Wedbush: War averted

This is the best news for the tech sector, says analyst Daniel Ives, since the Broadcom/Qualcomm “Fort Sumter” moment.

From a note to clients that landed on my desktop Sunday:

Late last night the US and China reached an agreement to halt additional tariffs in a deal that will remove a near-term overhang on tech stocks caught in the cross fire with Apple and the semiconductor space front and center…

Ever since the “Fort Sumter” moment when President Trump blocked Broadcom’s $117 billion bid for Qualcomm earlier this year citing national security concerns around 5G the technology sector and investors have been wondering what would be the next poker move between the two countries around national security, 5G competition, and broader cyber risks that have been heightened on worries/media reports around stepped up hacking from China and related hacking groups on US technology companies including Amazon (AWS) and Apple among others…

While it’s an initial reprieve, we would view this news out of the G-20 as a near-term positive catalyst for tech stocks going into year-end given the fear around the 25% tariff hitting on Jan 1 is now removed (for now) with Apple in the spotlight.

Apple thoughts: Given the company’s high exposure to China from both a demand and supply chain perspective with its flagship Foxconn factory  front and center, a potential 10% tariff or draconian 25% tariff on iPhones and related components would have been a tough gut punch to absorb for Cupertino (and its investors). Based on its exposed COGS [cost of good sold] and China exposure, a 10% tariff or higher as threatened by the Trump administration this past week could have potentially reduced Apple’s FY19 EPS by between 3% and 7% based on our initial analysis if enacted.

Maintains Outperform rating and $275 price target.

My take: Fort Sumter? I thought we were talking about trade war, not civil war!

16 Comments

  1. S Lawton said:

    Monday should be a very good day for the market and the reprieve gives Apple the opportunity for another good day but a 90 day delay does nothing to abate the uncertainty in the market.

    0
    December 2, 2018
    • Gregg Thurman said:

      I believe final agreement has already been negotiated. There would be no benefit to either party for such a delay, only to go after each other’s throat again in 90 days.

      This announcement is a “face saving” move for Jinping. He can claim victory over the US through hard fought negotiations, when the reality is that he caved because the Chinese economy would be severely harmed (more so than the US) had the tariffs continued/increased.

      Contributing to my belief is the fact that many US firms have shifted, or are in planning stages of shifting manufacturing to other counties. Vietnam has been a big winner in this. The primary expressed driver for these moves is political stability, not costs of doing business. Jinping cannot allow this exodus to accelerate.

      Jinping overplayed his hand and got caught holding an off suit deuce/trey.

      2
      December 2, 2018
  2. Gregg Thurman said:

    Permanent trade treaties have to pass through the House.

    Done deal. There is zero benefit to Trump if a Democratic controlled Congress failed to ratify this agreement. Undoubtedly Trump included Democrat leadership in the treaty negotiation process.

    First rule of negotiations: agree where you can.

    Too much is read into the differences between Trump’s Administration and Democrats. A trade agreement that protects US IP and increases US exports (both good for the US economy) is good for both Democrats and Republicans. I’ll guarantee that Pelosi will be standing alongside Trump when he signs the Bill. I’ll bet he even gives her the first pen.

    1
    December 2, 2018
  3. John Butt said:

    Just to be clear, the threatened tariffs only impacted American imported Apple products. All supplies to other countries including China were not affected.
    The article almost suggests otherwise

    0
    December 2, 2018
  4. Fred Stein said:

    Wedbush target = $275.

    Forget the rest. Forget all comments including mine.

    0
    December 2, 2018

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