- Apples (NASDAQ: AAPL) management severely downplayed the companys 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 Apples 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 Apples Chinese sales but also a major disruption in its supply chain. These two challenges may result in a downward revision to Apples guidance and put significant downward pressure on the stock going forward.
Apple Stock Cant Avoid Coronavirus
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Apple is Americas largest company, but it is increasingly reliant on China to hit its revenue targets.
The Asian nation made up around 15% of Apples 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 cant imagine a scenario where the supply chain isnt disrupted, said veteran industry analyst Patrick Moorhead of Moor Insights & Strategy. If theres one major hiccup in the raw materials, fabrication, assembly, test, and shipping, it will be a disruption.
Apples 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 Q2s [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.
Its a tough sell.
While Apple tends to give accurate guidance, this wouldnt be the first time the company was forced to cut projections over challenges in China.
Disclaimer: This article represents the authors 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