Apple generates roughly 80% of its revenue from its hardware business. Expecting App Store purchases to make up for the decline in the hardware business is downright ridiculous.
Stock markets across the globe have shrugged off coronavirus fears. Massive central bank intervention has calmed investors’ nerves. The fact that the Chinese economy has come to a standstill doesn’t seem to matter. Factories are shutting down indefinitely, and millions of people are quarantined. But that didn’t stop Morgan Stanley analyst Katy Huberty from suggesting that the coronavirus is bullish for Apple (NASDAQ: AAPL) stock.
Huberty reiterated an overweight rating on Apple stock. But her reasoning deserves a couple of eye rolls. Here’s what the Morgan Stanley analyst said,
While much of the investor focus on Coronavirus with respect to Apple has been on the potential negative impact the outbreak may have on the company’s hardware sales in China, we believe the App Store could possibly experience a tailwind from the actions taken to limit the spread of Coronavirus, as millions of Chinese consumers are spending more time at home and seeking alternative means of entertainment.
Suggesting that Apple will benefit from the spread of the coronavirus is not only stupid but also grossly insensitive. If her reasoning were factually accurate, buying Apple would be more morally outrageous than buying sin stocks. But she’s wrong, and here’s why.
The number of coronavirus infections and deaths in China is mounting daily. The Chinese government has been trying to downplay the calamity by allegedly under-reporting the cases. But their actions suggest that the situation is much more severe.
Despite claiming they have the situation under control, the government has been rapidly building new hospitals.
Many viral videos on Twitter also suggest that the situation is grimmer than what is being let on.
Densely populated cities like Shanghai have started resembling a post-apocalyptic ghost town.
It’s no surprise that Apple decided to close all China stores and corporate offices through Feb. 9. Worse, even major Apple supplier and iPhone maker Foxconn chose to stop all production for “at least” another week.
But given that the official cases of coronavirus are still rising, it’s highly likely that these shutdowns will become indefinite.
While the shutdowns may lead to higher App Store sales, overall, it’s not good news for Apple. Apple generates roughly 80% of its revenue from its hardware business. Expecting App Store purchases to make up for the decline in the hardware business is downright ridiculous.
Apple’s hardware business will take a massive hit due to the pandemic. Apple mostly makes luxury products, and people won’t be buying them in a time of crisis.
Essentials like face masks are already in short supply. This has led to skyrocketing prices, and as the situation gets worse, prices will only go up.
At a time when people are not going to work, relying on their savings and inflation is running amok, I don’t see them shelling out cash on Candy Crush, let alone the latest iPhone.
So, despite what sell-side analysts like Katy Huberty think, the coronavirus outbreak is a substantial net negative for Apple.
Disclaimer: The above should not be considered trading advice from CCN.com.
This article was edited by Gerelyn Terzo.
Last modified: February 6, 2020 2:59 AM UTC