Apple’s China haircut: ‘$450 billion will not be the end of it’

Every 1% drop in China’s growth rate, according to this academic fund manager, takes another $5.30 off the top.

Posted on Seeking Alpha Thursday by Kwan-Chen Ma:

The real bad news is that, if China’ slowdown was to blame for Apple’s downside guidance, the damage to Apple’s shareholders, close to $450 billion in two months already, will not be the end of it. Considering that Apple’s China revenue growth has been increasingly correlated with Apple’s Americas and Europe revenue growths in recent years (Figure 3), China’s slowdown in iPhone demand may soon be transmitted to the U.S. and Europe. The negative impact on Apple’s total revenue will be further compounded considering over 65% of revenue share between Americas and Europe (Figure 1B).

To Apple shareholders, maybe the more important question is how the correlated revenue growths affect Apple stock prices. Using the above relationship, we were able to estimate the correlated impact on all five Apple segments in terms of their segment revenue growths and Apple share prices, assuming 1% drop in China revenue growth rate (Table 1).

china recession

The way to read Table 1 is like this: For every 1% decrease in China revenue growth rate, Americas and Europe segments will lose -0.21% and -0.18%, and Japan will gain 0.10% instead…

The bottom line is that the net impact on Apple’s share price considering the correlated revenue growth between five segments is a loss of $5.30 for every 1% drop in China growth rate.

My take: Seeking Alpha takes contributions from far and wide. From the author’s bio:

K C Ma, Ph.D, CFA, is the Director and Chair of Roland George Investments Program at Stetson University. I direct college students managing $3.5 million stock and bond funds which are ranked #1 in the world for the last 16 years. Guys, these “kids” are managing real money!! It is not just a school project. (If interested, click here.)

10 Comments

  1. George Ewonus said:

    Didn’t Tim Cook say something quite the opposite about iPhone sales/activations in the Americas, Europe and Japan?

    0
    January 10, 2019
  2. Kirk Burgess said:

    This is absolute noinisese.

    Apple Clearly stated that they set record revenue totals in these markets last quarter (which invalidates the correlation thesis)

    – United States
    – Canada
    – Germany
    – Italy
    – Spain
    – the Netherlands
    – Korea
    – Mexico
    – Poland
    – Malaysia
    – Vietnam:

    0
    January 10, 2019
    • Gregg Thurman said:

      The economies in all of these Countries are doing quite well, thank you very much.

      In fact, the economies in Malaysia and Vietnam are benefitting from the trade issues between China and the US.

      Once resolved Vietnam and Malaysia (among other Southeast economies) will continue to benefit as uncertainty about government intervention (forced IP transfers and industrial espionage) by the Central Committee in China will cause a lot of firms to reconsider where their products are manufactured (China no longer being #1 option).

      0
      January 10, 2019
  3. Gregg Thurman said:

    China’s slowdown in iPhone demand may soon be transmitted to the U.S. and Europe.

    Another way to look at it.

    Because China has become the world’s manufacturer (as the Chinese Communist Central Committee planned), growth in its economy is dependent on economic growth in the US and Eurozone, exactly the opposite of the author’s hypothesis. When the Eurozone economy begins to grow again, manufacturing in China will resume. When the trade issues between the US and China are resolved, manufacturing in China will resume.

    Ergo, the world’s economy, which naturally includes China, is reliant on growth in the US (economy #1 by size) and the Eurozone (economy #2 by size).

    China’s economy may one day become the tail that wags the dog, but that day isn’t today.

    1
    January 10, 2019
  4. Fred Stein said:

    OK, we have a table with numbers. What does it mean?

    Is it a $5.30 hit to today’s price? Or to the Jan 3 low of $142.xx? Has the market priced this in already? Does Mr. Ma factor in the cumulative impact buybacks at current prices?

    0
    January 10, 2019

Leave a Reply