Apple's coronavirus revenue miss seen as short-term hurdle

Posted:
in AAPL Investors edited February 2020
While industry observers are clearly seeing a short-term financial and business impact from the coronavirus outbreak in China, the first analysts chiming in on the situation don't have long-term concerns surrounding Apple's financial prospects.

iPhone 11 and iPhone 11 Pro Max
iPhone 11 and iPhone 11 Pro Max


Late Monday, Apple issued a warning to investors that a challenging business and industrial environment in China was going to make Apple miss its guidance for the second fiscal quarter of 2020. Nearly instantly, Apple analysts chimed in on the situation, and so far, they all have a common theme -- short term problems, but continued strength long-term.

Gene Munster from Loup Ventures

Ultimately, Munster believes that Apple's growth cadence will resume. He believes that the coronavirus will be temporary, and notes that the financial impact isn't as profound as the revenue revision that Apple issued in January of 2019 -- also for reasons related to China.

Munster believes that Apple's results will likely fall between $58 billion and $60 billion. This is below Wall Street's prediction prior to the coronavirus statment which stands at $65.3 billion.

The math behind Munster's prediction assumes China accounts for 12% of Apple's revenue because of the virus, compared to the firms' previous expectation of 17% of revenue. This is also colored expecting tighter iPhone supply in the back half of the quarter, worldwide, inducing some problems that will negatively impact Apple's ability to fulfill global demand.

Daniel Ives from Wedbush

In a note to investors issued very shortly after Apple's revenue prediction warning, Ives warns that the news on Tuesday morning will be "knee-jerk" -- but ultimately the coronavirus is a temporary concern that will be outweighed sooner rather than later.

"While this news is a tough pill to swallow for the bulls, Apple remains a company significantly exposed to this virus issue given the company's massive supply and demand tentacles throughout China, writes Ives. "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 super cycle thesis despite today's news."

Ives is maintaining the "outperform" that it has applied to Apple stock. On January 24, Ives became Apple's biggest bull, and established a $400 per share price target.

To reach the $400 valuation that he first guessed would happen on January 14, Ives takes a 9.8x multiple for Services, with that business segment worth about $585 billion, and gives the rest of Apple's hardware a 5.2x multiple, with that valued at about $1.2 trillion.

Krish Sankar from Cowen

Krish Sankar has explained what he believes the impacts to Apple are, in a bit more numerical detail than Munster or Ives.

"The evolving nature of the health crisis in China has understandably led to a slower start for manufacturing activities there this year," writes Sankar. "Given healthy demand for the latest iPhone 11 cycle, Apple is facing the real possibility of inventory shortages for the Mar '20 quarter due to lower production output and reduced Chinese consumer demand."

"We estimate the reduced productivity will lead to a 3-4 week shortfall in demand vs typical channel inventory of 3-4 weeks entering the [March quarter]," says Sankar. "Relative to our original 46M unit sell-in forecast, the supply chain constraints could lead to a 11-12M unit shortfall globally based on a 14-week quarter."

Sankar is not as optimistic as other venues, in regards to "iPhone SE 2" production. He believes that production for Apple's rumored low-cost iPhone could get pushed out to the June quarter, for a launch in the late spring or early summer, instead of at an event in March.

Combining the three impacts, Sankar believes that there will be about a 13 million iPhone sale deficit in the quarter, versus what Apple was expecting. of those 13 million, about 11.5 million units are attributable to a later "iPhone SE 2" launch than expected, and 1.6 million sales deferred because of a lower demand in China.

Despite these relatively short term impacts, Cowen is not altering its $370 Apple stock target price that it set in January. Sankar arrives at this target by applying a 18x earnings multiple to the core businesses and a 30x multiple to the recurring revenue Services segment, leading to a blended 23x P/E multiple with a fiscal year 2021 earnings per share of $16.22.

Immediate impact on Apple's stock pricing

While there may not be a long-term problem for Apple, investors have started to sell. In pre-market trading, Apple stock has fallen to $314.15 as of 7:15 A.M. Eastern time, a decline of over $10 from the February 14 close.

Apple's previous guidance for the second fiscal quarter of 2020

Apple was forecasting revenue for the second fiscal quarter between $63 billion and $67 billion for the first fiscal quarter of 2020, with gross margin pegged between 38% and 39%. Operating expenses were expected to hit between $9.6 billion and $9.7 billion, while a tax rate of approximately 16.5% is anticipated.

At the time, Apple said it gave a wider than normal range because of the then-new coronavirus epidemic. As of yet, Apple has not provided a new revenue guidance range, and based on the commentary Apple has issued so far, it may not.

Apple last updated its revenue estimates over a year ago. It altered its first-quarter fiscal year 2019 revenue estimates because of a poor business climate in China. As of the first quarter of 2020, that had recovered and it is unclear what long-term impact the coronavirus may or may not have for the remainder of the fiscal year.
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Comments

  • Reply 1 of 42
    This could be a good buying opportunity today!
  • Reply 2 of 42
    bulk001 said:
    This could be a good buying opportunity today!
    Am ready to rock and roll to buy,
  • Reply 3 of 42
    BeatsBeats Posts: 3,073member
    More than anything this shows that China, the world's fastest growing smart phone market, is a critical market for Apple -- and why American corporations generally are so opposed to Trump's attempt to create a cold war with the country.

    The best way to think of China is the U.S. of a 100-120 years ago -- where growing wealth, innovation and industrial might meet.   It's the place where the future will happen.  That's why Trump fears it and attacks it.

    China is so "innovative".
  • Reply 4 of 42
    Coronavirus is not a temporary problem. CDC has already said that this virus is probably going to stick with us indefinitely like the flu except it’s much more deadly and communicable than the flu. 

    China started to destroy paper money today because they suspect that the virus survives longer on surfaces than previously believed. It may be good for the electronic payments industry, but it shows you how seriously China is taking this. 

    How many of you are ready to buy an iPhone that was manufactured in China after the epidemic started? iPhones are hermetically shrink wrapped.  Are you sure that when you break the shrink wrap, you are not releasing the virus, which no one knows for sure right now how long it can survive on surfaces? 

    I don’t think I’m the only person who is having these doubts. Manufacturing is only one problem facing Apple in the next several months. Consumption is another problem that may be significant. Personally, I will not be buying anything made in China until the scientists have a clue about what the humankind is dealing with. 
    edited February 2020
  • Reply 5 of 42

    Beats said:
    More than anything this shows that China, the world's fastest growing smart phone market, is a critical market for Apple -- and why American corporations generally are so opposed to Trump's attempt to create a cold war with the country.

    The best way to think of China is the U.S. of a 100-120 years ago -- where growing wealth, innovation and industrial might meet.   It's the place where the future will happen.  That's why Trump fears it and attacks it.

    China is so "innovative".
    They are now. 
    GeorgeBMac
  • Reply 6 of 42
    Analysts don’t know shit. I don’t know why Apple rumor sites keep posting every time a Wall Street analyst says something about Apple.
    lkrupp
  • Reply 7 of 42
    Analysts don’t know shit. I don’t know why Apple rumor sites keep posting every time a Wall Street analyst says something about Apple.
    Stock manipulation attempts. 
  • Reply 8 of 42
    apple ][apple ][ Posts: 9,233member
    sirozha said:
    Personally, I will not be buying anything made in China until the scientists have a clue about what the humankind is dealing with. 
    Haha, good luck with that. :#

    I have a pair of AirPods Pro that I'm waiting on and I am assuming that they're going to be coming from China. Does anybody know where Apple does their engraving?

    I'm not worried at all.

    I'm not saying that govts shouldn't take this virus seriously, but the worst thing to do is to get all caught up in the mass media hysteria about it.

    In some months the whole thing will have probably blown away and be forgotten about and the media will move on to their next hysteria and fear mongering experiment.

    I see some positives coming from all this too.

    The demand for Apple's next products will be sky high, but the supply will be lower than usual leading to a mad rush to get the devices. It'll be just like old times when the iPhone first came out or the iPad.
    lkruppGeorgeBMac
  • Reply 9 of 42
    Mike WuertheleMike Wuerthele Posts: 6,818administrator
    Analysts don’t know shit. I don’t know why Apple rumor sites keep posting every time a Wall Street analyst says something about Apple.
    Analysts know financial factors, but don't necessarily know Apple as a company. We discuss and contextualize them, because it is one of our top requests for coverage.

    When we think they're wrong, we say so.
    gatorguymuthuk_vanalingamGeorgeBMac
  • Reply 10 of 42
    hodarhodar Posts: 357member
    As of 2016, small to medium sized businesses made up about 90% of China’s economy.  90%!!!
    Of those small businesses, less than 50% have funds “on hand” sufficient to pay 30 days. 

    Do not begin to imagine how precarious China’s economy is to a pandemic like the Coronavirus.   I see a devastating economic collapse all but inevitable.  
    sirozha
  • Reply 11 of 42
    hodar said:
    As of 2016, small to medium sized businesses made up about 90% of China’s economy.  90%!!!
    Of those small businesses, less than 50% have funds “on hand” sufficient to pay 30 days. 

    Do not begin to imagine how precarious China’s economy is to a pandemic like the Coronavirus.   I see a devastating economic collapse all but inevitable.  
    We are heading into a global recession in the second half of 2020. The calamity in China multiplied by the uncertainty of the US presidential election is a perfect storm brewing. AAPL will be hit extremely hard this time. Much harder than at the end if 2018. Much harder than other MAGA companies because no other trillion dollar corporation is as dependent on China for both manufacturing and sales as Apple. 

    In the end, Apple will survive. AAPL may even be a good investment in the future, but the question is how long it would take Apple to rebuild its manufacturing base outside of China. MSFT had a lost decade under Ballmer, but now they are firing on all cylinders again. Apple is about to enter the Ballmer territory. 
    edited February 2020
  • Reply 12 of 42
    lkrupplkrupp Posts: 10,557member
    sirozha said:
    Analysts don’t know shit. I don’t know why Apple rumor sites keep posting every time a Wall Street analyst says something about Apple.
    Stock manipulation attempts. 
    The short sellers are dancing today!
  • Reply 13 of 42
    gatorguygatorguy Posts: 24,088member
    lkrupp said:
    sirozha said:
    Analysts don’t know shit. I don’t know why Apple rumor sites keep posting every time a Wall Street analyst says something about Apple.
    Stock manipulation attempts. 
    The short sellers are dancing today!
    The stuff I'm reading leans towards the short-sellers dancing the rest of the year.
    muthuk_vanalingam
  • Reply 14 of 42
    GeorgeBMacGeorgeBMac Posts: 11,421member
    sirozha said:
    Coronavirus is not a temporary problem. CDC has already said that this virus is probably going to stick with us indefinitely like the flu except it’s much more deadly and communicable than the flu. 

    China started to destroy paper money today because they suspect that the virus survives longer on surfaces than previously believed. It may be good for the electronic payments industry, but it shows you how seriously China is taking this. 

    How many of you are ready to buy an iPhone that was manufactured in China after the epidemic started? iPhones are hermetically shrink wrapped.  Are you sure that when you break the shrink wrap, you are not releasing the virus, which no one knows for sure right now how long it can survive on surfaces? 

    I don’t think I’m the only person who is having these doubts. Manufacturing is only one problem facing Apple in the next several months. Consumption is another problem that may be significant. Personally, I will not be buying anything made in China until the scientists have a clue about what the humankind is dealing with. 

    More infectious but not more deadly. 
    Like the flu it's mostly fatal only the elderly starting at about 50 and its mortality rate then doubles with each decade or age.  Below 50 its mortality is close to zero but by 80 it's up around 15%.

    Current data shows its infection rate at almost double the flu's rate of 1.25.   But, with the extraordinary measures China is taking to control it that may be a low estimate.  On the other hand, the lack of a vaccine tends to make it much higher.
  • Reply 15 of 42
    GeorgeBMacGeorgeBMac Posts: 11,421member
    Analysts don’t know shit. I don’t know why Apple rumor sites keep posting every time a Wall Street analyst says something about Apple.

    This was mostly based on what Apple said (lowering their near term forecast due to lower China Sales and, to a lesser extent, a more gradual  than expected restart of their factories).  Beyond that the epidemic seems to be leveling off (although "Peaked" is not yet being spoken) so factories should be expected to continue ramping up and, at some point, hopefully soon, the stores will reopen.  In other words, as conditions return to normal, so should Apple. So, in this case, the predictions seem to be more common sense than prediction.,
    edited February 2020
  • Reply 16 of 42
    lkrupplkrupp Posts: 10,557member
    sirozha said:
    Coronavirus is not a temporary problem. CDC has already said that this virus is probably going to stick with us indefinitely like the flu except it’s much more deadly and communicable than the flu. 

    China started to destroy paper money today because they suspect that the virus survives longer on surfaces than previously believed. It may be good for the electronic payments industry, but it shows you how seriously China is taking this. 

    How many of you are ready to buy an iPhone that was manufactured in China after the epidemic started? iPhones are hermetically shrink wrapped.  Are you sure that when you break the shrink wrap, you are not releasing the virus, which no one knows for sure right now how long it can survive on surfaces? 

    I don’t think I’m the only person who is having these doubts. Manufacturing is only one problem facing Apple in the next several months. Consumption is another problem that may be significant. Personally, I will not be buying anything made in China until the scientists have a clue about what the humankind is dealing with. 
    Man, you really have some Chicken Little issues to resolve for yourself.
  • Reply 17 of 42
    GeorgeBMacGeorgeBMac Posts: 11,421member
    hodar said:
    As of 2016, small to medium sized businesses made up about 90% of China’s economy.  90%!!!
    Of those small businesses, less than 50% have funds “on hand” sufficient to pay 30 days. 

    Do not begin to imagine how precarious China’s economy is to a pandemic like the Coronavirus.   I see a devastating economic collapse all but inevitable.  

    The central government has already announced plans to provide aid & support those small & medium sized business that are being impacted by this.  That;s what good governments do.
    muthuk_vanalingam
  • Reply 18 of 42
    There is a major race against time taking place: Containment versus vaccine development and production. If a vaccine is produced in large quantities quickly enough, then the long term impact of the virus will be mitigated. From what I’ve read, the ‘19 novel coronavirus is only slightly more dangerous than a typical flu virus. Vaccinating those most at risk ASAP will not stop the spread, but will reduce the number of deaths substantially.

    I take the alarmist postings here with a very large grain of salt, and even question their actual purpose. “How many of you are ready to buy an iPhone that was manufactured in China after the epidemic started?”

    Seriously? And your basis for that preposterous statement is that “
    China started to destroy paper money...”? What’s your real agenda here, sirozha?
  • Reply 19 of 42
    sirozha said:
    Coronavirus is not a temporary problem. CDC has already said that this virus is probably going to stick with us indefinitely like the flu except it’s much more deadly and communicable than the flu. 

    China started to destroy paper money today because they suspect that the virus survives longer on surfaces than previously believed. It may be good for the electronic payments industry, but it shows you how seriously China is taking this. 

    How many of you are ready to buy an iPhone that was manufactured in China after the epidemic started? iPhones are hermetically shrink wrapped.  Are you sure that when you break the shrink wrap, you are not releasing the virus, which no one knows for sure right now how long it can survive on surfaces? 

    I don’t think I’m the only person who is having these doubts. Manufacturing is only one problem facing Apple in the next several months. Consumption is another problem that may be significant. Personally, I will not be buying anything made in China until the scientists have a clue about what the humankind is dealing with. 

    More infectious but not more deadly. 
    Like the flu it's mostly fatal only the elderly starting at about 50 and its mortality rate then doubles with each decade or age.  Below 50 its mortality is close to zero but by 80 it's up around 15%.

    Current data shows its infection rate at almost double the flu's rate of 1.25.   But, with the extraordinary measures China is taking to control it that may be a low estimate.  On the other hand, the lack of a vaccine tends to make it much higher.
    First off, 50 is only elderly in your head. Are you 19 or something that 50 for you is elderly? People now live into their 90s. Are they elderly half of their lives? 

    Secondly, the death rate for those after 60 is 80%. This comes directly from the epidemiologist who is working in the epicenter of the epidemic. 

    Thirdly, the death rate for younger people is not near 0 at all. The now famous Chinese ophthalmologist who alerted his colleagues about the new virus at the end of December 2019 was 36 years old when he died from the virus last week. For you, 36 is probably old age, though. 

    And finally, this virus is much deadlier than the flu. That’s why the Chinese locked down 60 million people in their apartments and placed 780 million people under strict travel restrictions. The fewer than 2,000 people who died from this virus in China so far are such a small percentage that the Chinese government would never have shut down their economy and placed half of the population under the travel restrictions if this virus were not deadly. The Chinese are good at math. They realize what this virus could do if it’s allowed to spread like the flu. 


    edited February 2020
  • Reply 20 of 42
    sacto joe said:
    There is a major race against time taking place: Containment versus vaccine development and production. If a vaccine is produced in large quantities quickly enough, then the long term impact of the virus will be mitigated. From what I’ve read, the ‘19 novel coronavirus is only slightly more dangerous than a typical flu virus. Vaccinating those most at risk ASAP will not stop the spread, but wiqll reduce the number of deaths substantially.

    I take the alarmist postings here with a very large grain of salt, and even question their actual purpose. “How many of you are ready to buy an iPhone that was manufactured in China after the epidemic started?”

    Seriously? And your basis for that preposterous statement is that “China started to destroy paper money...”? What’s your real agenda here, sirozha?
    My preposterous statement comes right out of today’s news. You may want to actually read the news about China before you insert your foot in your mouth. 

    As for how deadly this virus is compared to the flu, would you consider 290 times more deadly than the flu “slightly more dangerous”? You know where I got this number? Math. See if you can do the math yourself. 
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