Apple (NYSE: AAPL) has warned that its iPhone 14 shipments would be hit due to the COVID-19 restrictions in China. Foxconn’s assembly plant in Zhengzhou which assembles the iPhone 14 is operating at “significantly reduced capacity.”
Notably, Apple is among the companies that are worst affected due to the COVID-19 restrictions in China. The company assembles most of its iPhones in the country. Also, the restrictions are negatively impacting the Chinese economy which is hurting sales of smartphones. China is among the largest markets for iPhones.
Apple warns of lower iPhone 14 production
Providing an update on the supply of iPhone 14, Apple said, “COVID-19 restrictions have temporarily impacted the primary iPhone 14 Pro and iPhone 14 Pro Max assembly facility located in Zhengzhou, China. The facility is currently operating at significantly reduced capacity.”
It added, “We are working closely with our supplier to return to normal production levels while ensuring the health and safety of every worker.” China has a strict zero COVID policy and imposes large-scale lockdowns to control the spread. The restrictions have hit the economic activity in the country.
Notably, Chinese stocks rallied last week amid hopes that China would relax its zero-COVID policy. However, there are no signs that China has any intention of relaxing the restrictions even as they have triggered protests in various parts of the country.
iPhone sales have been strong
Global shipments of both smartphones and PCs fell by double-digit in the third quarter. However, Apple said that iPhone sales increased almost 10% YoY to $42.63 billion in the quarter. The metric trailed analysts’ estimates of $43.21 billion though. On the company level, Apple’s September quarter revenues as well as profits beat estimates. Also, it was a new September quarter record in terms of iPhone sales as well as overall sales.
Some analysts were worried about the demand outlook for iPhone 14—especially the lower-priced models—amid the economic slowdown. The question on Apple iPhone 14 demand also featured during the company’s earnings call.
Responding to a question from Credit Suisse analyst Shannon Cross, Apple’s CEO Tim Cook said, “In terms of the new products, the 14 and the 14 Pro and Pro Max, it’s still very early. But since the beginning, we’ve been constrained on the 14 Pro and the 14 Pro Max and we continue to be constrained today.”
Apple reiterates that iPhone 14 demand is strong
While providing the update on iPhone 14 supply, Apple said, “We continue to see strong demand for iPhone 14 Pro and iPhone 14 Pro Max models.” It added, However, we now expect lower iPhone 14 Pro and iPhone 14 Pro Max shipments than we previously anticipated and customers will experience longer wait times to receive their new products.”
During the fiscal fourth quarter 2022 earnings call last month, Apple provided some color on the outlook for the current quarter. For the December quarter, it expects Mac sales to fall. It also said that the overall revenue growth would be lower than in the September quarter. Notably, since the onset of the COVID-19 pandemic in 2020, Apple stopped providing quantitative guidance.
Apple’s holiday sales could be hit
The iPhone 14 production issues have come at possibly the worst time for Apple as it would impact Apple’s sales in the December quarter. The quarter is seasonally strong due to holiday shopping. Notably, there are concerns over holiday shopping in the US amid high inflation.
Amazon is also circumspect about holiday spending. During the Q3 2022 earnings call, Amazon’s CFO Brian Olsavsky said, “we’re realistic that there’s various factors weighing on people’s wallets, and we’re not quite sure how strong holiday spending will be versus last year. And we’re ready for a variety of outcomes.”
Even Peloton is not too bullish about holiday shopping this year. The hiring activity in the US retail and e-commerce industry has also been lower as compared to the last year as retailers brace for a tepid holiday season.
Wall Street is still bullish on Apple stock
Wall Street analysts are generally bullish on Apple stock. Last week, Morgan Stanley reiterated AAPL stock as overweight and said that app store revenues might have bottomed.
In a client note, Morgan Stanley said, “All in, October marked a 4th consecutive month of App Store net revenue declines, although we’re closely watching App Store performance in the month of November to better gauge whether the 1-point improvement in Y/Y net revenue declines in October means declines bottomed in September and can improve into year end.”
Most analysts see Apple as a safe bet amid the global turmoil. The earnings for the September quarter did justify the classification. It impressed markets with its earnings and the stock rose 7.5%, which was its best day since 2020.
Tech stocks posted dismal earnings
It was a tumultuous week otherwise for tech stocks. Cumulatively, Meta Platforms, Microsoft, Amazon, and Alphabet lost $350 billion in market cap that week.
All these companies spooked markets with their quarterly earnings and their shares fell to new 52-week lows.
However, Apple stock plunged last week and had its worst week since 2020 as markets get wary of the production issues in China. So far, Apple’s sales have been largely immune from the economic slowdown. However, the resilience would be tested in the upcoming holiday season when the company might face both demand as well as supply headwinds.
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