How the UK's Brexit vote to leave Europe affects Apple

The Brexit news helped send the price of Apple's shares downward by 2.8 percent, from an already low valuation hovering around $96 over the past week to close at $93.40 today. However, Apple's shares buffeted the news better than most.

The NASDAQ stock market (where Apple's shares trade) was down by more than 4 percent overall. Amazon, Microsoft and Google all saw their shares drop by between 3.2 and 3.95 percent.

That probably says more about the excessive valuation of other tech firms. Apple is currently valued with a P/E of 10.39, while Google is priced at 28.44 times its earnings, Microsoft is valued at 38 times, and Amazon has an absurd valuation that's 287.73 times its actual ability to earn money.

The British Pound plummeted against the U.S. dollar, collapsing from $1.50 to close at $1.37, a massive move for a major currency and resulting in the Pound's lowest point in more than 30 years. The Euro also fell, but by a much smaller amount (close to 3 percent against the dollar). Currency exchange rates play a major role affecting the price of Apple's exports, so the weakening of any foreign currency against the dollar is generally a problem for Apple.

Known Unknowns

Going forward, the UK's departure from Europe will continue to roil the markets simply due to the uncertainty involved. No country has ever left the EU before, and the leave vote was promoted emotionally through a campaign centered on rejecting the advice of "elite experts."

It's unclear how such an unprecedented leap will actually happen and what unforeseen changes it will introduce related to trade, employment visas and future currency valuations.

It also means companies doing business in the UK will have to face an unknown set of new trade agreements and other regulation changes. The change is expected to hurt UK startups, both because it impacts their ability to hire EU citizens and introduces a lot of new complexity related to their ability to sell their products to Europe. But it's also a benefit in the sense that local firms can sell their products at a favorable exchange rate.

ARM Holdings, the UK firm Apple licenses silicon IP from for use in its Ax Application Processors (and owns a minority stake in) was spared any immediate downward movement in its stock price on the London Stock Exchange (in stark contrast to most other UK stocks), largely because its primary customers are not in Europe, and its revenues generally originate in dollars, making the falling Pound good news for its profitability.

Further, despite the Brexit vote, the UK continues to remain part of the EU for now, and the official declaration of an intent to leave — as stipulated in the triggering of article 50 of the Lisbon treaty has not yet occurred. This notification, which would start an irreversible timetable for leaving the EU, was purposely delayed by UK Prime Minister David Cameron, who announced that he would resign in October and that invoking article 50 trigger should be handled by his successor.

That provides the UK government with three months of time to consider its options, which could involve a parliamentary approval vote or even a subsequent referendum related to negotiating a more limited association with the EU rather than leaving completely. Extracting itself from the EU would involve massive legal work related to transferring EU related legislation and civil service programs into an independent sphere.

Upon further reflection, the UK may actually seek to retain its current EU status, particularly if its own member states, including Northern Ireland and Scotland, initiate their own efforts to leave the UK as a direct result of its decision to leave the EU.

Apple in the UK

Apple operates its primary European headquarters in Cork, Ireland, but does have offices in the UK, including a corporate office and R&D center in Cambridge the company set up in late 2014 in parallel with the hiring of five former Pin Drop employees, followed by the acquisition of VocalIQ last year.

Pin Drop was a mapping startup. Its former employees are now working on a variety of tasks for Apple, including multiple positions related to Maps. VocalIQ was a speech recognition startup that originated with the University of Cambridge Dialogue Systems Group; it focused upon automotive projects with carmakers including General Motors.

In job postings, Apple has described its Cambridge office as including "a team of highly talented software engineers and speech scientists [working] to expand the capabilities of Siri."

Apple prominently stressed the importance of its Siri voice assistance at this summer's WWDC, opening up new access to developers in iOS 10, expanding Siri's capabilities on tvOS and watchOS and bringing the service to the Mac desktop with macOS Sierra. Apple also highlighted new features of Maps on its platforms, including a new App Extensions architecture allowing third party apps to incorporate their own functionality into iOS 10 Maps, such as car sharing or restaurant bookings.

Having teams from both important initiatives based in the UK may result in Brexit-related complications for Apple pertaining to hiring qualified people, although any changes likely won't take meaningful effect for several months.

Apple also has 39 Retail Stores in the UK, and the region generates significant sales of iPhones and other Apple gear. A dramatically lower Pound means that UK citizens will face lower buying power, likely resulting in higher prices and therefore blunted demand for Apple's products and services.

At the same time, the lower Pound also means that Apple can hire employees and build out new offices and retail stores in the UK at a discount. Apple could also take advantage of panicked markets and newly conservative investors to offer new bonds in the UK, increasing its debt leverage to effectively use foreign earnings to fund American investments, dividend payments and stock buybacks.

Apple does not break down its regional sales within Europe, and will certainly continue to count UK sales within its "Europe" segment (which includes other non-EU nations as well as all of India, the Middle East and Africa). That entire segment contributed $29.4 billion in net sales over the last six months ending in March, and $9.3 billion in operating income.

That makes Apple's "Europe" only slightly smaller in importance to Greater China (which contributed $30.8 billion in revenues and $12.4 billion in earnings over the same six month period).

Apple in Europe

Outside of the UK, Apple conducts business across EU member states as well as countries such as Switzerland and Norway who are not EU members but do have close associations with the EU. That will likely make an independent UK familiar territory for Apple, which has done business in Europe for many years prior to the establishment of the EU.

A weaker Euro is a similar problem for Apple outside of the UK, although the Euro dropped far less than the Pound has. Despite the recent Brexit-related drop, the Euro is still within its recent trading range, and has actually strengthened by nearly 7 percent since hitting lows last winter that had a significant impact on European buying power and Apple's product prices in Europe, contributing to declining sales in the March quarter.

Two years ago, the European Commission initiated an investigation against Ireland for allegedly providing "state aid" to Apple related to how it taxes the company's profits related to two of Apple's Irish subsidiaries.

Apple fillings with the U.S. Securities and Exchange Commission noted that "if the European Commission were to conclude against Ireland, the European Commission could require Ireland to recover from the Company past taxes covering a period of up to 10 years reflective of the disallowed state aid. While such amount could be material, as of March 26, 2016 the Company is unable to estimate the impact." Apple has also stated that it "believes the European Commission's assertions are without merit."