No, The WeChat Ban Probably Isn’t A Big Deal For Apple

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Last week, U.S. President Donald Trump issued an executive order banning American companies from doing business with popular Chinese app WeChat on national security grounds. While the specifics of the ban aren’t clear yet, there are concerns that Apple (NASDAQ:AAPL) could see its Chinese iPhone sales tank if it is forced to remove the multi-purpose app, which has become integral to daily life in China, from its Chinese AppStore. However, are the concerns warranted? Probably not, in our view, considering Apple’s good relations with President Trump, the option of potential software workarounds in the event of a ban, and the company’s declining dependence on the Chinese market, which could limit the financial downside from a ban.

See our analysis –  Potential WeChat Ban Poses Under 10% Downside Risk For Apple Stock for more details on Apple’s Chinese business and how lower sales in the country could impact Apple.

Apple’s Relationship With President Trump

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President Trump appears to have a good relationship with Apple and its CEO, Tim Cook. For instance, in 2019, he indicated that he was looking to exempt Apple from proposed import tariffs, and a trade deal with China was signed shortly before 15% tariffs on Apple’s flagship products were about to go into force. Even this time around, we think it’s quite likely that the rules could exempt Apple’s AppStore in China, enabling iPhone users to continue using WeChat. Moreover, the core purpose of the ban is actually to protect U.S national security and privacy, and banning a Chinese app for iPhone users in China probably wouldn’t help much in that regard.

Possible Software Workarounds

If WeChat is indeed banned from the Chinese AppStore,  as an exceptional case Apple could also open up its platform to a certain degree in China, enabling users to install apps bypassing the AppStore. While this might be complicated, and hurt Apple’s commission’s revenue to an extent, the company could save its iPhone business in China.

Limited Financial Impact Even If Chinese Business Falls

We estimate that Apple will derive about $44 billion in revenue in FY’20 (16% of its total sales) from China, a bulk of which will come from the iPhone. Now, if Apple has to remove WeChat from its Chinese app store, and Chinese sales decline by half in FY’21, to about $22 billion, the company should still be able to pull in about $280 billion in total revenue for the year. This would be roughly 9% below the consensus forecast for FY’21. Assuming Apple’s margins and FY’21 P/E multiple remains the same (considering limited growth in China and the fact that the geopolitical tensions are likely baked in), Apple stock would fall by about 9%.

To be sure, the ban on Chinese Apps and the souring relations between the U.S. and China will have longer-term ramifications for Apple and U.S. companies in China, but the near-to-medium term impact is likely to be limited.

Apple’s Services business has been the biggest driver of its growing valuation, but which specific services are really driving growth? Our dashboard Breaking Down Apple’s Services Revenue estimates the numbers for AppStore, Apple Music, Apple TV+, iCloud, Third-party Subscriptions, Licensing, Apple Care, and Apple Pay.

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