Apple (AAPL) investors still have reason to be concerned about its biggest market outside the U.S., namely China.
Shares of the Tim Cook-led tech giant are higher on Wednesday afternoon after a largely positive interview with Jim Cramer on Tuesday evening.
Yet, analysts are noting that the company is not out of the woods on its key issues in China.
"Although we had expected challenges for Apple in China and other economies, the intensity has surprised us to the downside," HSBC analyst Erwan Rambourg warned on Wednesday. "We believe that with intensifying competition from Chinese vendors and a currently unfavorable currency set-up (a weak RMB-USD), growing operating profit in China in USD terms will now become more difficult for the company."
The risk is particularly outsized given China represented almost 20% of total revenue for the company in 2018, its second highest margin market.
"China to date remains one of the most profitable regions for Apple despite volatile trends... not only is Apple's market share under pressure but so is its supply chain." he added. "For now, Apple assembles the bulk of its products in China with the mainland's largest employer, Foxconn, and with Pegatron."
The concerns on both the supply and demand side motivated Rambourg to cut his price target for the stock by 20%, from $200 to $160, while maintaining a "Hold" rating.
The issues related to demand may be further exacerbated by the company's high profile as an American company in the minds of nationalistic, and socially monitored, Chinese consumers.
"According to a survey conducted by our colleagues in equity research, consumers in China and India are showing less interest in upgrading to an iPhone and more interest in upgrading to Xiaomi and Samsung," a report from Bank of America Merrill Lynch economists Ethan Harris and Aditya Bhave noted. ""Given the battles around high tech, this spillover from politics into sales could be particularly high in the cell phone market."
The politics of the trade war is even spreading to the corporate level.
According to the South China Morning Post, Menpad, a Shenzhen-based LCD display maker, said it will punish any employee that buys the popular American smartphone and fine them by an amount equivalent to its market price. To sweeten the deal, the company will subsidize Huawei or ZTE phone purchases by providing a 15% subsidy.
Cook has fought back against this outlook, noting his optimism on trade talks and the company's ability to recover from the nationalistic buying pressure.
"I believe [the trade war] is temporary. Because I think that, when you really look at it, it's in both countries' best interests to come to an agreement," he told Cramer. "I'm very optimistic that this will happen. And so that clearly will be good, not only for us, frankly, but I think more about the world in general."
Still, the headwinds present in China emanating from consumers, Qualcomm's (QCOM) successful legal order to cut sales of older phones in the country, and a disrupted supply chain pale in comparison to executive optimism.
Given the company's sizable interest in China, Cook and shareholders alike will be eager to see the results of the ongoing Sino-American trade talks. It could be the fulcrum upon which Apple stock pivots in the not-too-distant future.