Expect Apple Stock to Suffer When Coronavirus Batters the Top Line

Expect Apple Stock to Suffer When Coronavirus Batters the Top Line 1
  • Apple’s (NASDAQ: AAPL) management severely downplayed the company’s China-related challenges in the earnings call last week.
  • The company guided for revenue growth going in the 2nd quarter of 2020, but this is unlikely because of the worsening coronavirus outbreak.
  • China is a huge part of Apple’s revenue and supply chain. Coronavirus disruption may lead to a guidance cut.

The Wuhan coronavirus outbreak is getting worse. And American tech stocks with Chinese exposure are feeling the pain. Recently, Apple (NASDAQ: AAPL) decided to shut down all its stores and corporate offices [Reuters] in China as a precaution against the deadly disease provisionally known as 2019-nCoV.

These actions are dramatically out of line with the positive guidance Apple is providing for Q2 of 2020.

The outbreak will not only cause a drop in Apple’s Chinese sales – but also a major disruption in its supply chain. These two challenges may result in a downward revision to Apple’s guidance and put significant downward pressure on the stock going forward.

Apple Stock Can’t Avoid Coronavirus

Coronavirus could put an end to Apple stock’s breathtaking rally. | Source: Yahoo Finance

Apple is America’s largest company, but it is increasingly reliant on China to hit its revenue targets.

The Asian nation made up around 15% of Apple’s revenue in the 1st quarter of fiscal 2020 [Apple 10-Q]. On top of this, the company relies on a network of Chinese partners for its hardware supply chain. According to CEO Tim Cook [Apple.com], it even has some suppliers in the hard-hit Wuhan area.

Patrick Moorhead, an industry analyst from Moor Insights & Strategy, believes supply chain disruption is a foregone conclusion for Apple [SCMP].

“I can’t imagine a scenario where the supply chain isn’t disrupted,” said veteran industry analyst Patrick Moorhead of Moor Insights & Strategy. “If there’s one major hiccup in the raw materials, fabrication, assembly, test, and shipping, it will be a disruption.”

Apple’s Q2 Guidance Was Too Optimistic

Apple provided a wide guidance range for Q2 of fiscal 2020 – a period that ranges from January to March.

Management is forecasting [Apple.com] revenue of between $63 billion and $67 billion with a gross margin of between 38-39%. This represents significant growth from the prior Q2’s [Apple.com] revenue of $58 billion with a gross margin of 37-38%.

To put this in perspective, Apple believes it will grow revenue in a period of time when one of its core markets is reeling from an intensifying virus outbreak. They also believe they will improve gross margins during a period of supply chain disruptions.

It’s a tough sell.

While Apple tends to give accurate guidance, this wouldn’t be the first time the company was forced to cut projections over challenges in China.

Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com.

This article was edited by Josiah Wilmoth.

Last modified: February 2, 2020 3:15 PM UTC

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