Apple Warned About Damage From the Coronavirus. Analysts Say It's Just a Blip.

Eric J. Savitz Technology AAPL Apple Computers/Consumer Electronics Telecommunications Equipment Mobile Communications Devices Personal Electronics Freight Transport/Logistics Cell/Mobile/Smart Phones Consumer Electronics Handheld Electronic Devices Technology Transportation/Logistics Tim Long Chris Caso Dan Ives James Cordwell Jim Michael J. Olson Ong Piper Sandler Raymond James Asia Pacific Asia BRICS Countries China Greater China Emerging Market Countries Developing Economies Eastern Asia Financial Performance Earnings Sales Figures Share Price Movement/Disruptions Corporate/Industrial News Content Types Factiva Filters C&E Exclusion Filter C&E Industry News Filter AAPL DB DBK.XE I/CPR I/TRS I/XFFX M/TEC M/TRSH N/CNW N/DJN N/ERN N/PFM N/SLS N/WER R/ASI R/CH R/FE R/FEO Barrons.com Barrons Blogs Wires Fortune 500 CODES_REVIEWED Asia Technology author Eric J. Savitz author|Eric J. Savitz topicid 8582 name Eric J. Savitz extractedtext Eric J. 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Analysts Say It’s Just a Blip. Apple Warned About Damage From the Coronavirus. Analysts Say It’s Just a Blip. Apple Warned on Sales and the Coronavirus. Analysts Say It’s a Blip.

The stock fell by less than 3% despite Monday’s news that Apple’s March quarter revenue will be lower than expected.

Apple Warned About Damage From the Coronavirus. Analysts Say It’s Just a Blip.

The stock fell by less than 3% despite Monday’s news that Apple’s March quarter revenue will be lower than expected.

https://www.apple.com/newsroom/2020/02/investor-update-on-quarterly-guidance/ https://www.barrons.com/articles/apple-stock-rises-after-iphone-airpods-and-services-power-strong-earnings-51580249789 mailto:eric.savitz@barrons.com Apple Warned About Damage From the Coronavirus. Analysts Say It’s Just a Blip. By Eric J. Savitz Photograph by Justin Sullivan/Getty Images Analysts see little danger of lingering effects on Apple’s business from the coronavirus.

Apple shares have fallen less than 3% despite the company’s warning Monday that it will miss a previous forecast for March quarter revenue due to issues related to the growing coronavirus outbreak. Apple has problems with both its supply chain, creating a global shortage of iPhones, and with demand, as Chinese sales fall as a result of the outbreak.

Analysts largely see the issue as a temporary blip that should largely be made up by sales later in the year. There appears to be little concern that the issues will have lingering effects.

When Apple reported its December quarter results, the company projected March-quarter revenues of $63 billion to $67 billion, a range it said was wider than usual given the uncertain impact of the virus. But now it appears the guidance wasn’t sufficiently conservative, and that the impact of the virus is worse than Apple had expected. Apple didn’t give a new guidance range, but estimates on Wall Street are dropping to the $60 billion level, or below.

In its statement Monday, Apple (ticker: AAPL) said the guidance issued Jan. 28 “reflected the best information available at the time as well as our best estimates about the pace of return to work following the end of the extended Chinese New Year holiday on February 10.” But Apple now says “we are experiencing a slower return to normal conditions than we had anticipated,” and that it will fall short of the earlier forecast.

There are two issues. Contract manufacturers are reopening more slowly than expected, creating iPhone supply shortages that “will temporarily affect revenues worldwide.” And demand in China has been hurt.

“All of our stores in China and many of our partner stores have been closed,” Apple said. “Additionally, stores that are open have been operating at reduced hours and with very low customer traffic. We are gradually reopening our retail stores and will continue to do so as steadily and safely as we can.” Apple said that outside China, “demand across our product and service categories has been strong to date and in line with our expectations.”

Atlantic Equities analyst James Cordwell, one of the few bears on Apple among Street analysts, maintained his Underweight rating. But he says that while the news is illustrative of Apple’s reliance on China in the long run, he isn’t too worried about the short-term impact on financial results.

Cordwell cut his estimates for the second quarter, but lifted his view for the third, leaving his estimate for earnings per share for the full year fiscal year down just 1%. “The issues resulting from COVID-19 are clearly transitory in nature, but more significantly they serve as a reminder of the risks inherent in Apple’s hardware-dominated business, leaving the stock’s multiple continuing to look overextended in our view.” His target for the stock price is $275.

In early trading, the stock was down 2.5%, to $316.96, still leaving it with a gain of 8% for the year to date.

Cordwell’s changes to his financial model are instructive. For the March quarter, he cut his view to $60.1 billion in revenue and profits of $2.66 a share, from $65.9 billion and $3.09 a share, assuming a 50% cut in China hardware sales, a 7.5% hit to non-China iPhone sales, and a 30% increase in China App Store revenue. For the June quarter, he lifted his view to $63 billion in revenue and $2.78 a share, from $60.3 billion and $2.61.

Citi’s Jim Suva cut his March quarter revenue estimate more severely, slashing it by $8 billion to $57.3 billion, about half of that reflecting reduced sales in China. The rest reflects the lower global sales due to iPhone supply issues. His EPS estimate for the quarter dropped to $2.37, from $3, but he maintained his Buy rating and price target of $375.

Barclays analyst Tim Long, who has an Equal Weight rating on Apple shares, trimmed his target to $297, from $304. He also sees the announcement more as a reminder of Apple’s ties to China than any fundamental long-term shift in the business.

“While this is likely to be viewed as a transitory event, we believe another China issue (after tariffs) highlights an inherent risk with Apple being too exposed to the supply chain in China,” Long writes. “We still see risks to iPhone business, and remain skeptical on 5G iPhone demand this Fall.” He lowered his March quarter revenue outlook to $59 billion, from $62.7 billion, with profits of $2.77 a share, down from $2.94.

Deutsche Bank’s Jeriel Ong, has been cautious on Apple shares, but doesn’t see this as a major turning point, unlike a surprise earnings warning the company issued in January 2019. “We believe that investors are likely to be more forgiving of this downward revision as much of it is outside of Apple’s control,” he wrote.

Wedbush analyst Dan Ives, an unabashed Apple bull, isn’t shifting his view. “While the knee jerk reaction will be negative...in light of this shocker and have a ripple impact across the supply chain, we believe this is a more of a timing issue rather than an extended supply/demand issue for iPhones globally and does not change our longer term bullish thesis,” he wrote. “ 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.” He kept his Outperform rating and $400 price target.

Raymond James analyst Chris Caso kept his Market Outperform rating. Like his counterparts, he doesn’t see the revenue warning as a reason to turn bearish.

“We think almost all of the production and most of the demand is likely to be recaptured once Apple’s manufacturing partners are able to return to full production, and once retail facilities in China return to normal,” he wrote in a research note. “[A]s long as production normalizes by the summer, we would expect no impact to the 5G iPhone cycle—and since that’s the prime reason for our bullish view on the stock, this represents no change to our thesis.”

Piper Sandler’s Michael J. Olson said he saw a buying opportunity in any dip in the stock Tuesday. “We believe any material weakness...will prove to be a buying opportunity, as, in all likelihood, this is a temporary situation that will leave future quarters largely unaffected,” he wrote. “In fact, the iPhone supply constraints in the current quarter could result in pent-up demand for future quarters. Looking at the remainder of FY 2020, current iPhone demand (outside of China) appears to be strong, non-iPhone (especially wearables) remains solid and anticipation is growing for 5G iPhones.” He kept an Overweight rating and $343 price target on the stock.

Write to Eric J. Savitz at eric.savitz@barrons.com

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.