Shares in Apple (US:AAPL) shed 2 per cent on 18 February as the coronavirus outbreak forced the group to warn on revenue for the second time in little over a year. The tech giant scrapped its earlier guidance for the three months to March, explaining that the disease was hitting it harder than expected. It did not provide updated estimates.
First, Apple said that the supply of iPhones worldwide will be "temporarily constrained", because – while its manufacturing partner sites are located outside of the virus's epicentre, Hubei province – these are "ramping up" more slowly than anticipated since reopening. Second, demand for products in China has been affected by store closures. Greater China comprised 17 per cent of Apple's net sales for the 2019 financial year.
Guidance for the quarter a few weeks ago had already attempted to take into account a potential knock from the virus, now known as Covid-19. Apple had forecast revenue anywhere between $63bn (£48bn) and $67bn, which chief financial officer Luca Maestri conceded was “wider than usual”. Now it seems that the company will miss this $4bn ballpark.
Investors may be experiencing a sense of déjà vu: just last year, Apple lowered its guidance because of conditions in China. Chief executive Tim Cook wrote in a letter to investors on 2 January 2019 that the company had not taken into account “the magnitude of deceleration” in the Chinese economy, exacerbated by trade tensions with the US.
While the trade war has since made some progress, the start of 2020 has seen investors all over the world struggle to identify the impact of Covid-19 not only on the Chinese economy, but also on global supply chains. Markets had, so far, remained relatively buoyant on the hope that there will be limited collateral damage and that central banks will step in if necessary.
But the reaction to Apple’s warning confirmed its status as a bellwether for the global supply and demand of goods. Following the update, the US's S&P 500 index slumped 0.6 per cent and the tech-heavy Nasdaq slid 0.4 per cent. Markets in Asia tumbled, with Hong Kong’s Hang Seng down 1.5 per cent, and the Japanese Topix down 1.3 per cent.
China had represented one of Apple’s greatest opportunities, with a rising middle class and enormous scale for cheaper labour. Now the country is ostensibly one of its greatest challenges. The impact of the virus outbreak in the country has rippled down to other businesses exposed to Apple – hurting semiconductor companies in particular. Dialog Semiconductor (GER:DLGX) saw its shares slide as much as 4 per cent following the revenue warning.
Apple’s peers that do not rely principally on hardware sales have been more protected. Take Amazon (US:AMZN), whose cloud computing arm Amazon Web Services (AWS) contributed two-thirds of the group’s overall operating income for the October-December period. It is true that Apple is putting more emphasis on its services, but the division – while growing faster than products – still only accounts for a relatively small part of net sales: 18 per cent last year.
As the number of reported cases of COVID-19 moderates, investors may move in to buy the dip. The worlds’ central banks are poised to cushion the blow – the People’s Bank of China cut the rate on its medium-term lending on the day before Apple's revenue warning. While the virus has certainly highlighted the vulnerabilities in the the group's finely-tuned supply chain, it seems unlikely that the disruption will erode the value of one of the world’s largest companies in the long term.
Bank of America cut its revenue forecast for Apple's 2020 fiscal year by 2.4 per cent from $286bn to $279bn.
