Clouds part over Apple’s stock—for now

Late Friday news broke of an exemption for smartphones, laptop computers and other electronics imported from China, sparing Apple from the bulk of drastic tariffs set by President Trump. Those tariffs—announced on April 2 and ratcheted up the following week—would have substantially increased Apple’s costs and either crimped its vital profit margins or required price increases for customers already paying $1,000 or more for the latest iPhones.

Both were unappealing prospects—especially during a year when Apple is already struggling to sell its latest iPhones and launch new generative artificial-intelligence services for its devices. Shares in the world’s most valuable company have been hammered.

Even after a market bounceback following Trump’s clawback of some tariffs, Apple’s stock ended last week down nearly 12% from where it was before the initial tariff announcement. The other five megacap tech names averaged a loss of only 2%.

Apple’s shares are likely to make up lost ground on Monday, given the latest exemptions. Even so, investors shouldn’t assume it’s back to business as usual.

That became clear even before the weekend was over, after Commerce Secretary Howard Lutnick said on Sunday that more tariffs could soon be coming on electronic products. Trump himself said in a social media post later Sunday that “NOBODY is getting ‘off the hook’" on tariffs. The continued uncertainty will hang over Apple’s stock, raising the question of whether it can—or even should—reclaim its previous, rich valuation.

Going forward, Apple’s multiple will need to reflect a Trump discount. This will have to take into account the incredible leverage the administration now has over the company and chief Tim Cook.

Every administration utterance from this point on will have the potential to rekindle the existential crisis that gripped Apple the past two weeks.

And this is an administration that remains keenly interested in on-shoring production of everything designed by U.S. companies. Trying to do that at Apple would effectively set back the clock by 20 years—the company’s annual statement filed in 2005 was the first to claim that final assembly of “substantially all" of the products it sold took place in China.

That shift was the culmination of years of effort by supply-chain wizard Cook, and it paid off handsomely well before he became Apple CEO in 2011. Apple’s annual gross margins averaged in the low 20% range in the early 2000s, when it was predominantly a computer company making products in California and Ireland. Those margins hit 40% by the end of that decade, after the made-in-China iPhone and iPod also remade Apple’s business.

Friday’s exemptions may only ease the pressure Apple is now under to diversify its manufacturing base. And that will be an expensive shift, even if it doesn’t ultimately result in more than a million U.S. workers putting together iPhones for U.S. wages.

China has strong competitive advantages in manufacturing. This is why Apple and nearly all of its tech hardware peers outsource most of their production there.

“The reality is that major U.S. technology companies remain heavily dependent on China’s highly efficient and deeply integrated manufacturing ecosystem," IDC hardware analyst Francisco Jeronimo said in a report over the weekend. “For high-volume products like smartphones, tablets or PCs, any attempt at rapid diversification would be both costly and logistically unfeasible."

The Trump administration’s newfound sway over Apple could come into play in other ways, as well.

The government, for example, has tried unsuccessfully for years to get Apple to carve out a “backdoor" in its software to allow law enforcement easier access to its devices. The company’s resolve on this front may be freshly tested, although caving could hurt its image with customers and possibly affect long-term growth.

This new, less predictable reality needs to be reflected in Apple’s valuation. The stock was trading around 29 times projected earnings for this year ahead of Trump’s tariff announcement. That multiple was ahead of most other megacap tech stocks and more than twice the multiple commanded by hardware makers such as Samsung, Dell and HP.

Apple has long warranted a premium to its gadget peers given its superior cash flow and margins. That is harder to justify under a U.S. president waging a trade war—and willing to use any and all means to do it.

A U.S.-based company that sells more than $300 billion worth of foreign-made products every year is ill-suited for a world lurching to deglobalization. Apple’s shares will ultimately have to reflect that.

Write to Dan Gallagher at dan.gallagher@wsj.com