Investors are overreacting to China iPhone ban news, says Morgan Stanley
William GallagherFutian District, Shenzhen
Morgan Stanley warns investors to stick with Apple despite China rumors making the stock price tumble.
It is definitely true that the Chinese government forbidding staff to use iPhones is a drop in the bucket of Apple's sales to the country, even if the authorities enforced it. Yet it caused a significant drop on Apple's shares, and local carrier China Mobile has tried to calm rumors, while the Chinese government seems happy to stay non-committal.
Investment bank Morgan Stanley initially told investors just that it is bullish about Apple over the next year. Now it has issued a much stronger note saying China's move seems "more bark than bite."
"We believe Apple's 2-day -6% stock move suggests the market thinks recent China headlines will evolve into something broader," says Morgan Stanley, in a note to investors seen by AppleInsider. "We believe that's unlikely. In a worst case scenario, we see 4% rev and 3% EPS downside, suggesting the stock move is overdone."
After describing it as "overdone," Morgan Stanley also calls the stock move "unwarranted." Or at least, that it is based on the evidence so far.
"However, we believe [the] market is hinting at something broader," it continues. "It is not Huawei's re-entrance into the 5G smartphone market, or the potential for millions of Chinese government officials to abandon their iPhones that is the real risk here, it's that China could potentially be on the path to becoming more nationalistic, a move that would put over $30B of operating profit (over 20% of AAPL's total OP$) at risk, should China decide to limit Apple's access to the Chinese market."
Even that, though, it says is an "overextrapolation" of current events. Morgan Stanley points to how despite Huawei returning from oblivion, its "5G smartphone shipments will be greatly limited by supply constraints (and potential further technology restrictions)."
China and Apple need each other
Moreover, the analysts point out that Apple is "a critical contributor to China's economy, employing — directly and indirectly - millions of Chinese workers."
"Said differently, while China is critical to Apple's success, Apple is also critical to the Chinese economy," continues Morgan Stanley, "and therefore while the potential for a broad decoupling between Apple and China in this multipolar world clearly exists, we don't believe recent headlines are necessarily foreshadowing this 'worst case' scenario."
Morgan Stanley also notes that it assumes "most Chinese government officials... already own a smartphone from domestic OEMs." So the banning of iPhones could have even less effect than it might have done.
The investment bank does run through potential "worst case" outcomes, trying to figure out the maximum impact of China expanding its ban, and also of local firm Huawei continuing its apparent recovery.
One such worst case would be if Huawei were to come back in full force, without its current supply limitations, and entirely eroded Apple's gains in China in the last few years. If that happened, Morgan Stanley says "we estimate a 8% headwind to FY24 iPhone units/revenue and 3-4% downside to total revenue and EPS. "
"[However,] we don't believe it's realistic to consider this scenario today."
Morgan Stanley says it maintains is $215 price target for Apple.
Christine McKee
Chip Loder
Malcolm Owen
6 Comments
I think that for the most part, investors and analysts don't know how to process the risks that China poses to Apple and the world more generally, and so just don't even try. Also, the notion that mutual economic dependence provides protection against destructive behavior only works if the relevant decision makers share in that dependence. Dictators like Xi (and Putin) aren't personally affected if their economies are ruined or their people suffer, and so I don't think we can assume economic considerations will constrain them -- unless there are other people in the country who (1) care about the economics and (2) can credibly threaten the power (and/or life) of the dictator. If Xi has sufficient control over the military and internal security apparatus (and all indications are he has such control), then these economic considerations will not deter him if he thinks his lust of imperial power can be satisfied by attacking other countries or companies in a way that financial analysts would view as irrational.
If markets really were able to incorporate these risks into prices, then I think we'd see Lockheed-Martin trading a lot higher than it is and Apple trading a lot lower.
Yes, many investors have been brainwashed into believing China is hostile to America. They are easily disturbed by any negative news coming from China. But the truth of the facts is for every sale of APPL there is a buyer. So many investors think this is exaggerated.
The US government banned Huawei and ZTE devices because they are too insecure.
The Chinese government banned Apple devices because they are too secure.
While it was a tit-for-tat response, it also fits into China's "social credit system" in which the government assigns demerits for "antisocial" behavior. With enough demerits, antisocial citizens are locked out of jobs, prevented from travel, and from making purchases.
You can expect China to pressure Apple to give the government more access to iPhone data or to see pressure to discourage Apple purchases. They may even give citizens demerits for owning Apple devices.
The Chinese government wants absolute access to citizens' private lives.
That said, many other countries have the same ideas, including Russia, India, North Korea, and Belarus, but do not yet have the technology to pull it off.