The Wall Street Journal reported last week that the Chinese government has ordered officials at central government agencies to stop using Apple's (AAPL -0.35%) iPhones for work and to stop bringing the devices into offices. While the direct impact on Apple's sales will likely be minimal, the effects of this ban could reverberate and put a big chunk of Apple's China-derived revenue in jeopardy.
Tensions flare
The U.S. has imposed an array of sanctions on China, partly in an effort to restrict access to the most advanced semiconductor technology. Artificial intelligence is a particular area of focus. NVIDIA, the leader in the AI accelerator market, faces limits on what chips it can sell within China.
China has taken some steps that appear to be retaliatory. In May, China banned critical information infrastructure operators from using memory chips made by Micron (MU 2.92%) because of cybersecurity concerns. The move to restrict iPhone usage in central government facilities appears to be along the same lines.
The restrictions on Micron's products are narrow, just like the restrictions on Apple's iPhones. But the risk in both cases is that these narrow bans end up being treated as more expansive bans. China has been making a serious effort to reduce its reliance on foreign technology. While it's unlikely to fully ban iPhone sales, it can use this narrow ban to nudge consumers and businesses toward domestic alternatives.
Micron initially forecasted a low-single-digit to high-single-digit percentage impact on its total revenue from the China ban. China accounts for roughly one-quarter of Micron's total revenue, so the best-case scenario Micron laid out was for only a minority of its China revenue to be at risk.
However, the company changed its tune about a month later. In June, Micron disclosed that several Micron customers in China, including mobile OEMs, had been contacted regarding future use of Micron products. The company updated its outlook, saying that about half of its China revenue could be at risk. That works out to a low double-digit percentage of overall revenue.
This is the problem that Apple now faces. If only the Chinese government employees affected by the ban switched away from Apple's iPhones, the impact on Apple's revenue would be minimal. The risk is that others not affected by the ban end up moving away from Apple products as well, either because of pressure or simply reading the tea leaves.
Apple generated $74 billion of revenue from China in fiscal 2022, roughly 19% of the company's total revenue. While it's impossible to predict how much of that revenue is at risk, if this plays out like the ban on Micron products, tens of billions of dollars in annual sales could be in play.
Not great timing
This drama comes at a time when Apple is already struggling to grow. Revenue slumped in Apple's latest quarter along with operating income as sales of iPhones, Macs, and iPads declined. Global smartphone shipments are trending lower this year as consumers hold onto their devices for longer. As the smartphone market matures and new models deliver only incremental improvements, it's hard to view the iPhone as a growth business for Apple.
The company is betting that it can reinvigorate growth with its upcoming VR/AR headset. The Vision Pro is an impressive piece of technology, but it looks like a solution in search of a problem rather than a must-have gadget. And with the headset priced at an eye-watering $3,499, demand will likely be muted.
Apple's stock may face a greater risk from China's restrictions than the company. Apple stock trades for around 30 times earnings, which is historically high for the tech giant. That's not the kind of valuation that sticks around for a no-growth company. If Apple's revenue meaningfully declines as sales to China drop, you can expect investors to rethink the premium being attached to its shares.
The best-case scenario for Apple is for this ban to remain narrow and not impact sales in China beyond those directly affected. The worst-case scenario involves tens of billions of dollars in annual revenue vanishing. Apple stock looks expensive either way.
