Is America's leading company hostage to Chinese-U.S. relations?

Apple (AAPL) is the world’s leading company by market cap.

As the chart shows, at the $170.74 per share level in late September 2023, Apple’s nearly $2.67 trillion valuation led all publicly traded companies. Moreover, Apple is one of six companies with a market cap above the $1 trillion level.

Source: companiesmarket.com

After opening at a split-adjusted 12.0 cents per share level in September 1984, AAPL shares have come a long way, reaching a record $198.23 high in July 2023. Apple’s most popular and valuable product has been the iPhone, the primary source of revenue since 2008, one year after its launch. Apple also makes computers, including iMacs, MacBooks, and iPads, and its Apple watches and AirPods are popular worldwide products.

While Apple is a global brand, China is critical for the production and consumption of the company’s products. Over the past weeks, AAPL shares have corrected, and China is one of the leading reasons for the selloff that has taken the valuation lower from the record over $3 trillion market cap.

Not the first correction for AAPL shares

• While AAPL shares have been in a bull market since 1984, the stock has experienced significant corrections.
• In September 2012, AAPL reached a record $25.18 high before falling over 45% to $13.75 in April 2013.
• AAPL shares rallied to an all-time $58.37 peak in October 2018 before falling 39.2% to $35.50 in January 2019.
• In January 2022, AAPL reached $182.94 and fell 32.1% to $124.17 in January 2023.
• The latest correction has taken the shares from $198.23 in July 2023 to $170.27 on September 27. At just over the $170 level in late September, AAPL shares remain near the lows after the latest 14.1% correction.

U.S. - Chinese relations have deteriorated since early 2022

• In February 2022, the Russian and Chinese leaders shook hands on a “no-limits” alliance.
• In February 2022, Russia invaded Ukraine, starting the first major war in Europe since WW II.
• Chinese reunification plans for Taiwan and its alliance with Russia have caused increasing tensions between Washington, DC, and Beijing.
• U.S. – Chinese trade tensions began to escalate before 2022.
• China is the world’s second-leading economy and is virtually tied with India for the world’s most populous country.

The reasons that China is critical for AAPL’s future

• Years ago, before his death, Apple’s founder and CEO transferred most of the company’s manufacturing to China because of its massive, ready-made supply chain network and ability to scale up production almost overnight.
• Apple products rely on rare earth minerals that are critical ingredients in the company’s products.
• In early 2023, over 95% of iPhones, AirPods, Macs, and iPads were made in China.
• In 2022, nearly 20% of Apple’s global revenues came from China.

The reasons for caution about AAPL’s future earnings

• Deteriorating relations between the U.S. and China caused the Chinese government to ban iPhone usage by government workers and state-owned company employees for work purposes.
• In China, nearly all businesses are government-owned or government-controlled.
• China has pushed back on its reliance on U.S. technology over the past months.
• Continuing deteriorating U.S.-Chinese relations could weigh on revenues while increasing manufacturing costs, causing the shares to move lower over the coming months.

The factors for optimism and buying the dip

• AAPL shares have been in a bull market for nearly four decades.
• The global brand remains strong.
• India could offer AAPL an alternative to Chinese production issues.
• China-U.S. relations could improve, causing AAPL shares to rise to higher highs.
• Buying AAPL on a scale-down basis, leaving room to add on further declines, could be the optimal investment approach for the world’s most valuable company.

Thanks for reading, and stay tuned for the next edition of the Tradier Rundown!