On September 1st U.S. collections of a 15% tariff will begin on $125 billion of targeted goods (smartwatches, bluetooth headphones, flat-panel televisions, and many types of footwear) from China. While Apple’s wearables segment is within the targeted tranche, we believe there’s a low probability that tariffs are levied against Apple wearables starting September 1st and an even lower probability of that without an offset.
- This year wearables will account for about 6% of Apple’s overall revenue, growing at about 50% y/y. The wearables segment is gaining momentum as evidenced by revenue growth accelerating slightly in Jun-19 to just over 50% y/y compared to just under 50% in Mar-19.
- The US adding tariffs to any Apple product without some type of corresponding offset to mitigate the negative effects crosses the rubicon on many dimensions.
- We believe the US does not want to be the first to add tariffs to Apple, given Apple is arguably the leading US Company and the face of American business in China. The optics of a US protectionist first approach penalizing a US global leading company while China doesn’t penalize Apple would seem to surrender the moral high ground.
- Separately, to date, Apple has avoided tariffs, from both the US and China.
What if We’re Wrong.
If Apple wearables are tariffed by 15% for the next year, and Apple bears the cost, FY20 earnings would likely decline from about $12.80 to $12.70. The math is 6% of Apple’s business is wearables, and half of that comes from the US, so 3% of overall revenue will be impacted by a wearables tariff. Increasing costs by 15% from the tariffs on 3% of the business would likely lower EPS estimates by $0.05-$0.10 per year.
The Bigger Question, Will the iPhone be Tariffed?
If wearables are tariffed, investor expectations will shift to the iPhone being tariffed in December. The greatest impact would be a decline in AAPL’s earnings multiple. It’s too early to frame in the financial impact of an iPhone tariff, given the exact percentage will likely change along with the impact of any offsets.