Trump tax plan could benefit Apple, Salesforce, other tech

How Trump's tax plan could affect tech companies

Financial trends and news by Steven Loeb
November 14, 2016
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Donald Trump made a lot of very big campaign claims, many of which are beginning to sink in as being rhetorical talk. For instance, his infamous call to build a border wall - many would argue - was never his plan. It was a way for him to make his point to Americans, to get them to see the big picture and realize there's a problem with our borders and that it's hurting American jobs.

One promise that he very likely will keep, though, are his calls for tax cuts, specifically on the corporate level. His plan would lower the the current rate from 35 percent to 15 percent.

That's a dramatic cut, and would obviously have an affect on the overall economy, and on individual industries, but what effect will that have on the tech specifically? According to Toni Sacconaghi, Wall Street Analyst at Bernstein, not as much as some others, since tech companies already pay a lower tax rate.

"Changes in tax policy will impact sectors differently. Ironically, while a lower corporate tax rate will help boost technology sector earnings, it appears as though tech earnings will be boosted much less than the broader market," he wrote in a note on Monday.

Currently, the tech sector pays a tax rate of between 18 percent and 21 percent, lower than other sectors, like healthcare.

"While it is difficult to know how any new tax policies might work, we simplistically assume that all US-based companies would face a 15% federal tax rate, and that state and local taxes would be de minimis. Under such assumptions, we estimate that the overall market will average a ~14% earnings uplift should Trump's tax reform bill be enacted," Sacconaghi wrote

Tech companies, on the other hand, would only see a boost of around 7 percent to 8 percent, since they already pay a lower tax rate due to "permanently reinvesting" foreign earnings abroad.

Winners and losers

Of course, not every company within the tech sector will be impacted the same way, and Sacconaghi outlined some of the potential winners and losers from Trump's plans. Basically, the more offshore cash a company has, which it can bring back to the U.S., and the higher tax rate it already pays, which will then be lowered, the better it will do.

Microsoft and Qualcomm for example, are what he calls "classic modern-day tech companies," ones that have low tax rates but also "huge offshore cash balances," so they will be fine, though they will become more expensive since they won't benefit much from the lowered tax rate.

Meanwhile, IBM and Hewlett Packard have little trapped cash overseas, and will likely lose in this scenario compared to other companies. 

"IBM is relatively unique in that it has historically been able to access its globally generated cash without incurring incremental income tax, even though most of it is generated offshore," said Sacconaghi, and it "will not have any incremental access to cash it can't already access."

As a result, he expects IBM to have its price-to-earnings multiples inflate relative to the market, making the company 10 percent more expensive than it is now. In other words, IBM shares could take a big hit. Shares are down 3.06 a share on Monday, or 1.9 percent, to $158.21 percent. So, perhaps Sacconaghi's note is already having an impact. 

One company that will benefit from Trump's proposed tax plan is Apple, since it currently pays a higher tax rate than most other tech companies, and has a lot of cash overseas. 

"Apple is also unique – it generates most of its earnings in very low cost foreign jurisdictions, but chooses to accrue taxes on its income statement for a portion (about 50%) of those offshore earnings, resulting in a relatively high tax rate by tech-company standards (26%) and an unfathomably large foreign cash balance ($216B)," Sacconaghi pointed out. 

Other companies that are most likely to benefit from Trump's tax cuts are Salesforce, Yahoo, Visa, Mastercard and Amazon. Cisco, Oracle and eBay will also benefit, as they're the companies that have the most offshore cash available to bring back home.

Trump vs Apple

That Apple would benefit from a Trump presidency is ironic given that the company was one of his biggest targets on the campaign trail, declaring that he was going to get Apple to start making its devices in the United States.

We are going to do what’s good for the country,” Trump said. “We’re going to get Apple to build its damn computers in this country instead of other countries.”

He also called for a boycott of the iPhone during the standoff between Apple and the FBI over the San Bernardino shooter's phone.

There is also a big indication that Trump's policies could hurt Apple sales. One of his major talking points during the campaign was about China being a currency manipulator. Part of Trump's plan is to impose a 45 percent tariff on imports from the country.

Over the weekend, in an editorial in the Global Times, China’s state-run newspaper, threatened to half iPhone sales if Trump goes through with this plan.

"China will take a tit-for-tat approach then. A batch of Boeing orders will be replaced by Airbus. US auto and iPhone sales in China will suffer a setback, and US soybean and maize imports will be halted," it wrote.

There was also a threat of limiting the number of Chinese students studying in the U.S.

Obviously a squeeze on iPhone sales in China would be bad news for Apple; the Chinese market has already become oversaturated, leading to a slowdown of global smartphone sales last year. So perhaps Trump's tax policies do benefit Apple, but other policies may negate some of those gains. 


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