COVID-19 Disrupts March, Long-Term Intact

COVID-19 Disrupts March, Long-Term Intact

First things first – the real impact of COVID-19 is on the individuals affected.

Apple announced they will miss March guidance based on COVID-19 affecting demand for Apple’s products in China and dampening global iPhone supply. Outside of China, the company indicated “customer demand across our product and service categories has been strong to date and in line with our expectations.” 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.
  • The low probability near-term risk is even though global demand is strong for Apple products, China needs to get back on its feet or the company will eventually not have adequate supply and risk losing sales. We believe greater than 60% of Apple’s revenue is somehow impacted by the China supply chain or manufacturing in the region.
  • While the company did not outline the specifics of the Mar-20 financial impact, our best estimate is March quarter revenue will likely fall between $58B-$60B, below the Street at $65.3B and below the low-end of the company’s March guidance estimate of $63-$67B.
  • Our revised estimate is based on a combination of Greater China accounting for 12% of revenue, compared to our previous expectation of 17% of revenue, along with tighter iPhone supply in the back half of the quarter negatively impacting Apple’s ability to fulfill global demand.
  • We’ve been tracking iPhone availability in 13 countries and have yet to see any measurable disruption in estimated shipping times. This leads us to believe Apple has now drawn down its channel inventory, and we’ll begin to see lengthening online lead-times in the weeks ahead.

The Case for a Higher Multiple

For the past two years, we’ve believed Apple should trade at least in line with other large-cap tech companies given its combination of hardware, software, and services that drives more predictable revenue. Tonight’s news, at first take, appears to be a setback for our higher AAPL multiple case, given hardware needs to be manufactured which adds an element of risk different than online-only business. In fact, many online businesses are being impacted by COVID-19, including Alibaba which, last week, warned that the outbreak is developing into a “black swan event,” mentioning the virus 15 times on their earnings call. Putting it together, we continue to believe that Apple’s diversified product and service line should be valued in line with Google, Microsoft, and Facebook which currently trade at higher multiples.