Following allegations that China may forbid officials from using iPhones made by Apple, a $2.8 trillion firm, investors are uneasy. If the present retaliatory actions finish here, the 7% decline in the stock price over the last two days appears exaggerated. But more severe measures of repression indicate a concern, particularly in light of Apple's high market value.
No official announcement of the prohibition has been made within China, and the word has only been patchily distributed around several departments. In reality, the government-owned China Mobile on Thursday refuted rumors that it was stopping the sale of iPhone models.
Even so, Apple would be able to withstand the indicated measures. Less than 1% of people in China works for the government, while China makes up 19% of Apple's revenue. For the fiscal year that ends in September, analysts predict revenues of $407 billion. Consider that the margin for iPhones sold in China is 35%, which is greater than the company's average margin. A $280 million profit would be lost due to the restriction. Apple's current valuation of 28 times anticipated earnings results in a value loss of around $8 billion. This amounts to 0.2% of Apple's market value.
It's not unrealistic to imagine that the measures could get worse. When it comes to bans, China frequently follows the tit-for-tat principle. After the United States Congress enacted the Defense Authorization Act in 2018, which mandated that anyone working for the government has to give up their phone if it was built by Chinese telecommunications giants Huawei or ZTE, President Xi Jinping increased the emphasis regarding national security. Apple and other corporations could suffer additional consequences if the US Congress takes additional action, such as banning TikTok. Furthermore, consumer boycotts have affected companies like H&M in the past during nationalistic backlashes, despite the fact that they seem unlikely right now.
Apple's stock price response appears on par even in that case. Suppose 25% of the Chinese market is lost. About $19 billion in sales or roughly $7 billion in profit will be lost as a result. This amounts to $188 billion, about 7% of Apple's current market capitalisation, based on the multiple.
But Apple's present market value is the biggest issue. Its market value would be reduced by nearly one-third if it regressed to its ten-year average of 18 times anticipated earnings. If dangers in China increased, a lower multiple would also make sense. China offers operational efficiency and expansion prospects in all areas of business, from production to sales. The completely cooked price of Apple might leave it severely burned.