COVID-19: How the Virus Can Hurt Your Portfolio

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Apple, among several other corporations around the world have been strongly hindered by the outbreak of COVID-19, also known as coronavirus, across the globe.

During this past week, the S&P 500 Index took a negative shock of 0.4%, from its $3379.55 aggregate value, predominantly due to the investors’ concerns that the coronavirus epidemic will affect the markets. This includes major businesses such as tech giant, Apple. Just yesterday, the stock dropped over two percent, yet the company’s market is still at a high worth of over a trillion dollars. Nevertheless, many investors and analysts are citing the lack-luster revenue targets, as a result of coronavirus as the central cause of the change in the stock market.

Coronavirus is a highly contagious respiratory illness first discovered in Wuhan, China that has become so widespread that it has been labelled  a global health emergency. With more than 2,000 people dead from the coronavirus worldwide, the bulk of which are in China, there have been over 71,000 confirmed cases of the disease worldwide. China’s response to this epidemic was to shut down the areas most heavily affected by the coronavirus, which brought companies’ production to a halt, including Apple’s manufacturing set up in the area.

Tim Cook, Apple’s CEO, announced last week that several Chinese factories would remain closed until later notice with about 42 Apple stores located in China also closing temporarily , including one within the affected region.He also restricted employee travel altogether. Not only will these actions hinder overall sales for Apple products; some speculate that the company may face zero sales in China. Although under 10% of Apple stores are located physically in China, the nation contributes 17% to the tech company’s total sales.According to Citi, “each week of no China sales is $850 million of sales or a reduction of -1.3%. Should the situation elongate to a month it would represent $3.4 billion or a reduction of -5.2%” for Apple’s total sales.

“As Apple depends on a network of Chinese partners for its hardware supply chain, including those in the Wuhan area, it will most likely not see the same financial success as in the previous quarter wherein China alone made up approximately 15% of the company’s revenue.”

Even though Apple stated that online stores will remain open, Citi believes that the deliveries may be reduced or obstructed due to the manufacturing predominantly done in mainland China — specifically about half of Apple’s total 775 supply vendors.

As Apple depends on a network of Chinese partners for its hardware supply chain, including those in the Wuhan area, it will most likely not see the same financial success as in the previous quarter wherein China alone made up approximately 15% of the company’s revenue. Apple’s management published a forecast of the company’s expected revenue in the upcoming quarter ranging from January to March. The announcement claims that the revenue will be between $63 and $67 million with a gross margin of between 38-39%, which is a significant growth compared to the prior second quarter.

In other words, Apple believes that even with one of its core markets struggling with an outbreak of a dangerous illness, the company will continue to grow in revenue during this period of time. Moreover, the tech company claims that their gross margins will improve while supply chain disruptions occur. 

While some reputable analysts believe Apple’s recovery from the impact of the coronavirus outbreak is slim, others claim that if the company is able to return its supply chain back to regular operations by mid-February, then the potential ramifications will be minimal.”

In fact, one of the top analysts, Ming-Chi Kuo of TF International Securities, predicts that the coronavirus will further negatively affect Apple’s success, especially with the supply and demand for new products expected to launch in September as usual. As Kuo expects lowered product shipments overall in the region, as well as large-scale production risks in the factories that produce the Apple products, he believes that the launch will be postponed at the end of the day. In addition, Kuo notes that the restricted employee travel will not allow many U.S.-based engineers to come to China to perform validation tests, which will become yet another factor in pushing back the launch date of Apple’s new line of products. Just last week, Kuo cut his iPhone shipment forecast for the first quarter of the year 2020 by 10%, citing the coronavirus as the root of the decision.

While some reputable analysts believe Apple’s recovery from the impact of the coronavirus outbreak is slim, others claim that if the company is able to return its supply chain back to regular operations by mid-February, then the potential ramifications will be minimal. In fact, multiple companies, such as Dow Jones, Disney, Uber, and Chipotle (to name a few) have recovered from this week’s major scare of the coronavirus negatively impacting the market and overall businesses. In general, the Dow Jones has risen nearly 1500 points (since the virus began having market effects) despite the drastic drop in stock from a variety of corporate companies due to the virus.

Apple may be on thin ice due to the massive effect of the coronavirus epidemic on the production, sales, and testing of their current and new products; however, the illness is not the end-all-be-all for the company and as we’ve seen many times before, it’s likely that their overall financial success will continue.

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