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