Tuesday, February 18, 2020

Coronavirus Takes a Bite Off Apple Revenue

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What’s happening: Apple warned investors on Monday that the coronavirus disruption in China could dent its revenue in the current quarter.

What happened: Apple said on Monday that it would be unable to meet its earlier-issued quarterly revenue target, following a strong decline in Chinese customer footfall and iPhone-supply disruptions due to the virus outbreak. This is the second time recently when the tech giant has been forced to issue a warning due to China-related concerns.

Samsung Electronics is likely to be a major beneficiary of Apple’s China production woes.

The Cupertino, California-based iPhone maker had hoped for its China operations to return to normal following the Lunar Year holiday. The company warned that its operations had since been significantly slower than expected. Apple said it would fail to meet its sales guidance range of $63 billion to $67 billion issued at the end of last month. Apple did not, however, issue a new outlook for its fiscal second quarter revenue.

Why it matters: Apple makes most of its iPhones in China via its manufacturing partner Foxconn, which has the capacity to produce as many as 500,000 iPhones a day. Although Foxconn has reportedly moved its manufacturing facilities to Zhengzhou city, it has resumed operations with merely 10% of the workforce. This is likely to impact global supplies of the iPhone, Apple’s best-selling product.

The coronavirus has not only forced the company to halt production, but also shut retail stores in the Asian nation. China is an important market for Apple, contributing around $3 billion to its revenue each month. Although some Apple retail stores in China reopened last week, they were open for only seven hours instead of the usual 12 hours.

On the other hand, Samsung is reaping the rewards of having manufacturing facilities in Vietnam and China. The smartphone maker has simply ended production in China and relocated manufacturing equipment to the other two Asian nations to continue to meet global demand.

Possible downside to estimates and shares: Apple had delivered strong revenue and earnings growth for the fiscal first quarter, easily surpassing expectations. iPhone sales had climbed 8% to $55.96 billion, driven by new models. The company’s revenue guidance for the second quarter had prompted analysts to raise their outlook too.

Apple’s shares have gained a little over 90% since mid-February last year, climbing from below $170 to above $300. Despite this growth, the stock rose again after the mega tech company reported upbeat results last month. With the company now warning of a revenue shortfall, shares could take a hit as the US market opens today after the President’s Day holiday. Apple has tried to reassure investors saying that it is a “fundamentally strong” company and the disruption to business from the virus “is only temporary.”

What to watch: Apple is likely to launch a new and economical version of the iPhone in coming weeks. Investors are hoping for a new iPhone cycle in the latter half of the year and are on the look out for any news related to normal operations resuming in China. Apple is expected to issue an update on the impact of coronavirus on its business during its upcoming earnings call in April.

The Markets Today

     

Investors will be watching US stocks today, with the markets reopening after the long weekend as the country celebrated President’s Day on Monday.

Context: US stocks closed mixed on Friday, while finishing the week higher. The Dow Jones rose 1%, the S&P 500 gained 1.58% and the US Tech 100 surged 2.2% last week.

Details: After closing higher last week, US stocks are likely to face some pressure today as investors focus on the economic impact of the coronavirus outbreak. Reports of the situation worsening, with no cure still in sight, have fuelled investor fears.

Gains recorded by three major sectors - financials, utilities and technology - led stocks higher last week, which offset declines in the consumer services and oil & gas sectors. With that, the S&P 500 rose 0.18% on Friday, while the Nasdaq added 0.2%, although the Dow closed down 0.09%.

Expedia was among the top performers of the S&P 500 index, with its shares rallying more than 10% after the company reported better-than-expected quarterly earnings. Summer Infant was the top performer in the US Tech 100 index, climbing a whopping 270%, with Pulse Biosciences being the worst performing stock. Declining stocks outnumbered the ones that posted gains on the NYSE (New York Stock Exchange) on Friday.

Why it matters: The rally in stocks last week could take a complete U-turn today. US stock futures are also pointing towards a lower open this morning. Futures headed south on reports stating that the impact from China’s virus had worsened. China’s government reported a rise in new cases, with the death toll crossing 1,800 and 93 more deaths reported in the Hubei region. Many leading companies have issued warnings of the coronavirus impact on their results. China is also likely to postpone or even cancel its Beijing auto show. Futures on the Tech 100 suffered the most, declining over 0.8% following the news.

What to watch: The market will look at the major indices, with stock futures indicating a lower start. Investors will also keep a close eye on the NY Empire state manufacturing index and NAHB housing market index, scheduled to be released today. The Empire state index is likely to increase to a reading of 5 in February, while the housing index is expected to remain unchanged at 75.

Other Markets: Most European indices opened lower on Tuesday, with the UK 100, German 30 and French 40 down 0.55%, 0.68% and 0.55%, respectively.

Support & Resistances
for Today

     

market snapshot

     

Futures at 0400 (GMT)

News shaping
the markets today

     

What else to watch today

     

Russia’s producer prices, Canada’s manufacturing sales and the speech by ECB’s Fabio Panetta.