs. S&P500 down 2%), we think investors will wait for datapoints/noise level to stabilize before getting more positive on the name (dynamic we think should occur in early 2019). For investors willing to look past the noise, we note: a) high probability that some of the negative datapoints are embedded into AAPL’s Dec-qtr guide; b) historically, supply-chain cuts have been more severe vs. trends at AAPL (inventory dynamic); and c) we haven’t gone through a single iPhone cycle where there hasn’t been “noise” around supply-chain cuts (though we concede this is earlier).
In a WSJ interview published after market close, President Trump indicated he expects to proceed with stated plans to increase tariff rates from 10% to 25% on $200B of Chinese imports starting in January 2019 and implement tariff on additional $267B of Chinese goods (including iPhones and Mac). Apple is a significant employer in China and this Administration has urged the company to move more manufacturing to the US. This could simply be a negotiating tactic ahead of the G20 Summit later this week, though we do note that this Administration has proven a willingness to push forward with such actions. It is unclear whether the incremental tariffs would be at 10% or 25%, but assuming a 10% rate, we estimate an EPS impact of ~$0.33 (~2.5%) on our baseline F2019E EPS of $13.06 assuming implementation in March Q and assuming AAPL would absorb the incremental costs rather than passing them on to consumers.
Baird Equity Research
Another body blow? Yesterday afternoon President Trump alluded to possible tariffs on iPhones and other Apple products, which is likely to create fresh demand concerns following recent supply chain rancor. While we take the negative supply chain comments with the proverbial grain of salt, there's little question that higher iPhone prices due to potential tariffs would likely negatively impact demand and profitability at some level. We certainly acknowledge the near-term risk, but remain positive on the long-term position and would buy on weakness.
............ The Street will not be taking this news lightly as with the litany of bad news Apple (and its investors) have seen over the last month from the Cook iPhone metrics pull, softer data points out of Asia around XS/XR initial demand, and now this tariff threat on iPhones out of left field from Trump and Beltway will surely add to this white knuckle period for Apple. While we ultimately believe this is all part of a broader negotiation with China as talks heat up over the next week, now Cook and Apple find themselves squarely at the center of the tariff talks which were previously background noise as investors try to gauge what a potential 10% tariff on iPhones and other products would do to demand and unit growth over the next 6 to 12 months if ultimately imposed. The reality is Apple and Cook are firmly implanted in China as a core production factory and ultimately we would not see this dynamic changing in the foreseeable future. With ASPs for the iPhone in the $800 range and consumers clearly price sensitive around higher smartphone prices the last thing Cook and investors want to see is additional tariffs added to iPhones and impacting demand drivers at this crucial growth juncture for the company.