The Warning Heard Round The Market
Apple (AAPL) made big headlines on Monday when it issued a profit warning. The maker of iPhones, iPads, Watches and every other kind of hot consumer technology says the coronavirus is having an impact on production and demand. This spells bad news for Apple’s revenue in China and its ability to meet demand everywhere else. The company had been looking for revenue in the range of $63 to $67 billion, it now offers no guidance and share prices are suffering.
“ ... 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… These iPhone supply shortages will temporarily affect revenues worldwide."
“... 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.”
And Apple’s Not The Only One
Apple is not the only company that will see its Q1 revenue suffer. The entire supply chain is already moving lower on the new. Broadcom (AVGO), Qorvo (QRVO), and Skyworks Solutions (SKWS) are among today’s biggest losers. Apple accounted for 20%, 30%, and 10% of annual revenue last year and will have no small impact on their bottom lines. Broadcom is especially vulnerable, it just signed a new deal with Apple that effectively doubles its exposure.
And it’s not just Apple and its supply chain. It is every company with business or operations in China. They are going to take a hit on revenue and earnings simply because China has been and largely still is on lock-down. With nearly 80% of the S&P 500 Q4 earnings reports in the bag, about 40% of them talk about the impact of the virus on business.
The sectors most concerned about the virus are the Industrials (XLI), Information Technology (XLK), and the Healthcare Sector (XLV). Apple, as we all know, is a very prominent member of the Information Technology Select SPDR at 20% of the portfolio. While most companies say it is too early to quantify the impact of the virus on revenue earnings 25% of them have already lowered guidance.
The Earnings Growth Outlook Is Under Pressure
The outlook for Q1 2020 and full-year 2020 EPS growth was already under pressure. The consensus for 2020 EPS growth is down 400 basis points over the last year and the pace of downward revision is accelerating. The consensus for Q1 2020 EPS growth has been in free-fall since the middle of last year and dangerously close to 0.0%. At the current pace of decline, I expect Q1 EPS growth to turn negative before the reporting cycle begins. If that happens it could spark the long-awaited broad-market correction so many analysts (like myself) think is overdue.
Apple: The Technical Outlook Is Still Bullish
Apple shares fell on the revenue warning but the outlook remains bullish. Today’s decline shaved 2.5% off of the share price, far less than it could have, and support is evident at the short-term moving average. The moving average has been a driver of upward price action since the middle of 2019 and should continue to do so in the near-term.
Looking at price action, the market is consolidating around the $320 level where it will likely remain until the virus is contained or Q1 results are released. Apple will report Q1 results at the end of April. Until then traders need to watch the $304 level for support and the $328.50 level for resistance. If prices should fall below support I would look for a buying opportunity to develop. The long-term outlook for Apple and S&P 500 earnings remains bright, the coronavirus will go away sooner or later.