Apple’s EPS Could Fall $1 If U.S. Follows Through On iPhone Tariffs

Apple’s (NASDAQ:AAPL) iPhone and key products such as the iPad and Macs could face tariffs in the United States starting from December 15, following the tariffs on products such as Airpods and Watch which were imposed starting from September 1. In this analysis, we break down the potential impact that the import levy could have on Apple’s gross margins and EPS over FY’21 (FY ends September), the first full year post the potential imposition of tariffs. View our interactive dashboard, How Much Will Apple’s EPS Decline If US Follows Through On Tariffs On iPhone? We assume that the company will face a flat tariff rate of 15% on imports of all of its products in the U.S. (excluding services) and we also assume that Apple will not increase the pricing on its products, considering its already high price points.

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

• We expect Apple to post gross margins of 38% in 2021, with gross profits of $103 billion.

2.Estimating Apple’s Gross Profits With Tariffs

2.1 Estimating Apple’s U.S. Hardware Revenues

• Although Apple doesn’t break out its U.S. sales, its Americas sales (which include North & South America) accounted for ~42% of total revenue in FY’18.
• Considering this, we assume that total U.S. sales account for 33% of revenue and U.S. hardware sales account for about 27% of revenues.

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

• We estimate that Apple will post a company-wide gross margin of about 38% in FY’21
• Considering this, we estimate COGS for the U.S. to stand at about $45 billion.

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

• We assume that the tariff will directly hit Apple’s COGS in the U.S. raising it by 15%. This would raise COGS from $45.5 billion to $52 billion.

2.4 Estimating Dollar Gross Profits In the U.S With Tariffs

• Assuming $73 billion in U.S. hardware revenues and COGS of about $52 billion with tariffs, this would translate into gross profits of $21 billion in the U.S.

2.5 Estimating Apple’s Total Gross Profits With Tariffs

• Apple’s total gross profits, with tariffs placed on U.S. hardware, could stand at $96.5 billion

3. Impact Of Tariffs On Gross Margins And EPS

• Apple’s Gross Profits Would Be ~7% Lower On Account Of Tariffs

• Using Gross Profit Decline As A Proxy, We Estimate That Apple’s EPS Could Decline Almost $1 Per Share

4. Conclusion

• Apple will face a significant impact on its bottom line if the U.S. follows through on these tariffs and if the company does not raise pricing to compensate.
• That said, we believe the likelihood that these tariffs will actually be imposed is somewhat low, considering that the U.S. and China are looking to resume trade talks and work out their differences.

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