Shares of Apple (AAPL) are under pressure on Tuesday after the company warned that it does not expect to hit its quarterly revenue target due to the novel coronavirus outbreak. However, many Wall Street analysts see the weakness in the shares as a buying opportunity, with Piper Sandler analyst Michael Olson saying that it will likely be a temporary situation that will leave future quarters largely unaffected.
REVENUE SHORTFALL: In a statement over the weekend, Apple said that, "As the public health response to COVID-19 continues, our thoughts remain with the communities and individuals most deeply affected by the disease, and with those working around the clock to contain its spread and to treat the ill. [...] Work is starting to resume around the country, but we are experiencing a slower return to normal conditions than we had anticipated. As a result, we do not expect to meet the revenue guidance we provided for the March quarter due to two main factors. The first is that worldwide iPhone supply will be temporarily constrained. While our iPhone manufacturing partner sites are located outside the Hubei province - and while all of these facilities have reopened - they are ramping up more slowly than we had anticipated. [...] The second is that demand for our products within China has been affected. All of our stores in China and many of our partner stores have been closed. Additionally, stores that are open have been operating at reduced hours and with very low customer traffic."
WEAKNESS A BUYING OPPORTUNITY: Commenting on the news, Piper Sandler analyst Michael Olson told investors that any material weakness in Apple shares as a result of the 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, the analyst added. Looking at the remainder of Apple's fiscal 2020, Olson believes current iPhone demand outside of China appears to be strong and that its non-iPhone business remains solid while anticipation is growing for 5G iPhones. The analyst kept an Overweight rating and a $343 price target on Apple's shares.
Voicing a similar opinion, Baird analyst William Power argued that the broader story remains intact and thus he would be a buyer of Apple shares on weakness. Power reiterated his Outperform rating and $360 price target on the stock. Also commenting on the news, JPMorgan analyst Samik Chatterjee said he expects most long-term investors in Apple shares to look past these "temporary headwinds" as the company's long-term outlook is unchanged. Both Apple's products and services are continuing to demonstrate strong underlying consumer demand, Chatterjee added. He reiterated an Overweight rating on the shares with a $350 price target.
Meanwhile, Morgan Stanley analyst Katy Huberty adjusted her near-term estimates to reflect a revenue shift from March into the June and September quarters, but noted that her full-year estimates for Apple remain largely unchanged. Given that June is typically Apple's weakest revenue quarter, she thinks Apple likely will be able to rebuild iPhone channel inventory to normal levels and fully recapture the $7.5B revenue reduction to her March quarter estimates largely in the June quarter, with the balance recognized in the September quarter. Huberty kept an Overweight rating and an unchanged $368 price target on Apple shares.
TARGETS, ESTIMATES LOWERED: While keeping a Buy rating on the shares, DA Davidson analyst Tom Forte lowered his price target for Apple to $370 from $385 and updated his projections for the March quarter and remainder of fiscal year 2020. Canaccord analyst T. Michael Walkley also lowered his price target for Apple to $345 from $355 to account for the weakness, keeping a Buy rating on the name. Additionally, Barclays analyst Tim Long cut his price target for Apple to $297 from $304, while maintaining an Equal Weight rating on the shares. The analyst noted that the announcement was not surprising given the impacts of the coronavirus and argued that it is likely to be viewed as a transitory event. Nonetheless, another China issue after tariffs highlights an inherent risk with Apple being too exposed to the supply chain in China, he added.
In a research note of his own, Citi analyst Jim Suva told investors he believes channel iPhone inventory is materially being depleted and that once manufacturing production fully comes online, Apple will need to produce more than normal to replenish channel inventory, which is typically takes up to six weeks. Suva reduced his arch quarter sales estimate by $8B to $57.3B. However, much of this will be recouped in the June quarter and during the second half of 2020, Suva contended. Furthermore, the pending 5G iPhone launch in September will help Apple "get back on track "to single digit iPhone unit growth, which when coupled with incremental services and wearables sales, will accelerate its sales growth, he added. The analyst kept a Buy rating on the shares with a $375 price target
SUPPLIERS ALSO UNDER PRESSURE: Chipmakers Nvidia (NVDA), Qualcomm (QCOM) and Broadcom (AVGO) were also under pressure following Apple's warning. Noting that Apple is Qorvo’s largest customer, Wells Fargo analyst Gary Mobley argued that the news will "no doubt" cause investors to question Qorvo's $800M-$840M March quarter revenue guidance given on January 29. Although the coronavirus is still a serious issue yet to be fully controlled, he believes the supply chain issues and retail closures impacting the manufacture of, and demand for, smartphones in China may be temporary in nature. Mobley believes investors should buy shares of Qorvo on any weakness related to Apple's news. He has an Overweight rating and $135 price target on Qorvo's shares.
Meanwhile, Morgan Stanley analyst Craig Hettenbach pointed out that the news could weigh on Qorvo, Skyworks (SWKS) and Qualcomm. He estimates Qorvo has around 30% exposure to China smartphone OEMs, Skyworks has around 10%-15% exposure to China smartphone OEMs, and Broadcom has low single digit exposure to China smartphones. In terms of implications for Micron (MU) and Western Digital (WDC), the analyst sees decelerating smartphone builds as a risk that memory improvement is deferred, and believes they may have the potential to derail the memory recovery if China demand does not come back quickly.
Impacts from nCoV are not limited to Apple, and in fact "one could argue that [Apple]'s largess would perhaps give them priority over others and minimize their impact - it's likely worse for others," Credit Suisse analyst John Pitzer told investors in a research note of his own. The analyst expects that most U.S. semiconductors companies will need to lower first and second quarters guidance albeit lack of near-term clarity suggests negative preannouncements are unlikely until March and perhaps not until the second half of March.
PRICE ACTION: In afternoon trading, shares of Apple have dropped over 2% to $318.06.
