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Apple iPhone Shipments to Get Hit by Coronavirus Outbreak

By Evan Niu, CFA - Feb 4, 2020 at 6:00AM

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The Mac maker has now closed all of its stores in China as a precaution.

Investors can't say Apple (AAPL 0.29%) didn't warn them about the potential impacts from the coronavirus outbreak that China is grappling with. When the Mac maker released its blowout Q4 earnings report last Tuesday, the company cautioned that the epidemic would create "greater uncertainty" in the first quarter. As a result, Apple's revenue guidance included a wider range than usual ($4 billion).

Over the past week, the situation has evolved rapidly.

Exterior of Pudong Apple Store at night

Apple has now closed all of its retail stores in China, including this one in Pudong. Image source: Apple.

iPhone volumes could take a 10% hit

As the number of confirmed cases and deaths continues to rise and public health officials the world over struggle to contain the outbreak, companies are also responding with efforts to reduce the contagion risk. As of a week ago, Apple had restricted business travel and closed just one of its retail stores in the Middle Kingdom, among other actions. Over the weekend, Apple shuttered all of its remaining retail stores in China, as well as its corporate offices and other locations.

Apple provided a statement to Bloomberg's Mark Gurman:

Our thoughts are with the people most immediately affected by the Coronavirus and with those working around the clock to study and contain it. Out of an abundance of caution and based on the latest advice from leading health experts, we're closing all our corporate offices, stores and contact centers in mainland China through February 9. Apple's online store in China remains open. We will continue to closely monitor the situation and we look forward to reopening our stores as soon as possible.

Widely followed Apple analyst Ming-Chi Kuo of TF International Securities has now put out a research note to investors that cuts iPhone shipment estimates in the first quarter by 10%, citing supply-chain disruptions that are expected to impact iPhone production. "Our latest survey indicates that the iPhone supply is being affected by the coronavirus and, therefore, we cut the iPhone shipment forecasts by 10% to 36-40 [million] units in 1Q20," Kuo wrote.

CEO Tim Cook had confirmed that the tech giant does have suppliers in the Wuhan area, but it has alternate sources for those components. "And we're obviously working on mitigation plans to make up any expected production loss," the executive told investors. Shortly after Cook's statements, Foxconn said it would "continue to meet all global manufacturing obligations."

However, Reuters reported yesterday that Foxconn has ceased production at "almost all" of its facilities in China through Feb. 10, which would clearly have an adverse impact on Apple. Foxconn operates the largest iPhone production plant in the world around 300 miles north of Wuhan. The contract manufacturer is hoping to mitigate disruptions by increasing output at other factories it operates in other countries outside of China, according to the report.

Given how quickly conditions are changing, Kuo added that it would be "difficult to predict" how iPhone volumes in Q2 could be affected. (Just look at how things have changed over the past week -- and the second quarter is still about two months away.)

Don't be surprised if Apple ends up reporting first-quarter revenue near the low end of its guidance as the outbreak continues to take a toll on global economies and consumer sentiment.

Evan Niu, CFA owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has a disclosure policy.

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