Technology giant Apple (AAPL) was up more than $6 earlier this week, helping to lead US markets higher after positive feelings came out of this weekend’s US/China meeting at the G20 summit in Argentina. While investors are hoping that the recent $14 plus bounce from the late November low will put a bottom in for shares, there are reasons to believe the worst is not yet over.
(Source: Yahoo Finance)
It was only a week ago that there was a major worry that if trade talks broke down between the US and China, President Trump could add a new round of tariffs that would target iPhones, laptops, etc. Over the weekend, the two countries reportedly agreed to a short-term trade ceasefire, but most experts don’t think anything concrete will come soon. Until a firm agreement is reached, there will be the constant risk that if things fall through, President Trump will escalate the situation and follow through with his recent promise.
Apple shares had tumbled more than 27% from a high of more than $233, which was a more than $1 trillion valuation and the largest US company, on fears that iPhone sales were not coming in as hoped. While I previously argued that the situation wasn’t a repeat of what we saw a few years ago, shares at the recent low almost got to the point where the decline was the same. The only good news is that the pullback makes the company’s buyback more powerful, and new investors coming in get a higher dividend yield.
Unfortunately, things don’t seem to be getting better in the near term. After the bell on Monday, Cirrus Logic (CRUS), a supplier that generates a substantial portion of its revenues from Apple, cut its quarterly revenue forecast. Management is now calling for revenues of $300 million to $340 million, down from an original forecast of $360 million to $400 million. That first guidance range was only given on Nov. 1, and itself was a disappointment as the street was looking for more than $419 million.
Apple itself gave a slightly weaker than expected forecast at its most recent report, calling for December (fiscal first) quarter revenues of $89 billion to $93 billion. That forecast would set a new record for Apple, but the street was at the high end going into the report. Since then, the street average has come down by a little more than $1 billion, but it likely is going lower. As you can see in the graphic below, there’s at least one analyst that remains quite positive, expecting almost $101 billion, along with substantial EPS growth.
(All current estimates seen here)
Take that outlier on both the top and bottom lines down to a more realistic number, and throw in more cuts likely to come on the Cirrus Logic news, and it wouldn’t surprise me if the street revenue average is close to Apple’s guidance midpoint by the end of this month. Should we get any weak November numbers from those suppliers that report monthly figures, the street will further pounce on the negativity train.
Apple shares started to recover a bit last week after a company VP talked about the iPhone XR being the best seller every day since it went on sale. That comment isn’t that helpful to investors, because the XR is a lot cheaper than its XS counterparts, and the XR also went on sale more than a month later, so Apple likely sold millions of XS units already. I also doubt there’s anyone who expects the year or two older iPhone models to sell better than the XR as well. Just because the XR is the best-selling currently doesn’t mean it is selling enough to meet expectations.
So while Apple shares have bounced a bit off their recent low, I fear that investors will have another chance to buy at a lower level. The US/China news wasn’t the worst-case scenario over the weekend, but there also isn’t a deal in place just yet. The Cirrus Logic warning also is very worrisome, and it’s likely to lead to more analyst panic and estimate cuts. I would tread carefully in the short term, and if Apple trades back down toward that $170 low, we can look at the situation again then.
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