Loup Ventures

About the Author Loup Ventures

At Loup Ventures, research is in our blood. The spirit of our team has always lived on the curiosity to discover new insights that yield investment opportunities. For years we did this on Wall Street, focused on public tech companies. Now we invest in private frontier tech companies, but public companies like Tesla, Nvidia, and others are also meaningful innovators in frontier tech. These public companies are shaping the emergence of AI, robotics, autonomous vehicles, and AR/VR just as much as early stage startups. As a result, we’ve always kept a watchful eye on public market participants to inform our private investment strategy. Gene Munster is a managing partner and co-founder at Loup Ventures. Prior to Loup Ventures, Gene was a managing director and senior research analyst at Piper Jaffray where he covered technology companies including Apple, Amazon, Google and Facebook. During his 21-year tenure, Gene received many acknowledgements including: Top Stock Picker from Forbes, Best on the Street from The Wall Street Journal, and was widely recognized for his work on Apple. Gene holds a bachelor’s degree in finance and entrepreneurship from University of St. Thomas.

Clear Headed Thinking Amidst Tariff Confusion

By Gene Munster

The fear of tariffs is leading investors to make false predictions, causing distortion to the financial markets. At best, we’re a month away from an agreement, so speculation is unhealthy. We’re taking the approach of sober analysis based on what is known rather than speculation. The framework of our view is based on the US Trade Perspective along with factoring in the real goal of tariffs. Separately, we revisit the potential impact on Apple (AAPL) as an example of our rationale.

Bottom line: It’s going to take time (30 days) for this to sort out. While there will be losers, the broader impact will likely not be as negative as investors fear.

The US Trade Perspective

This is not a market event, but a geopolitical one. At the core, China is gaining economic strength, as evidenced by them joining the World Trade Organization in 2001. Since then, US trade officials believe China has been coloring outside the lines by selling products in the US at a price lower than the price in China (“dumping”) and manipulating their currency, which has made the price of Chinese goods cheaper in the US. The US supports an economically stronger China but one that plays by an agreed upon set of trade rules. It’s likely that last week’s trade talks stalled when the US asked for greater assurance that China would adhere to the details of the agreement.

The Goal of Tariffs

Markets don’t like uncertainty, which in part explains why Monday’s trading session eliminated $1.4 trillion of the market cap, about 3x more than the combined proposed US ($325B) and China ($60B) increases in tariffs. We see a gross misunderstanding regarding the mechanics of these tariffs. The goal of levying tariffs on China is to penalize China-based companies selling competing products in the US. For example, a steel supplier in China is at a high risk of increased tariffs because they are competing with US-based steel producers. Similarly, a phone manufacturer like Huawei is at high risk of increased tariffs, given its products compete with the iPhone.

Indications Suggest Apple Has Little Risk

Despite the widespread speculation related to which products and companies will be impacted, the truth is no one knows how this will play out. Even after we hear details from the Office of the United States Trade Representative (USTR), the impact will still be in question, given the uncertainty about how consumers will react. In the case of Apple, there are similar unknowns, but we do have 3 indications that the company is at little risk. First, US policymakers aim to protect US companies, and Apple is the most successful US company in China. Second, Apple has historically avoided tariffs. Third, it is unlikely that China would impose import tariffs on US goods manufactured in China as that would discourage US companies from manufacturing there. Keep in mind, Apple indirectly employs about 1m Chinese workers to assemble its products.

That said, we view Apple’s biggest risk coming from Chinese consumers boycotting Apple products to damage what is a symbol of US success in China. In the Dec-18 quarter, there were calls on China social media to boycott Apple products due to growing trade disputes with the US along with the arrest of Huawei CFO Sabrina Man in Canada (which triggered a boycott of Canada Goose Holdings). This may have played a role in China iPhone units declining 40% y/y in Dec-18 after being up nearly 20% yy in Sep-18 (Loup estimates).

Disclaimer: We actively write about the themes in which we invest or may invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we may write about companies that are in our portfolio. As managers of the portfolio, we may earn carried interest, management fees or other compensation from such portfolio. 


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