Apple Inc. realized Wall Street’s worst fears with a Presidents Day holiday warning on Monday that it won’t be able to meet 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 AAPL, +0.02% said in a statement. About 15% of Apple’s revenue derives from China and many of its products including the iPhone are manufactured there.
The company’s announcement triggered global stock losses, the tech-heavy Nasdaq-100 futures NQ00, -0.67% slid 0.7%, and Apple shares fell over 3% in premarket trading.
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 closed at $324 on Friday.
Apple stock has climbed around 11% so far this year, but has underperformed other big technology names, such as Microsoft Corp. MSFT, +0.89%, 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.
Still, while a “tough pill to swallow for the bulls,” the analysts “believe this is a more of a timing issue rather than an extended supply/demand issue for iPhones globally and does not change our longer term bullish thesis on the name.”
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 declining iPhone volume exposure to China.
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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