By The Numbers: How Tariffs On Airpods & Apple Watch Impacts Apple’s Profits

Bloomberg reported that Apple‘s (NASDAQ:AAPL) Airpods, Apple Watch, some Beats headphones, and HomePod face a 15% tariff in the United States starting from Sunday, Sept 1, marking the first time Apple will see a direct impact of the escalating trade war between the U.S. and China. We believe it’s likely that Apple will absorb the impact of the import levy, without raising prices of its products in the interim. In this analysis, we break down the potential impact that this could have on Apple’s gross margins and profits over FY’20 (Apple’s fiscal year ends September) While the tariff is likely to apply to some iMac models, we believe the impact will be small, and are excluding it for the purpose of this analysis.

View our interactive dashboard analysis How The Tariffs On Airpods & Apple Watch Impacts Apple’s Profits

1. A Look At Apple’s Revenue & Gross Profits Without Tariffs

• Apple reports sales of the Apple Watch, Airpods, and other Audio products in the Other products segment
• We project this segment will have sales of $25 billion FY’20, accounting for 10% of total revenues.

2.Estimating Apple’s Gross Profits With Tariffs

2.1 Estimating Sales Of Watch, Airpods Etc. In The U.S.

• While Apple doesn’t break down its U.S. sales, its Americas sales (which include North & South America) account for ~42% of total revenue.
• Considering this, we estimate that the U.S. accounts for about a third of Apple’s revenues, with U.S. revenues for Watch etc. standing at $8.2 billion.

2.2 Estimating Cost Of Goods Sold (COGS) For Watch Etc. In the U.S., Excluding Tariffs

• We estimate that Apple will post a company-wide gross margin of about 38% in FY’20.
• Considering this, we estimate COGS for Watch, Airpods etc. in U.S. to stand at about $5.1 billion.

2.3 Estimating COGS For Watch Etc. In U.S., With 15% Tariffs

• We assume that the tariff will directly hit Apple’s COGS for Watch Airpods etc in the U.S. raising it by 15%.

2.4 Estimating Dollar Gross Profits For Watch Etc. In U.S With Tariffs

• Assuming $8.2 billion in Watch, Airpods & other sales in the U.S. and COGS of about $5.9 billion with tariffs, this would translate into gross profits of $2.4 billion for the Watch, Airpods etc. in the U.S.

2.5 Estimating Apple’s Total Gross Profits With Tariffs On Watch Etc. In The U.S.

• Apple’s total gross profits, with tariffs placed on the Watch and other products in the U.S., could stand at $98.8 billion (versus $99.6 billion without tariffs)
• This translates into gross margins of 37.7% (versus 38% without tariffs)

3. Comparing Apple’s Gross Profits With And Without Tariffs

• Apple’s Gross Profits Would Be About 1% Lower, And Gross Margins About 30 bps Lower On Account Of Tariffs

4. Conclusion

• This round of tariffs will have a limited impact on Apple, reducing its dollar gross profits by under 1% and impacting gross margins by 30 bps.
• However, the company could face a more pronounced impact as the iPhone – which accounts for over half its revenues – is slated to face tariffs from December 15.

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