Apple’s Q2 2020 warning: What the analysts are saying

Most claim to be unsurprised. So far, no targets lowered.  UPDATE: Spoke too soon. At least three Apple analysts lowered their price targets. See below.

apple warning analysts sayingExcerpts from the notes I’ve seen, new ones up top:

Katy Huberty, Morgan Stanley: COVID-19 Impacts Revenue Timing but Not FY20 Estimates. Notably, 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… 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… We are buyers on weakness and fully expect Apple to take advantage of any pullback to repurchase more shares. Overweight. $368.

Timothy Arcuri, UBS: March Guide Off the Table – Supply and Demand Impact Unknown. Our price target is based on ~21x (unchanged) our C21 EPS estimate (unchanged). AAPL continues to trade at ~22x NTM and multiple compression has been modest despite the virus fears. We think investors are likely viewing the situation as temporary and a higher multiple versus history looks justified given healthy iPhone upgrades with 5G, foldable, material runway for Wearables growth given low attach-rate, and traction of new services. AAPL is expensive relative to history, but not relative to large cap technology stocks. Buy. $355.

Toni Sacconaghi, Bernstein: Coronavirus Pre-announcement – Our Thoughts. In some ways, the announcement is not entirely a surprise, given Apple’s very high production exposure to China (~70% of revs manufactured in the country) and sales into China (17% of revenues are generated from Greater China). That said, AAPL stated 3 weeks ago that it felt it could manage the issue, and built cushion into its guidance to account for the impact… It is hard to know whether AAPL’s revenue shortfalls this quarter will ultimately be “pushed out” to future quarters, or “lost”. We suspect a bit of both. While Apple emphasized the shortfall did not reflect weakness in fundamental demand, it does highlight the transactional nature of Apple’s business and its dependence on China – given this is the second preannouncement largely due to China in 13 months – and risks putting some incremental pressure on Apple’s multiple, which has inflated over the last 12 months. Market perform. $300.

Kyle McNealy, Jefferies: Stay Focused on the Bigger Picture. The biggest constraint on output at this point is labor. The ramp-up at factories is therefore dependent on when workers return from the extended Lunar New Year holiday and any stay periods lapse. Industry research firm Counterpoint estimates that Foxconn reopened on Feb. 10th with 40% of the labor force and Pegatron opened with 80%. These labor force percentages will gradually increase to full strength but that could take until the end of the February at the earliest. We assume a production split of 58% for Foxconn, 39% for Pegatron, and 3% for Wistron. We also assume production started at the above labor force percentages on Feb. 10th and ramps linearly to 100% at the end of February. This scenario translates to an incremental -6.5% impact to March quarter Product sales versus our previous model assuming production started closer to full capacity after Feb. 10th. Buy. $370.

Rod Hall, Goldman Sachs: Negative pre-announcement as COVID-19 affects both supply and demand. We assume that, as with every other company operating in China, the situation on the ground continues to evolve for Apple. We are reducing our forecasts for both the March and June quarters but we see this as a temporary issue for Apple. In the case of the June quarter we are assuming that effects are mainly supply oriented as expected new products like the SE 2 and iPad Pro potentially push out and Apple finds itself without enough inventory more broadly. On a positive note, we are increasing our unit volume expectations for both the September and December quarters this year as we equally assume that some lost early year demand materializes later as new devices launch. Neutral. $300. 

Michael Olson, Piper Sandler:  Coronavirus Impacts iPhone Supply & Local Product Demand. We are lowering our estimates for the Mar-20 quarter, but leaving estimates for all other future periods unchanged. 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. Looking at the remainder of FY20, current iPhone demand (outside of China) appears to be strong, non-iPhone (especially wearables) remains solid and anticipation is growing for 5G iPhones. Overweight. $343.

Samik Chatterjee, J.P.Morgan: Update iPhone Volume Forecast on Near-term Impact of nCoV; Long-term Outlook Remains Unchanged. While we continue to remain bullish on the strong demand for 5G enabled iPhones expected to launch later this year for Apple (2020 product cycle), in conjunction with Apple’s pre-announcement in relation to continuing challenges stemming from nCoV outbreak on both domestic demand and global supply, we are now moderating our near-term iPhone volume… We expect most long-term investors in Apple shares to look past these temporary headwinds, with both products and services continuing to demonstrate strong underlying consumer demand. Overweight. $350.

Amit Daryanani, Evercore: March-qtr Negative Pre = June-qtr Positive Pre? Stay LONG. In aggregate, demand for AAPL products will just shift from March-qtr to the out quarters (June & Sept) as it is unlikely that customers seeking AAPL product will go out and buy non-AAPL products. Net/net: We think the negative update to March-qtr is largely expected and given this is more [of a] supply issue, it creates upside potential to June/Sept. Outperform. $365. 

Daniel Ives, Wedbush: Apple Revenue Guidance Range Off the Table Due to COVID-19 Impact. This unexpected news confirms the worst fears of the Street that the virus outbreak has dramatically impacted iPhone supply from China/Foxconn with a demand ripple impact worldwide. While we have discussed a negative iPhone impact from the coronavirus over the past few weeks, the magnitude of this impact to miss its revenue guidance midway through February is clearly worse than feared. While the knee jerk reaction will be negative tomorrow 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 on the name. Outperform. $400.

Gene Munster, Loup Ventures: COVID-19 Disrupts March, Long-Term Intact. Given the black swan nature of COVID-19, this disappointment should be kept in the context that this is not as negative as the Dec-18 miss.Bottom line: The duration of the impact of COVID-19 is unknown and we believe, eventually, Apple’s business will return to normal in China and the company will resume its 5% plus revenue growth cadence.

Neil Cybart, Above Avalon: Apple Removes 2Q20 Guidance Due to Coronavirus. It is certainly possible, maybe we should say likely, that customer demand is coming in weaker than Apple management thought just three weeks ago. However, my suspicion is that weaker demand is not the major driver in management removing its 2Q20 revenue guidance. Apple management had a few days dealing with coronavirus under its belt when it provided guidance back on January 28th. While Apple wouldn’t like to admit this, the company could have shipped a million or two extra iPhones into the channel at quarter end to compensate for weaker demand in China… Rumors are building that Apple is close to releasing a successor to the iPhone SE. In a situation where Apple has no choice but to push back an iPhone launch by a few weeks, the company would be looking at launching in 3Q20 instead of 2Q20. That on its own would probably be enough for a guidance revision.

Ben Bajarin, Tech.pinions: Corona Virus Impact Update. Talking with contacts in the manufacturing supply chain, factories had to have a 14-day quarantine for employees coming back from certain regions of China after the Chinese New Year. Most factories did not even allow employees to come back to work until Feb. 10th, at which point most factories did not see a full workforce return due to quarantines… Yes, this is a short term blip, but it may go longer than even the March quarter. As companies seek to re-ramp their supply chain and meet demand, they have a lot of catching up to do. Some companies are likely to manage this better than others, but I’ve already heard concerns products may be delayed or in short supply even into the holiday season of 2020.

Chuck Jones, Forbes: Apple Withdraws Its March Quarter Revenue Guidance Due To The Coronavirus. Assuming that revenue comes in at $60 billion with gross margins able to hit the guidance low-end of 38%, bottom-line EPS should be about $2.57 vs. the Street’s $3.00. This is a major miss to earnings, and the stock could very well fall by 5% or more, especially since there is no good timeline on when life and business in China should be back to normal. However, if the impact from the virus starts to lessen in the next few weeks I expect most investors to look at this as a one-time event.

UPDATE: Lowered price targets.

Tom Forte, DA Davidson: Buy. Price target to $370 from $385.

Shebly Seyrafi, FBN: Outperform. Price target to $340 from $350. 

Tim Long, Barclays: Equal Weight. Price target to $297 from $304. 

8 Comments

  1. David Drinkwater said:
    My take as a long-term investor is to shrug my shoulders, but if I were chasing money, I will acknowledge that I missed an opportunity to sell and re-buy. (Since I have a Chinese supply chain, I have extra insights.). We all will see what tomorrow holds.

    Personally, though, I wish quarter to quarter results were deprecated vs predicted results 8 quarters from now. (Yes, FUTURE results.)

    1
    February 17, 2020
  2. Gianfranco Pedron said:
    Oh come on! I can’t believe not even ONE analyst has set their hair on fire, stampeding towards the exit trying to stir anxious investors into a selling frenzy.

    Sounds like somebody changed the rules of the game.

    Bummer.

    1
    February 17, 2020
    • David Emery said:
      Yeah, but some like perennial laggard Toni and Rod Hall are still underwater.

      0
      February 19, 2020
  3. Bart Yee said:
    So Forbes says if Apple, because of the external Coronavirus event, has reduced revenues of $60B given everything else stays the same, EPS would be around $2.57 compared with the “current, uncorrected” (my emphasis) Street estimates of $3.00, well that would be a major miss.

    Sure, Apple tells us the real impact, ending speculation by the financial and investor community. But then Wall Street will still judge Apple with unrevised criteria, holding Apple to previous estimates? Were the estimates so conservative that Coronavirus was figured in already? That’s just setting up Apple and AAPL to fail.

    Suggests that without revisions, the analysts are unable to do their jobs, which is to do research, analysis and gauge or predict impacts to the company. Where’s all those channel checks, production insiders, retail store reviews, etc.?

    2
    February 17, 2020
    • Gregg Thurman said:
      So Forbes says if Apple

      Chuck Jones? The original plagerizing regurgitator hasn’t had an original thought in years.

      2
      February 18, 2020
  4. Gregg Thurman said:
    11:44 PM EST
    ASX200 (Australia) +0.11%
    NZX50 (New Zealand) +0.49%

    NIKKEI (Japan) -1.25%
    Shanghai (China) -0.39%
    Hang Seng (Hong Kong) -1.39%
    KOSPI (Korea) -1.38%
    TAIEX (Taiwan) -0.83%

    Europe not yet open.

    1
    February 17, 2020
  5. Paul Brindze said:
    Frankfurt AAPL opened down less than 5%

    1
    February 18, 2020

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