Brett Schafer
The worst may be on the horizon for this technology giant caught in the tariff turmoil.
Multinational corporations are getting caught in the middle. Apple (AAPL) may be the company with the worst exposure.
Not only is the smartphone and computer brand a huge user of Chinese manufacturing and electronics assembly, it also sells billions of dollars’ worth of products into the Chinese market every year. The sale of these products may be at risk due to retaliation from the Chinese government.
Unsurprisingly, Apple stock has crashed 27% from all-time highs on this news. But the pain may be far from over. Here’s how tariffs could affect Apple’s business, and where the stock could move through the rest of 2025.
More expensive iPhones
Apple has worked to diversify its global supply chain, but still greatly utilizes China to build its iPhones. In order to bring these products into the United States using existing manufacturing lines, Apple will need to pay a 150% surcharge on these imports, unless the levy is waived. That could have some ugly ramifications for Apple’s unit costs.
The Wall Street Journal made some estimates of how tariffs could affect the cost of an iPhone for Apple. It was estimated that an iPhone previously cost $550 to build. With a 54% tariff — the original proposed increase on Chinese imports — an iPhone will now cost Apple $850 to bring to America. Add on the newly minted tariffs, and you are getting a bill of well over $1,000 per phone.
This presents a problem for Apple. Ever since iPhone production scaled up, Apple has sported a consolidated operating margin of 25%, best in class for an electronics manufacturer. That is because it could make an iPhone for half of what it sold it to customers for. Today, you can buy a new iPhone for $1,000, with some models costing more and some a little less. If Apple wants to maintain its same unit economics under the tariffs, it will have to raise the price of a new iPhone to $1,500 based on these new Chinese tariffs.
Can its existing customer base afford this upgrade? I doubt it. My hunch is that a $500 increase in selling prices will lead to cratering demand for new iPhones. Many customers will delay upgrades, especially since new iPhones currently come with minimal upgrades from previous versions. This is an ugly situation for Apple, which could see collapsing demand with tightening margins that could drastically affect its earnings power.
Slow-moving supply chains and stagnant revenue
Wait, can’t Apple just make its iPhone somewhere else? Sure, it can. But at what cost? First, it will take many years to move supply chains and replicate them in other Asian countries, or perhaps even in Latin America. Apple has aimed to move some of its production to India and Vietnam over the last few years, but that still remains a small sliver of its production sourcing. This will not be cheap, either.
Moving production back to the United States is technically an option, but this would take much longer and lead to higher selling prices due to the high manufacturing wages paid to laborers in the U.S. Plus, Apple would still have to pay tariffs on imports of raw materials. This isn’t an option, unless you think people will willingly pay for $5,000 iPhones.
Even before these changes, Apple’s revenue was stagnating. It has barely grown since the end of 2021, with profit margin expansion the only growth engine at the moment. This margin expansion is about to reverse course. Apple’s $126 billion in operating income will start falling over the next 12 months if these tariffs on China are not rolled back.
Where Apple stock is headed next
As you can see, there is a ton of risk to Apple’s business right now. You might think this means Apple’s stock is trading at a dirt chip earnings multiple to counteract this risk. Logical, but incorrect.
Miraculously — or perhaps frighteningly — Apple stock still trades at a price-to-earnings ratio (P/E) of 30. This is well above the S&P 500 average and the long-term market average of 15 to 20. Remember, Apple’s earnings are lining up to fall this year, which will lead its P/E ratio to climb even higher. Its forward P/E ratio may be above 50 in a worst-case scenario.
In my view, this makes Apple stock radically overvalued. I predict more pain for Apple shareholders in 2025 unless these tariffs are completely walked back.
Brett Schafer has no position in any of the stocks mentioned. The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of Censational Market.
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