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Why Apple's coronavirus caution is nothing like last year's China warning: Morning Brief

Myles Udland
Markets Reporter

Wednesday, February 19, 2020

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Demand delayed versus demand destroyed

With U.S. markets closed on Monday, Apple (AAPL) announced that it would not meet its first quarter revenue guidance because of coronavirus.

The company cited two factors in its press release: global supply constraints due to Apple’s factories coming back online slower than anticipated and Chinese demand declines because fewer people are shopping and stores are open for fewer hours.

On Tuesday, shares of Apple fell 1.8%. The broader market, however, was mixed — the S&P 500 dropped 0.29% and the Nasdaq actually gained ground, rising 0.02%.

And while this news surely brought to mind Apple’s January 2019 warning, analysts saw the company’s latest cautionary statements as outlining a mere delay in demand because of coronavirus, not a destruction of demand as suggested in Apple’s trade war commentary of 2019.

Perhaps not surprisingly, then, Wall Street analysts remained generally positive on Apple following the company’s latest China-related warning. And while Apple’s financial results will be impacted in the short-term, in the mind of many analysts the longer-term story for the company both in China and around the world is unchanged. In fact, it may have even improved.

“We are lowering our estimates for the Mar-20 quarter, but leaving estimates for all other future periods unchanged,” said Michael Olson, analysts at Piper Sandler in a note to clients published Tuesday.

“We believe any material weakness in AAPL shares as a result of the Mar-20 quarter revenue shortfall will prove to be a buying opportunity, as, in all likelihood, this is a temporary situation that will leave future quarters largely unaffected. In fact, the iPhone supply constraints in the current quarter could result in pent-up demand for future quarters.” (Emphasis added.)

Piper Sandler has a $343 price target and an Overweight rating on Apple shares.

Katy Huberty at Morgan Stanley said in a note Tuesday that Apple’s margins don’t appear at risk, writing that, “the March quarter shortfall is entirely tied to labor, rather than component, constraints and Apple doesn't expect any meaningful component cost inflation at this time.”

Huberty adds that, “a larger than expected demand-related shortfall will just increase estimates in future quarters as we don't view demand as perishable in light of strong retention rates among iPhone owners.”

Morgan Stanley has a $368 price target and Overweight rating on Apple shares. The firm said they are buyers on any weakness in the stock.

Jeffrey Kvaal at Nomura Instinet wrote Tuesday that the “silver lining” in Apple’s guidance cut is that pent-up demand for iPhones may get pushed all the way back to the company’s next flagship release, iPhone 12.

“We do not yet believe Apple’s iPhone 12 timelines are in jeopardy,” Kvaal writes. “Demand that slips into the iPhone 12 cycle may feed the ‘supercycle’ narrative that has fueled Apple’s shares of late.”

Employees wear face masks as they stand in a reopened Apple Store in Beijing, Friday, Feb. 14, 2020. (AP Photo/Mark Schiefelbein)

In 2019, Apple blamed the trade war and a greater-than-forecast deceleration in China’s economy as hurting its business during the all important holiday quarter.

“As the climate of mounting uncertainty weighed on financial markets, the effects appeared to reach consumers as well, with traffic to our retail stores and our channel partners in China declining as the quarter progressed,” CEO Tim Cook said at the time. “And market data has shown that the contraction in Greater China’s smartphone market has been particularly sharp.”

Apple shares fell 10% the day after this news while the broader market fell almost 3%. The market of early 2019 was not inclined to put lipstick on Apple’s pig. But this dire warning also marked the bottom for both the company’s stock and the overall market.

Fading corporate warnings about the macro environment was a profitable trade for 2019 and has been a resilient theme in the early days of 2020. For the full-year 2019, Apple shares gained 86% while the S&P 500 rose 30% and the Nasdaq climbed 36%.

Tom Lee at Fundstrat said in a note Tuesday that Apple’s warning offers investors the “first hints” of what we’re likely to see in first quarter results. “And it should be sloppy,” Lee added.

But given the global nature of coronavirus concerns — across both geographies and sectors — these negative impacts aren’t likely to be a “thesis killer” for a market most strategists expect to climb higher throughout the year.

By Myles Udland, reporter and co-anchor of The Final Round. Follow him at @MylesUdland

What to watch today

Economy

  • 7:00 a.m. ET: MBA Mortgage Applications, week ended Feb. 14 (1.1% prior)

  • 8:30 a.m. ET: Housing starts month on month, January (1.425 million expected, 1.608 million prior)

  • 8:30 a.m. ET: Building permits month on month, January (1.45 million expected, 1.42 million prior)

  • 8:30 a.m. ET: PPI final demand month on month, January (0.1% expected, 0.2% prior)

  • 8:30 a.m. ET: PPI final demand year on year, January (1.6% expected, 1.3% prior)

  • 8:30 a.m. ET: PPI final demand excluding food and energy month on month, January (0.2% expected, 0.1% prior)

  • 8:30 a.m. ET: PPI final demand excluding food and energy year on year, January (1.3% expected, 1.1% prior)

  • 2:00 p.m. ET: Federal Open Market Committee January meeting minutes

Earnings

Post-market

  • 4:15 p.m. ET: Boston Beer Company (SAM) is expected to deliver adjusted earnings of $1.54 per share on revenue of $283.8 million for the fiscal fourth quarter of 2019

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