Why the coronavirus outbreak is rattling markets
New York (CNN Business)Whatever high Apple executives were on in January after the company posted record earnings and strong iPhone sales during the holiday quarter has likely faded. The tech giant is having a rough month.
The iPhone maker has been hit harder than expected by the coronavirus outbreak. The company told investors earlier this week that it no longer expects to meet revenue guidance it provided only last month for the current quarter, which ends in March. Travel restrictions, limited store hours and disruptions at factories in China are keeping Apple (AAPL) from selling and making as many devices as it had hoped.
The situation raises the stakes for key product releases slated for later this year. In order to make up for the decline in performance caused by coronavirus, the company will need to drum up demand for new iPhones, which are still its biggest revenue driver.
Apple has a big tool in its arsenal this year: A 5G-enabled iPhone that is widely expected to be released in September. Some analysts expect the 5G iPhone to trigger a “super cycle” of device upgrades.
“Every time there’s a big step function, from 3G to 4G and 4G to 5G, that easily will be another big uptick in the driver of the iPhone units,” said Keith Gangl, portfolio manager at Gradient Investments.
But there are questions about whether ongoing disruptions caused by coronavirus could cause problems for — or even delay — the 5G iPhone release that many are counting on to provide a big boost to the company.
Apple said Tuesday it would no longer meet the $63 billion to $67 billion sales projection it gave for the current quarter when it reported earnings last month. That guidance range was already wider than usual, which Apple hoped would account for the potential impacts of coronavirus.
Tuesday’s announcement creates additional uncertainty because Apple didn’t specify how far off its projections it would be, or how much of the miss is due to supply constraints versus a drop in demand, Gangl said.
“The virus itself is a moving target, so it’s hard to speculate what it will mean for the suppliers and for demand. We need more data and more time,” Gangl said.
There are some indications that it’s more of a supply issue.
On Wednesday, Nikkei reported that Apple will likely miss its schedule for releasing a more affordable version of the iPhone S this spring,citing sources familiar with the matter.
Around 15 million to 17 million units of the updated iPhone S were set for release in March, Wedbush analyst Dan Ives told CNN Business.
Apple did not respond to a request for comment on the report.
The less expensive iPhone S is another way for Apple to convince customers — especially those reluctant to shell out for premium models — to upgrade their phones. That could have helped boost the company’s sales during the March quarter, especially ahead of the typically slow summer quarter. But Ives said the new phone’s release will now likely be pushed into April.
“This doesn’t significantly move the needle,” Ives said. “But it is another indication of just how dramatically the supply chain has been negatively impacted by the coronavirus tragedy.”
Some analysts worry that the delay of the cheaper iPhone S could be a harbinger for the 5G model later this year, if coronavirus continues to weigh on Apple’s supply chain.
“The impact of the constrained manufacturing environment in China on the production of the new iPhones expected to launch in September remains unclear at this point, but supply constraints are possible,” Monness Crespi Hardt analyst Brian White said in an investor note.
White added that coronavirus-related manufacturing disruptions in China could also limit production of the equipment used to build 5G wireless networks, which are key to getting customers to adopt 5G devices.
A delay in the release of the 5G iPhone would be a blow to Apple, especially after its main competitor, Samsung (SSNLF), released a full line of 5G-enabled phones earlier this month.
“The stock is priced for a 5G upcycle,” Gradient’s Gangl said. “It depends on how long it gets pushed. If it’s weeks, it could be okay. If they miss the holiday season, that could be a problem.”
Wedbush’s Ives agreed, calling the 5G iPhone the “heart and lungs of the super cycle thesis.”
“If those get delayed by a few weeks, a month, it would impact the quarterly trajectory but it’s not something that would be overly concerning to investors,” Ives said. “If it gets delayed three to six months, that could be a problem.”
The next update on where things stand will likely come when Apple reports earnings for the current quarter in April.
Source: Read Full Article