Apple Inc. realized Wall Street’s worst fears with a U.S. Presidents Day holiday warning that the company won’t be able to meet its fiscal second-quarter financial guidance due to the coronavirus in China.
“Work is starting to resume around the country, but we are experiencing a slower return to normal conditions than we had anticipated,” Apple (NAS:AAPL) said in a Monday statement. About 15% of Apple’s revenue derives from China and many of its products including the iPhone are manufactured there.
As for analysts, long-term bulls were not throwing in the towel. “While trying to gauge the impact of the iPhone miss and potential bounce back in the June quarter will be front and center for the Street, we remain bullish on Apple for the longer term 5G supercycle thesis despite today’s news,” said Wedbush analysts Daniel Ives and Strecker Backe, in a note to clients.
They are sticking to an outperform view, with a $400 price target. Apple shares recently changed hands near $316.
Apple stock has climbed around 11% so far this year, but has underperformed other big technology names, such as Microsoft Corp. (NAS:MSFT) , which is up 17%. Wall Street remains worried that Foxconn, which manufactures iPhones for Apple, is struggling to resume production.
On Monday, the American Chamber of Commerce in Shanghai warned that a survey of some members showed U.S. manufacturers in the region are struggling from a lack of workers.
“While we have discussed a negative iPhone impact from the coronavirus over the past few weeks, the magnitude of this impact to miss its revenue guidance midway through February is clearly worse than feared,” said the Wedbush analysts, who expect a “knee-jerk” negative reaction for shares later Tuesday.
Raymond James analyst Chris Caso argued that the March quarter is seasonally slow for Apple, so he expects that “almost all of the production and most of the demand is likely to be recaptured once Apple’s manufacturing partners are able to return to full production, and once retail facilities in China return to normal.”
Provided that Apple’s production issues are resolved by the summer, he doesn’t anticipate an impact to the upcoming 5G iPhone upgrade cycle, “and since that’s the prime reason for our bullish view on the stock, this represents no change to our thesis,” Caso wrote. He rates the stock at outperform.
FBN Securities analyst Shebly Seyrafi also said investors seem focused on the next iPhone cycle and Apple’s ability to drive sales later in the year, but given the outbreak and revenue warning, he now expects China “to be a damper on growth over the next several quarters.” Apple derives a greater portion of its revenue from China than “most technology companies,” he added.
Seyrafi cut his price target on Apple’s stock to $340 from $350 but kept his outperform rating.
Samik Chatterjee and a team of analysts at J.P. Morgan said Tuesday that owing to “continuing challenges stemming from the coronavirus outbreak on both domestic demand and global supply,” they are now expecting much lower fiscal second-quarter iPhone volumes and a more modest reduction in those volumes for the third quarter, led by the iPhone 11.
“We see downside risks to consensus expectations for the smartphone industry and 5G smartphone volumes in 2020, led by the lower volume outlook for China,” said Chatterjee. But the analysts said the impact on 5G iPhones may be less, due to the fact North America accounts for around 40% of iPhone volume shipments and Apple’s iPhone volume exposure to China is declining.
The analysts are sticking to a overweight rating and a $350 price target.
“It is actually as clear as can be that this is a temporary, short-term issue, and we wouldn’t be surprised if it barely proves to be that,” said David Bahnsen, chief investment officer of The Bahnsen Group. “Yes, demand is down where there is a direct impact, but their productive capacity is not an issue, and delayed demand is hardly systemic with this company and this product.”
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BMO Capital Markets analyst Tim Long agreed that the specific events are “transitory,” but he said they highlight “an inherent risk with Apple being too exposed to the supply chain in China.” Long lowered his price target on the stock to $297 from $304 while maintaining an equal-weight rating on the shares.
Bernstein analyst Toni Sacconaghi wrote that it was too soon to tell whether the revenue impact will be made up in a future quarter or “lost” for good, though he suspects the reality will be somewhere in between.
“While Apple emphasized the shortfall did not reflect weakness in fundamental demand, it does highlight the transactional nature of Apple’s business and its dependence on China – given this is the second pre-announcement largely due to China in 13 months – and risks putting some incremental pressure on Apple’s multiple, which has inflated over the last 12 months,” wrote Sacconaghi, who has a market-perform rating and $300 target on Apple’s shares.
The stock has added 18% over the past three months, as the Dow Jones Industrial Average (DOW:DJIA) has increased 4.5%.