China’s Covid lockdowns an ‘absolute gut punch’: Analyst

COVID lockdowns at Apple’s (AAPL) main iPhone 14 Pro and iPhone 14 Pro Max plant in Zhengzhou, China, are hitting the company at what’s arguably the worst possible time. The holiday season is Apple’s most important time of year, as consumers buy up new iPhones, Apple Watches, and iPads for friends, family, and themselves.

The lockdowns at the plant in Zhengzhou mean that Apple might not have enough iPhones to meet demand this year, which could significantly impact the company’s bottom line.

The news follows Apple’s mixed Q4 results, in which the company reported record revenue but saw a $40 million miss on iPhone revenue and $800 million miss on services revenue.

“After battling the macro headwinds and delivering a strong September quarter/guidance in a stark contrast to the rest of Big Tech, this latest zero-COVID situation is an absolute gut punch for Apple in its most important holiday quarter,” Wedbush analyst Dan Ives wrote in an investor note.

Throw in soaring inflation, rising interest rates, and general unease throughout the economy, and Apple’s holiday quarter could be a serious letdown.

Apple’s holidays not looking so bright

Like most consumer tech companies, the holiday season brings in huge amounts of cash for Apple. Consumers eager to get their hands on the latest iPhones order online and head to stores in droves, gooseing the company’s revenue and sales numbers at the same time every year.

To say Apple’s iPhone is the company’s breadwinner is an understatement. In 2021, Apple reported Q1 revenue of $123.9 billion, of which about 57%, or $71.6 billion, came from iPhone sales. For the full year, the iPhone accounted for 52% of Apple’s total revenue of $394.3 billion.

NEW YORK, NY- September 16: View of the Apple Store during today's iPhone 14 launch at Apple's 5th Avenue store in New York City on September 16, 2022. Credit: RW/MediaPunch /IPX

Apple’s iPhone could face supply shortages this holiday season. Credit: RW/MediaPunch /IPX

The lockdown at the Zhengzhou plant, however, means that Apple could have fewer iPhones available for holiday shoppers. What’s more, because the facility manufactures Apple’s pricier iPhone 14 Pro and iPhone 14 Pro Max, customers who can’t get their hands on Pro models might opt for the less expensive iPhone 14 and iPhone 14 Plus. As a result, consumers would spend less on their smartphones than Apple would otherwise like.

“Our checks suggest that the Zhengzhou facility is running at about 50% utilization rate and aiming to ramp to 70% in the last two weeks of Nov. and back to a full rate in Dec.,” BofA Global Research analyst ​​Wamsi Mohan wrote in an investor note.

“We estimate a 5-6 [million] unit disruption in supply if the situation does not deteriorate further,” he added.

The iPhone will still power sales the rest of the year

While China’s zero-COVID policy might hurt Apple in the near term, analysts don’t see the problem as a serious threat in the long term. After all, consumers still want to get their hands on iPhones regardless of when they’re able to buy them.

“While the Zhengzhou and Foxconn situation in China remains an ongoing albatross for Apple, our positive thesis on the demand story during this economic dark storm for Apple remains unchanged and would-be buyers on any knee-jerk weakness this morning as the Street digests this news,” Ives said in his note.

In the longer term, though, Apple’s production challenges will likely be nothing more than blip, as the company continues to grow its product lines and, potentially, expand into the AR/VR space with its own headset.

“What’s going to matter in the near-term, and certainly for the longer term is demand for the products is health,” Daniel Flax, senior research analyst at Neuberger Berman, told Yahoo Finance.

“The Pro and the Pro Max, good initial reception as the product cycle gets underway. If Apple is able to continue executing on its product cycles, I think the next one to two years will be a good time for Apple and a good time for their shareholders,” Flax added.

As for the holidays, we’ll have to wait until Apple reports its Q1 earnings sometime in late January to find out how much the lockdowns hurt sales.

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2022-11-07 14:24:25

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