When it rains, it pours. This is an apt description of how the narrative around Apple (NASDAQ: AAPL) is changing as China's delinking with the collective West appears to be gaining momentum, with research houses across Wall Street suddenly chomping at their proverbial bits to price tail risks into their thesis vis-a-vis the iPhone manufacturer.
First, in what is largely being dubbed as a failure of the US policy to contain the rise of China, Huawei's recently launched Mate 60 Pro contained the Kirin 9000S Soc, which is based on the 7nm node that was considered too far beyond the capabilities of the Chinese chipmaker SMIC. While the SoC utilizes Deep Ultraviolet Lithography (DUV) instead of the cutting-edge EUV method, it nonetheless marks a significant escalation in China's ability to keep pace with the rest of the tech world.
Soon thereafter, China lobbed a volley of its own when it banned its central government employees from using Apple's smartphones. This move is expected to slash Apple's China sales by 500,000 units. For reference, the tech giant is widely expected to sell 45 million units in the Asian country next year.
2.
“.. In a worst case scenario, we see 4% rev and 3% EPS downside, suggesting the stock move is overdone. ..
.. However, we believe market is hinting at something broader. It is not Huawei's re-entrance into the 5G smartphone market, or the potential for millions of Chinese…
— Carl Quintanilla (@carlquintanilla) September 8, 2023
However, it is the specter of an escalation that worries investors. If China were to limit Apple's access to its lucrative market, the iPhone manufacturer stands to lose around one-fifth ($30 billion) of its operating profit, as tabulated by Morgan Stanley.
If China Invades Taiwan, Apple's Share Price Will be "Cut in Half"
Is China really going to invade Taiwan? $KWEB $BABA
See the full interview: https://t.co/JF9R8Cxeth pic.twitter.com/rFYyL93EDi
— Thomas J. Hayes (@HedgeFundTips) September 12, 2023
This brings us to the crux of the matter. China's recent restrictions on the sale of iPhones to its government employees have acted as a clarion call of sorts, forcing even seasoned analysts to contend with the tail risk events, including the Asian giant's potential invasion of Taiwan.
Great Hill Capital's Thomas J. Hayes recently attempted to quantify the impact on Apple's share price if China were to invade Taiwan (watch the full interview here). According to the analyst, Apple's share price would be "cut in half" should this doomsday scenario materialize. The analyst also rightly contends that investors remain wary of Alibaba, which is already around 70 percent off its highs and where this tail risk has been almost fully priced in. Conversely, investors can't get enough of Apple even though the stock is currently trading at around 27x its FY 2024 EPS vs. a historical multiple of just 13x.
Highlighting the remote probability of this tail risk event, Hayes contends that as per his discussions with pertinent authorities, a potential invasion of Taiwan is still around 7 years away. Nonetheless, given the growing opacity of China's decision-making process and its increasing belligerence, perhaps the time is ripe for investors to start taking a holistic view and apply a Taiwan discount to Apple's shares.
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