China’s Covid lockdowns are an ‘absolute punch’: analyst

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

The Zhengzhou factory closures mean Apple may not have enough iPhones to meet demand this year, which could have a significant impact on the company’s bottom line.

The news comes on the heels of Apple’s mixed fourth-quarter results, in which the company posted record revenue but saw a $40 million shortfall in iPhone revenue and $800 million on service revenue.

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

Add to that runaway inflation, rising interest rates and general malaise across the economy, and Apple’s holiday quarter could be a serious disappointment.

Apple’s Holidays Don’t Look So Brilliant

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 are ordering online and flocking to stores, exploding the company’s turnover and sales at the same time every year.

To say Apple’s iPhone is the company’s breadwinner is an understatement. In 2021, Apple reported first-quarter 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.

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

However, the Zhengzhou factory lockdown means Apple may have fewer iPhones available for holiday shoppers. Additionally, since the factory makes Apple’s most expensive iPhone 14 Pro and iPhone 14 Pro Max, customers who can’t get their hands on the Pro models can opt for the cheaper iPhone 14 and iPhone 14 Plus. As a result, consumers would spend less on their smartphones than Apple would otherwise like.

“Our audits suggest that the Zhengzhou facility is operating at around 50% utilization and aims to reach 70% in the last two weeks of November and return to full capacity in December,” Wamsi said. Mohan, BofA Global Research analyst. written in an investor note.

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

The iPhone will continue to drive sales the rest of the year

While China’s zero COVID policy could hurt Apple in the short term, analysts don’t see the issue as a serious long-term threat. After all, consumers still want to get their hands on iPhones, no matter when they can buy them.

“While the Zhengzhou and Foxconn situation in China remains a permanent albatross for Apple, our positive thesis on the demand story during this dark economic storm for Apple remains unchanged and potential buyers on any instinctive weakness this morning as the rue is digesting this news,” Ives said in his memo.

Longer term, however, Apple’s production challenges are likely to be little more than a blow as the company continues to expand its product lines and potentially expand into the AR/VR space. with his own helmet.

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

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

As for the holidays, we’ll have to wait until Apple releases its first quarter results in late January to find out how badly the lockdowns hurt sales.

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Do you have any advice? Email Daniel Howley at dhowley@yahoofinance.com. Follow him on Twitter at @DanielHowley.

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