Despite recent market concerns over Apple Inc.'s (NASDAQ:AAPL) business in China, Morgan Stanley (NYSE:MS) analysts have deemed the company's stock sell-off as "overdone." The tech giant's shares experienced a minor recovery on Friday after two consecutive sessions of decline triggered by fears about its Chinese operations.
A Wall Street Journal report had earlier indicated that the Chinese government was banning the use of iPhones for official work purposes. This news, coupled with a Bloomberg report suggesting potential expansion of this ban to include other state-affiliated workers, contributed to the market jitters. Additionally, Chinese technology company Huawei's new phone release, which is seen as a viable competitor in the market, added to these concerns.
However, according to Morgan Stanley's Erik Woodring, these fears may be exaggerating the potential risks. He noted that Apple has been instrumental in providing direct and indirect employment for millions in China, making it a critical component of the Chinese economy.
Woodring also highlighted that while there are concerns about China becoming more nationalistic, potentially jeopardizing Apple's $30 billion-plus operating profit from the region, he believes this is an "overextrapolation" by the market. He pointed out that Huawei's 5G smartphone shipments will likely be significantly limited due to supply constraints and possible further technology restrictions. Moreover, iPhone restrictions by the Chinese government aren't necessarily a new development, reportedly having started as far back as 2020.
In Woodring's view, even in a worst-case scenario where Apple loses around 70% of its iPhone shipments in China - an outcome he considers highly unlikely - this would result in a revenue downside of only 4% and earnings per share downside of 3%. This scenario assumes that Apple gives back all the market share it gained from Huawei over the past three years.
Woodring remains positive about the strength of Apple's ecosystem in China. He noted that many consumers are likely entrenched as they own multiple Apple devices. "Government curbs may force some switching to domestic vendors, but we assume most Chinese government officials (or at state-owned enterprises) already own a smartphone from domestic manufacturers," he stated.
Morgan Stanley's analysis suggests that the market's reaction to recent headlines about Apple's China challenges may be overstated. The investment bank maintains its bullish stance on Apple over the next year, arguing that the current stock move is based on evidence so far and seems "more bark than bite."
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