In the midst of reports that Apple’s supply chain is set to resume production, we’re reminded the Coronavirus impact will likely affect the June quarter and potentially beyond. That said, we continue to believe this storm will pass, and Apple will be the top-performing FANNG name in 2020.
Tracking Supply
We’ve been tracking lead times for 4 key Apple products in 13 countries over the past month and found the Coronavirus has had a modest tightening of iPhone supply over the past two weeks. This is a change from our observations previous to Feb 17 (the day Apple preannounced March would be below expectations) when we did not measure any impact of Coronavirus on supply.
Recent Changes to Availability
- iPhone (~52% of revenue) availability tightened by an average of 3.5 days, as measured by supply of iPhone 11 64GB and iPhone 11 Pro 64GB.
- AirPods (~4% of revenue) availability surprisingly improved by an average of 2 days given better supply of AirPods Pro. AirPods 2nd gen lead times were unchanged.
Expect Supply to Tighten More
We are starting to see the impact of the slowdown in China supply and assembly on the availability of key Apple products. While over the past two weeks the magnitude of the tightening of supply is less than we would have expected, we believe supply will tighten further in the coming weeks.
Thoughts on 2020 Financial Impact
Taking a conservative view that less supply will push out 3.5 days of revenue from the March quarter for all Apple products, suggests a negative 2% impact to March revenue. More importantly, if the trend continues into the June quarter, with 3.5 days of supply headwind for the entire June quarter, that would reduce revenue by about 4%.
Equally as important, demand will be also be impacted by the conditions, suggesting the negative impact will be greater than 4% in the June quarter and likely the September and December quarters as well. Since this is not currently reflected in the majority of Street estimates, investors should anticipate upcoming downward revisions.
Our Apple Investment Thesis Intact
In the face of upcoming downward revisions in the Street’s Apple estimates, we continue to believe Apple is a must-own name. Our long-term thesis is strengthened by a belief that Apple will come out of this period stronger, given some less-capitalized companies will exit with compromised balance sheets.
Our long-term view is unchanged. Apple’s combination of hardware, software, and services yields a competitive advantage not fully reflected in Apple’s earnings multiple and ultimately share price. Additionally, the upcoming rollout of 5G will be a 3-year boost to iPhone revenue, and the wearables, healthcare, and augmented reality themes will be foundational to expanding Apple’s addressable market over the next decade.