Apple (NASDAQ:AAPL) is expected to be among the most affected companies by the Trump administration’s tariffs on trading partners, as it manufactures almost all of its iconic devices overseas. Now the early impact has been manageable – during its Q2 earnings call last week, the company estimated an additional $900 million in costs from tariffs for Q3, which translates to just about 2% of the company’s direct cost of sales. However, the longer-term impact is likely to be more severe, as further “sectoral” tariffs on components such as semiconductors loom. Moreover, wireless carriers like AT&T and Verizon have signaled they were not likely to absorb much of the tariff burden on smartphone pricing. That being said, Apple has a solid track record of navigating challenges via clever pricing strategies, close coordination with partners, and its solid supply chain management. These strengths could help mitigate the blow and eventually lift Apple stock back toward the $250 levels seen earlier this year.
Apple Has Room To Raise iPhone Prices
Apple’s pricing strategy on its iPhone has typically been smart, with the company upselling customers with more storage capacity or premium features while holding the base price of its flagship iPhones steady for over seven years. Over the same roughly seven-year period, the U.S. consumer price index has gained roughly 29%. This gives Apple room to raise iPhone prices by $100 to $200 for the next-generation iPhone due this fall without significant customer resistance. Moreover, iPhone prices in the U.S. are seen as a reference point of sorts for iPhone customers across the world, and a price hike in the U.S. could give the company room to boost pricing across all markets, even in countries that aren’t directly impacted by the tariffs. This could help margins to an extent.
India And Vietnam
Currently, most iPhones sold in the U.S. are manufactured in China, which faces tariffs of over 100%. However, Apple is working to shift production to other countries such as India, which initially faced a 26% tariff, now lowered to 10%. CEO Tim Cook also indicated that most of the devices shipping into the U.S. during the June quarter will come from India and Vietnam. That said, the Chinese supply chain is much more sophisticated, and it remains to be seen if Apple’s latest devices, which are rumored to include an ultra-thin new iPhone, can be produced with minimal reliance on Chinese inputs.
Fast-Growing Services Soften Impact
Apple’s services business – which is its highest margin segment – is also its fastest growing. Services grew by almost 13% over the first six months of the year, compared to the hardware business, which expanded by a mere 2%. Services margins stood at a solid 75% compared to about 38% for the hardware business. As Apple continues to expand its services operations, it could help to partly offset the impact of the pressure on its U.S. hardware business.
Apple stock has declined by about 18% year-to-date, faring worse than its big tech peers such as Amazon and Google. Apple stock has weathered severe storms before and emerged stronger. While the near-term outlook remains challenging, Apple’s strong device ecosystem and healthy financials provide a solid foundation for the stock’s recovery.
Surely, markets can remain irrational for extended periods, particularly when fear dominates sentiment. For long-term investors with patience and conviction, the current AAPL pullback may represent an opportunity. However, those uncomfortable with such volatility might consider a hedged approach or diversifying within a broader portfolio, such as the Trefis Reinforced Value (RV) Portfolio, which has outperformed its all-cap stocks benchmark (combination of the S&P 500, S&P mid-cap, and Russell 2000 benchmark indices) to produce strong returns for investors, or consulting a financial advisor with experience in bear markets could be beneficial. Remember, significant wealth can be generated in the market by those who maintain a calm and strategic approach during periods of volatility.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
