This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
Apple (NASDAQ: AAPL) has optimized its costs through a global manufacturing footprint. This relationship -- specifically with China -- may be coming to an end if President Donald Trump gets his way. The maker of the iPhone used the large and cheap labor market of China and other Asian nations to cheaply build and assemble its hardware before selling to consumers around the world, making a tidy profit in the process.
Now, with large tariffs implemented on imports from China, Apple has begun to move some of its manufacturing to India in order to hedge its bets. However, this caught the ire of Trump, who said that Apple will face a 25% tariff on iPhone imports and that the products should be made in the United States in order to reshore manufacturing.
According to analysts, building iPhones in the United States will greatly raise Apple's operating costs. Does that give investors a reason to sell the stock?
Stuck between China and the United States
Due to higher labor costs, assembling iPhones in the United States would increase Apple's variable costs for its hardware products. Analysts estimate it would cost Apple tens of billions of dollars to switch manufacturing to the United States while raising the per-unit price from $40 to $200 or higher. It is possible that Apple could make up these costs by raising the retail price on iPhones, but that is asking a lot from consumers when flagship devices already cost around $1,000.
Last quarter, Apple's product division generated just under $25 billion in gross profit, which is revenue minus manufacturing/assembly costs. If Apple is forced to pay high tariffs or manufacture its phones in the United States, these large gross profits may disappear, leading to less bottom-line income and free cash flow. On top of the higher costs in the United States, Apple's supply chain wouldn't be immune from tariffs, with parts of the iPhone imported from Asia and still subjected to high tariffs as of this writing.
In actuality, around half of Apple's gross profit comes from its high-margin services segment, which will not be directly impacted by tariffs. This includes revenue from the App Store and distribution agreements from Google to be the default search engine on the Safari web browser. In fiscal year 2024, $71 billion of Apple's total gross profit of $181 billion came from services.
These high-margin revenue streams are under attack from antitrust lawsuits. Apple is now forced to allow mobile applications to use alternative payment methods to sidestep its 30% fee on payment processing, which could lead some profits to disappear. Current lawsuits may bar Apple from accepting a huge $20 billion (or more) annual payment from Google for default search engine status, another potential profit hit coming down the line.
Slowing revenue growth, falling behind in AI?
Even before these threats from tariffs and antitrust lawsuits, Apple was not firing on all cylinders compared to the other "Magnificent Seven" stocks. Over the last three years, Apple has only grown its revenue by a cumulative 3%. Alphabet's is up 29%, Microsoft's is up 36%, and Nvidia's is up a staggering 339% over that same time frame. The company is simply not growing much anymore as it fails to deliver any new hardware device that comes close to the popularity of the iPhone.
In artificial intelligence (AI), Apple may be falling well behind the competition. It has failed to release updated services for Siri while letting competitors like Alphabet post cutting-edge breakthroughs in text, video, and image generation for consumers. This is not showing up in the numbers today, but Apple is at major risk of failing to win in the next great technology paradigm, which will impact its bottom line eventually despite its wide brand moat today.
AAPL Revenue (TTM) data by YCharts
Is now the time to sell Apple stock?
Apple stock is down 17.8% this year. I believe the stock still looks overvalued for investors today. It trades at a price-to-earnings ratio (P/E) of 31, which is higher than the S&P 500 average and higher than Alphabet even though Alphabet is growing much faster.
Low-growth stocks trading at a premium earnings multiple are dangerous to own, even if they have been strong performers in the past. Apple may see its earnings finally move in the wrong direction if tariffs, lawsuits, and failures to win in AI lead to deteriorating power in the global technology landscape. It wouldn't shock me if Apple's profits were lower in five years compared to today.
For these reasons, Apple stock is an easy sell from your portfolio right now.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
