Shares of Apple (AAPL) are sliding after the iPhone maker warned it will badly miss its quarterly sales forecast, sending the stocks of several of its suppliers into negative territory as well. Following the announcement, both Jefferies analyst Timothy O'Shea and Loop Capital analyst Ananda Baruah downgraded Apple to Neutral-equivalent ratings, while several other Wall Street analysts also cut their targets on the tech giant’s stock.
REVENUE WARNING: Apple said on Wednesday night that it is revising its first quarter revenue guidance to approximately $84B, down from its previously provided view of $89B-$93B. Additionally, Apple now sees gross margin for the quarter of roughly 38%, operating expenses of about $8.7B, and a tax rate of approximately 16.5% before discrete items. The company said in a statement that economic weakness in some emerging markets, particularly Greater China, turned out to have a "significantly" greater impact on revenue than the company had previously projected, and that lower than anticipated iPhone revenue, primarily in Greater China, accounts for all of its revenue shortfall to its guidance and for much more than the company's entire year-over-year revenue decline.
‘BOMBSHELL’ WARNING: In a research note following the announcement, Jefferies’s O'Shea downgraded Apple to Hold from Buy and lowered his price target on the shares to $160 from $225, as "uncertainty grows around the hardware business." The analyst pointed out that Apple's business in China appears to be "rapidly deteriorating" with the revised outlook for iPhone "materially worse" than expected. O'Shea still thinks Apple can build a "massive" Services business over time, but noted that the company has not missed its guide in years. As such, the extent of the fiscal first quarter miss suggests Apple is "navigating uncharted waters," he contended. The analyst now models 185M iPhone sales in fiscal 2019, down 10% from his prior estimate of 206M. Meanwhile, his peer at Loop Capital also downgraded Apple to Hold from Buy and cut his price target to $160 from $225. Analyst Ananda Baruah argued that the announcement "greatly reduces the visibility" of the company's revenue trajectory in the medium term and puts its valuation into question. Further, Baruah warned that sales may be declining through the first half of 2019 since Apple is not looking forward to a material iPhone cycle in the upcoming iteration of the product. Also commenting on the news, Oppenheimer analyst Andrew Uerkwitz told investors in a research note of his own that he believes Apple's negative pre-announcement raises more questions than answers related to China, the future of the company's iPhone and its potential gross margin problem. Uerkwitz remains "solidly" on the sidelines as he continues to believe investors are not pricing in longer-term risks. Not as bearish, Wedbush analyst Daniel Ives reiterated an Outperform rating on the stock. However, the analyst lowered his price target for Apple to $200 from $275 after the company's "bombshell negative pre-announcement" that will be “a defining moment” for years to come. While the Street had been anticipating softness in the December quarter and around March guidance given a slew of negative iPhone XS/XR data points coming out of the Asia supply chain over the past few months, the magnitude of the top-line miss with China demand the culprit was "jaw dropping" and will heavily weigh on shares accordingly, he contended. Other Wall Street firms lowering their price targets for Apple included Wells Fargo, BMO Capital, Needham, DA Davidson, Maxim, Goldman Sachs, Piper Jaffray, Morgan Stanley, UBS, Canaccord, Nomura Instinet, JPMorgan, BTIG, and RBC Capital.
SUPPLIERS UNDER PRESSURE: Maintaining a Cautious View on the Semiconductors sector, Morgan Stanley analyst Craig Hettenbach told investors that the sizeable iPhone miss in China and a weaker China PMI reading this week provide further evidence of a strong downward bias in "the most important growth region for semis." He sees more reasons for investors to reduce exposure to semis, rather than add, ahead of what he expects to be a challenging earnings season. In terms of exposure to Apple, Hettenback said he estimates Skyworks (SWKS) has 45% exposure, followed by Qorvo (QRVO) at about 35% and Broadcom (AVGO) at 15%- 20%. Beyond the companies with the greatest Apple exposure, the analyst also highlighted risks to broad-based suppliers such as Texas Instruments (TXN), Amphenol (APH), ON Semiconductor (ON), NXP Semiconductors (NXPI), Analog Devices (ADI) and Cypress Semiconductor (CY), calling out ON as his top Underweight idea. Meanwhile, B. Riley FBR analyst Dave Kang said he is an "aggressive" buyer of Lumentum Holdings (LITE) on the selloff related to Apple's guidance cut. Apple weakness was already reflected in Lumentum's November pre-announcement, Kang argued, reiterating a Buy rating. Voicing a similar opinion but regarding Cirrus Logic (CRUS), Stifel analyst Tore Svanberg argued that the shortfall pre-announced by Apple had been "strongly foreshadowed" given recent supply chain commentary and is already "largely baked-in" to current Cirrus’ estimates following the company's own pre-announcement on December 3. Svanberg reiterated a Buy rating on Cirrus’ stock.
PRICE ACTION: In late morning trading, shares of Apple have dropped over 8% to $144.71. Meanwhile, Skyworks and Qorvo have slipped almost 8%, Broadcom has slid over 5%, Lumentum has dropped about 7%, and Cirrus and On Semiconductor have slipped nearly 6% each.