Apple Faces Manufacturing Challenges Amid Tariff Threats
Apple (NASDAQ: AAPL) has optimized costs via a global manufacturing strategy. However, this tactic, particularly its strong reliance on China, may change due to new trade policies under President Donald Trump. Traditionally, Apple utilized China’s inexpensive labor to assemble its products efficiently, yielding substantial profits.
With the introduction of significant tariffs on Chinese imports, Apple is shifting some manufacturing to India as a precaution. This move has drawn criticism from Trump, who stated that Apple may incur a 25% tariff on iPhone imports, insisting that production should occur in the U.S. to revive domestic manufacturing.
Impact of Manufacturing Shifts on Costs
Analysts warn that U.S.-based iPhone assembly would sharply increase Apple’s operating costs. Estimates suggest the transition could cost Apple tens of billions of dollars and raise the per-unit price from $40 to over $200. While Apple could adjust retail prices, asking consumers to pay more for already expensive devices, averaging around $1,000, could be a steep challenge.
Last quarter, Apple’s product division recorded nearly $25 billion in gross profit, calculated by subtracting manufacturing costs from revenue. If tariffs increase or domestic production becomes necessary, this profit margin could shrink, affecting overall income and cash flow. Additionally, other components sourced globally could still incur tariffs, further straining profitability.
Interestingly, about half of Apple’s gross profit stems from its services segment, including revenue from the App Store and agreements with Google for default search engine placement on Safari. In fiscal year 2024, $71 billion of Apple’s $181 billion gross profit was derived from services, which remain unaffected by tariffs.
However, this segment faces challenges from ongoing antitrust lawsuits, compelling Apple to allow alternative payment methods that might diminish profits. Potential rulings could also prevent Apple from securing a $20 billion annual payment from Google related to search engine agreements, which could adversely affect future earnings.
Revenue Growth and Competitive Concerns
Apple’s revenue growth has stagnated compared to other leading tech companies. Over the last three years, Apple’s revenue has only risen by 3%, while competitors like Alphabet, Microsoft, and Nvidia have seen increases of 29%, 36%, and 339%, respectively. Apple currently struggles to launch new hardware that captures consumer interest similarly to the iPhone.
In the realm of artificial intelligence, Apple appears to lag behind rivals who have made significant advancements, particularly with AI technologies linked to text, video, and image generation. Although these issues aren’t immediately reflected in financial data, Apple’s failure to keep pace in emerging tech could jeopardize its long-term profitability.
Is It Time to Sell Apple Stock?
This year, Apple Stock has dropped 17.8%. Analysts suggest that the stock may still be overvalued, trading at a price-to-earnings ratio (P/E) of 31, higher than both the S&P 500 and Alphabet, despite slower growth.
Investors should be cautious with low-growth stocks that trade at premium earnings multiples. Potential profit declines due to tariffs, ongoing legal issues, and a failure to innovate in AI could prompt a significant drop in Apple’s earnings in the next few years.
Should You Invest $1,000 in Apple Right Now?
Prospective investors should weigh the risks before purchasing Apple Stock.
Notably, the Motley Fool analyst team recently identified their top 10 stocks for investment, omitting Apple from the list, emphasizing potentially higher returns on those alternatives.
The choice of when to invest has significant implications, as historical data show that stocks like Netflix and Nvidia performed extraordinarily after joining similar recommendation lists in the past.
The insights presented here represent the author’s views and do not necessarily reflect the opinions of Nasdaq, Inc.
