The news is full of China, and trade wars, and President Trump. For companies with exposure to the US/China import/export trade, the posturing between the two governments has created a minefield of distraction for companies to navigate.
The result, for investors, is confusion. In the past week, share prices have dropped sharply, with the S&P losing 4% between May 5 and May 13. There has been a parial recoveryt in the last 48 hours as stocks have ticked up, regaining in some cases as much as 1/3 of their losses.
The tech sector and manufacturing industries are heavily impacted by the trade tensions between the two countries. We’ll use the TipRanks database to look at three major large-cap stocks that have proven sensitive to the tariff news.
Apple, Inc. (AAPL – Research Report)
Apple’s share price has been on a roller coaster for the past year. The stock reached a record level near $230 in October last year, before falling hard in the last quarter. But what goes down must come up, and AAPL shares rose with the New Year. CEO Tim Cook used well-timed media announcements to soften the bad news while highlighting the good, in a mostly successful effort at damage control.
The pressure on Apple comes mainly from declining iPhone sales. The smartphone accounts for 53% of Apple’s revenues, but the market’s replacement cycles are maturing, China’s economy is slowing, and the company’s supply chain and export markets are both impacted by increased tariffs on Chinese trade. Apple’s strategy to counter these market stressors – which is showing early indications of success – revolves around switching the business emphasis to the Services segment while also increasing emphasis on iPad and Mac sales. In addition, Apple lost an important legal decision in the US Supreme Court, when the Justices found that the plaintiffs in an anti-trust price-fixing suit do have standing to sue. The repercussions of that decision, however, will take years to make themselves felt in the market.
On a more immediate note, AAPL shares reacted badly to the prospect of renewed tit-for-tat tariffs between the US and China. Between May 3 and May 13, Apple slipped 12% in the markets, sparking fears that the stock is weaker than its recent gains would indicate. Apple is nothing if not resilient, however, and as two positive sessions in a row, with combined gains of nearly 3%, remind us.
Wall Street’s analysts are taking a highly ambivalent stance toward Apple right now. Macquarie’s Ben Schachter (Track Record & Ratings) sees the legal decision as the main factor for this stock right now, saying, “Going forward, Apple will be pressured in competitive, regulatory and legal forums to reduce the 30% rate it charges developers.” He sets a hold on AAPL, with a $190 price target.
Jim Kelleher (Track Record & Ratings), five-star analyst from Argus, however, sees Apple with a brighter outlook. He points specifically to “Apple’s high Services revenue in [Q2] and the surge in its contribution from Wearables & Home segment, which was the only unit to grow sequentially from peak Q1.” Kelleher’s price target, $250, suggests a 31% upside to AAPL.
Overall, Apple’s analyst consensus is a ‘Moderate Buy.’ The stock has an even split of 17 buy and 17 hold ratings, along with 2 sells, given over the past three months. Shares trade for $190, so the average price target of $215 gives Apple a 13% upside potential.
Nvidia Corporation (NVDA – Research Report)
Nvidia, the world’s #10 semiconductor chip manufacturer by sales volume, was hard-hit by last year’s cryptocurrency retreat – the company’s graphics processors are in high demand by crypto miners – and has been hit again by this week’s ratcheting of the US-China trade war. China is another major market for Nvidia products, and the company was already feeling the pain of the Chinese economic slowdown. The deterioration in the trade situation has only cast that into sharp relief.
The trade problems could not have come at worse time for Nvidia. The company’s share price dropped 56% in the second half of last year, and has had difficulty regaining traction this year, regaining only a small part of the losses. And Nvidia is facing hurdles in its proposed acquisition of networking company Mellanox (MLNX). A Mellanox investor is attempting to file a class action suit to nix the deal, saying that the banks used unfair valuations of Mellanox when Nvidia made its bid. The court case is likely to be an irritant rather than a stopper. As an irritant, however, it is serious – Nvidia’s bid of nearly $7 billion is 93% of the company’s total cash on hand. It cannot afford a disruption of this deal.
Nvidia’s Q1 2020 results will be reported later today (May 16), and while the company is expected to show earnings and revenue in-line with last quarter, those numbers are likely to be serious declines from the year-ago quarter. Revenues are expected at $2.2 billion, with EPS at 82 cents. These are down 31% and 60% from one year ago.
With that in the background, the mixed reviews from the analysts makes sense. Stifel analyst Kevin Cassidy (Track Record & Ratings) sets a hold on NVDA, and takes the further step of lowering his Q1 earnings estimates to 82 cents. He expects to see “dramatic slowing of data center spending and potentially lower PC GPU average selling prices in FY20 and sees the company being challenged to meet its full year guidance for revenue flat to slightly down.” Cassidy puts a $145 price target on NVDA, suggesting a 9% downside.
Mitch Steves (Track Record & Rating), of RBC Capital, takes a more optimistic view. First, he sets a $200 price target, indicating confidence in a 25% upside. And he explains his optimism, saying, “For the Apr-qtr, we are raising our gaming revenue estimate to north of $1B due to higher than expected ASPs. We also think the month of January was the weakest of the first four months of the year (crypto comparisons), which suggests that the q/q uptick could be better than feared.”
So, the reviews and forecasts for NVDA are all over the place. About the only thing we can say for certainty – as of this writing – is that the company is making headlines, and something will happen soon. Right now, NVDA stock has a ‘Moderate Buy’ from the TipRanks analyst consensus, based on 17 buys, 8 holds, and 2 sells. The average price target is $188, suggesting an 18% upside from the current share price of $159.
Boeing Company (BA – Research Report)
Like Apple and Nvidia, Boeing is facing headwinds from a number of fronts. The most serious is the grounding of the 737 MAX aircraft, the most popular model of the company’s most popular commercial airliner. The grounding came after fatal air crashes just months apart, both of brand-new aircraft just moments after takeoff. The company has traced the problem to a software malfunction in the autopilot, and is working on a fix. The FAA has not yet approved the software fix, however, and the 737 MAX fleet remains grounded worldwide.
Boeing can probably weather that. The company has other aircraft in production, not affected by the isues with the 737s. However, the grounding disrupted orders for Boeing aircraft in China, which in recent years has made up a growing portion of Boeing’s current and future revenues. Tariff issues are also harming Boeing’s China trade. Boeing has over two hundred production orders from China, and the Chinese government is making noises about cancelling some or all them in retaliation for increased tariffs.
In terms of timing, however, the twin blow of the 737 grounding and the tariffs could not have been worse: the Chinese aerospace company COMAC has, since 2008, been developing a narrow-body commercial airliner specifically to compete with the 737 series. The plane, dubbed the C919, is in prototype production and conducting test flights. This is a long-term threat, however; the C919 is not expected to enter commercial production until 2021 at the earliest.
With all of that in the background, it’s no surprise that Barclays analyst David Strauss (Track Record & Ratings) downgraded his stance on Boeing, giving the aerospace giant a ‘hold’ rating. Strauss says he believes that 737 MAX production recovery will take longer than the company expects. Strauss’s price target, $367, indicates a modest 6% upside for the stock.
Writing at Cowen, however, industry expert Cai Rumohr (Track Record & Ratings) gives BA the thumbs up. He looks into the recent production numbers and notes, “April deliveries were decent with four more than expected 737’s and four more 787’s. Given the MAX grounding, only four net cancellations in April is somewhat encouraging.” Rumohr gives BA a $460 price target, suggesting an upside of 33%.
Overall, Boeing is another ‘Moderate Buy’ stock on the analyst consensus. This rating is derived from 12 buys, 8 holds, and 2 sells. Shares are priced at $345 and the average price target is $427, giving Boeing an upside potential of 23%.
Enjoy the Research Reports on the Stocks in this Article:
Apple, Inc. (AAPL) Research Report
Nvidia Corporation (NVDA) Research Report
Boeing Company (BA) Research Report
This author holds a long position in Apple, Inc.
