Apple , the world’s most valuable company, saw its stock decline by 2.8% in Friday’s trading following the U.K.’s vote to leave the European Union. This was largely related to overall market movements, as well as concerns about the company’s sales and profitability in Europe following the historic vote. That said, Apple fared comparably better than the NASDAQ and S&P 500 indices, which fell by about 4% and 3.6% respectively. Below, we outline some of the potential implications of the Brexit for Apple and explain why the impact on Apple stock was somewhat muted compared to the broader market.
We have a $123 price estimate for Apple, which is about 30% ahead of the current market price.
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Apple’s U.K. Business Could Shrink
Apple’s British business could shrink, given the weaker British Pound and the relatively higher probability of a recession in the U.K. The pound declined by close to 10% versus the dollar on Friday, falling to 30-year lows. This could force Apple to raise prices in the U.K, hurting its shipments, or could impact dollar margins if Apple decides to maintain similar prices. Additionally, it’s likely that the currency devaluation will increase inflation, while a potential recession could also reduce purchasing power, hurting sales of Apple’s relatively pricey devices. That said, the U.K. is a relatively small market for Apple, accounting for about 2.3% of Apple’s revenue over the past 12 months, according to FactSet. [1]
Repercussions In Europe, Further Currency Headwinds
The Euro fell by close to 3% versus the dollar on Friday, and there is a possibility of an economic slowdown in region given that the U.K. is one of the largest consumers in a continent with a generally high savings rate. According to a rough rule of thumb from the The Economist, a given reduction in Britain’s GDP growth could result in a drop of about half as much to Europe’s economic growth. This could impact Apple’s financials, since the E.U. (including the U.K.) accounts for about 21.5% of Apple’s sales and close to 20% of segment operating profits. Apple’s international business could also be hurt by the Brexit. The company has already been facing significant currency headwinds (Q1 FY’16 sales would have been 4% higher on a constant currency basis) and the Brexit could further strengthen the dollar, which is viewed as a safe haven currency, impacting Apple’s results.
Why Apple Reacted To The News Better Than The Broader Market
There are actually some positives to this news for Apple, which could explain why the stock performed better compared to other tech stocks and the broader market. A stronger dollar could reduce Apple’s cost base, since its contract manufacturers and suppliers are primarily located overseas, particularly in Asia. Additionally, Apple’s sales to Japan (which accounted for 7% of total FY’15 revenues) could be more valuable in dollar terms, given that the yen, which is also viewed as a safe haven currency, surged against the dollar on the news of the Brexit. Apple has also been actively raising funds from overseas over the last few years to fund its capital return program, and the weakening pound as well as possibly lower interest rates in the U.K. could help the firm issue debt in the country. Additionally, we believe that Apple stock is already undervalued, reducing the impact of such negative macro outcomes. For instance, Apple trades at a forward P/E of about 10x vs. the NASDAQ index which trades at about 19x.
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Notes:
- Apple’s stock drops in wake of Brexit vote, MarketWatch, June 2016 [↩]
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