President Trump Delivers Worrying News to Apple Stock Investors

Apple (NASDAQ: AAPL) has faced a series of headwinds in the past two years. Some investors believe the company is losing ground to its competitors in the rapidly growing artificial intelligence (AI) field; iPhone sales are no longer the growth driver they once were; and lawmakers and regulators have targeted the tech leader due to alleged antitrust practices. However, all of these problems have taken a backseat to the risk Apple runs due to President Donald Trump's trade policies. We haven't seen the last of that either. Some recent comments from the president's spell even more bad news for Apple.

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Trump targets Apple

Apple does the bulk of its manufacturing in China, the country that President Trump has targeted the most with his tariffs. While the administration has flirted with duties on imported goods from most countries, most of these pale in comparison to the ones it has threatened to impose on China. So, presumably, Apple could at least minimize the impact of tariffs by relocating its manufacturing to other countries, like India.

Having a more diversified global manufacturing footprint would be a decent way to navigate President Trump's trade agenda, or so Apple might have thought. On May 23, Trump put a dent in these plans. The president said on social media that unless Apple makes iPhones for U.S. customers in the United States, it will have to pay tariffs of at least 25%.

Trump posted on Truth Social: "I have long ago informed Tim Cook of Apple that I expect their iPhone’s that will be sold in the United States of America will be manufactured and built in the United States, not India, or anyplace else. If that is not the case, a Tariff of at least 25% must be paid by Apple to the U.S. Thank your for your attention to this matter!"

In other words, Apple is free to move its factories to some other country, but unless that country is the United States of America, it will incur the wrath of the current administration and will have to pay up. What could this mean for investors?

Can Apple overcome this obstacle?

President Trump isn't targeting just Apple. He later clarified that this standard would apply to other tech companies, too. But that doesn't make things better for Apple. Shifting production for millions of iPhones to the U.S. would be a logistical nightmare for Apple (if it could do it at all), not to mention, it would vastly increase the company's costs. Under this scenario, Apple would have no choice but to significantly increase its prices. It's challenging to speculate on what the administration will do next, but it's worth noting that there has been a lot of back-and-forth. Trump's tariffs rules change quickly.

Trump previously announced a tech tariff exemption that included smartphones, and now, it seems he has reversed course. The unpredictability and uncertainty of it all are a challenge to Apple, and the market despises uncertainty. Apple stock dropped right after Trump's May 23 post, but has since regained the loss.

In my view, despite potential iPhone-related challenges in the short term, Apple's long-term prospects (think a decade or more) hinge more on its services segment. With more than 2.35 billion devices in circulation and high customer loyalty and retention, Apple will continue to generate new monetization ideas, while the current ones, including those in fintech, streaming, and other areas, will grow in prominence in the long run.

Apple has over a billion paid subscriptions. Its services segment carries far higher margins than other parts of the business.

What if Apple does have to incur higher production costs for its iPhones? There are at least three things to remember here. First, being one of the most valuable brand names in the world grants it significant pricing power. Apple's iPhones are already more expensive, generally speaking, than their direct Android competitors. Although there are multiple reasons why that's the case, the company's brand power likely plays a role. So, even if it has to pay steeper tariffs, Apple may be able to pass some of those costs on to customers and avoid significant margin erosion.

Second, considering how unpopular $5,000 smartphones would be, even the current administration might not implement exceedingly steep tariffs and would instead reach a deal with Apple and other tech leaders. Third, there is a decent chance Trump's trade policies won't survive beyond his administration. These factors suggest that Apple's long-term prospects are still attractive.

Is valuation a problem? Apple's forward price-to-earnings (P/E) ratio stands at 27.9 compared to 27.1 for the information technology industry and 21.5 for the S&P 500. Perhaps the company's forward P/E seems a little steep considering the issues it is facing might cut into its earnings even if it's in line with the industry average. But for investors willing to hold onto its shares for a while, that might not be too much of an issue in 10 years or more. That's why I'd still recommend the stock while it's down 20% from where it started the year.

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Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple. The Motley Fool has a disclosure policy.