Expect Apple Stock to Suffer When Coronavirus Batters the Top Line

• Apple’s (NASDAQ: AAPL) management severely downplayed the company’s China-related challenges in the earnings call last week.
• The company guided for revenue growth going in the 2nd quarter of 2020, but this is unlikely because of the worsening coronavirus outbreak.
• China is a huge part of Apple’s revenue and supply chain. Coronavirus disruption may lead to a guidance cut.

The Wuhan coronavirus outbreak is getting worse. And American tech stocks with Chinese exposure are feeling the pain. Recently, Apple (NASDAQ: AAPL) decided to shut down all its stores and corporate offices  [Reuters] in China as a precaution against the deadly disease provisionally known as 2019-nCoV.

These actions are dramatically out of line with the positive guidance Apple is providing for Q2 of 2020.

The outbreak will not only cause a drop in Apple’s Chinese sales – but also a major disruption in its supply chain. These two challenges may result in a downward revision to Apple’s guidance and put significant downward pressure on the stock going forward.

Apple Stock Can’t Avoid Coronavirus

Apple is America’s largest company, but it is increasingly reliant on China to hit its revenue targets.

The Asian nation made up around 15% of Apple’s revenue in the 1st quarter of fiscal 2020  [Apple 10-Q]. On top of this, the company relies on a network of Chinese partners for its hardware supply chain. According to CEO Tim Cook  [Apple.com], it even has some suppliers in the hard-hit Wuhan area.

Patrick Moorhead, an industry analyst from Moor Insights & Strategy, believes supply chain disruption is a foregone conclusion for Apple  [SCMP].

“I can’t imagine a scenario where the supply chain isn’t disrupted,” said veteran industry analyst Patrick Moorhead of Moor Insights & Strategy. “If there’s one major hiccup in the raw materials, fabrication, assembly, test, and shipping, it will be a disruption.”

Apple’s Q2 Guidance Was Too Optimistic

Apple provided a wide guidance range for Q2 of fiscal 2020 – a period that ranges from January to March.

Management is forecasting  [Apple.com] revenue of between $63 billion and $67 billion with a gross margin of between 38-39%. This represents significant growth from the prior Q2’s  [Apple.com] revenue of $58 billion with a gross margin of 37-38%.

To put this in perspective, Apple believes it will grow revenue in a period of time when one of its core markets is reeling from an intensifying virus outbreak. They also believe they will improve gross margins during a period of supply chain disruptions.

It’s a tough sell.

While Apple tends to give accurate guidance, this wouldn’t be the first time the company was forced to cut projections over challenges in China.