Apple (NASDAQ:AAPL) recently warned that it wouldn't meet its second-quarter revenue guidance (for 9%-16% growth) due to the novel coronavirus outbreak in China. It stated that its worldwide iPhone supply would be "temporarily constrained" by manufacturing issues in China and that its store closures and reduced operating hours for open locations would throttle its sales to Chinese consumers.
That warning wasn't surprising since Apple previously announced the closures and its top contract manufacturer Foxconn only brought back about 10% of its workforce after the extended Chinese New Year holiday. Apple's stock dipped after the announcement but subsequently rebounded as investors digested the news.
Many Apple investors likely consider the coronavirus (officially known as COVID-19) outbreak to be a temporary headwind. That's likely true, but that headwind could hurt Apple's smaller suppliers more than the tech giant. Today, we'll discuss the outbreak's potential impact on four of Apple's top suppliers: Jabil (NYSE:JBL), Skyworks Solutions (NASDAQ:SWKS), Qorvo (NASDAQ:QRVO), and Cirrus Logic (NASDAQ:CRUS).
Jabil is a manufacturing company that produces Apple's iPhone and iPad casings. Its orders from Apple accounted for 22% of its revenues in fiscal 2019.
Jabil's revenue from Apple feeds its DMS (Diversified Manufacturing Services) business, which accounted for 39% of its revenue last year. That business also manufactures products for the material sciences, technologies, and healthcare sectors.
The remaining 61% of its revenue came from its EMS (Electronic Manufacturing Services) unit, which produces myriad products across the automotive, industrial, cloud, defense, energy, telecom, retail, and smart home markets. Its other top customers include Amazon, Cisco, and HP.
In Jabil's first-quarter report last December, it estimated that its full-year revenue would rise about 5.5% to $26.7 billion. Citing a "nice start to the year," it also raised its EPS guidance from 16% growth to 21% growth.
Based on those forecasts, Jabil's stock looks cheap at nine times forward earnings. However, Jabil will likely reduce or withdraw that guidance when it reports its second-quarter numbers in mid-March -- so investors should wait for that update to see if it's still an undervalued growth stock.
2. Skyworks Solutions and 3. Qorvo
Skyworks and Qorvo both supply wireless chips for Apple's devices. Skyworks sells a wide range of chips, while Qorvo mainly sells front-end radio frequency (RF) modules.
Apple's orders accounted for 51% of Skyworks' revenue and 32% of Qorvo's revenue last year, so any slowdown at Apple will significantly impact both companies. To make matters worse, both companies rely heavily on Huawei, which faces a slowdown in its Chinese smartphone sales and restrictions stemming from the ongoing trade war between the U.S. and China.
Analysts expect Skyworks' revenue and earnings to rise 4% and 7%, respectively, this year -- which are decent growth rates for a stock which trades at 15 times forward earnings. Qorvo, which also trades at 15 times forward earnings, is expected to generate 6% revenue growth and 9% earnings growth this year. However, investors should expect analysts to slash those estimates if the coronavirus outbreak worsens.
4. Cirrus Logic
Cirrus Logic, which produces audio chips for Apple's devices, relied on Apple for a whopping 78% of its revenue last year. Cirrus has been Apple's longtime supplier, but Apple notably installed Maxim Integrated's (NASDAQ:MXIM) audio codec in its latest AirPods instead of using Cirrus' competing codec -- which suggests that Cirrus investors shouldn't get too comfortable.
Wall Street expects Cirrus' revenue to rise 2% next year as its earnings -- facing a tough comparison to favorable tax benefits in fiscal 2020 -- dip 2%. Those are tepid growth rates for a stock that trades at 21 times forward earnings.
Cirrus' concentrated exposure to Apple enabled its stock to outperform Jabil, Skyworks, and Qorvo by a wide margin over the past 12 months. But as that tide reverses, Cirrus could be pulled further out to sea than those other suppliers.
The key takeaways
I've always argued that it's a better idea to invest in Apple than its suppliers. Apple has a strong brand, a well-diversified business, an expanding ecosystem of subscription services, plenty of cash, and lots of clout to demand lower prices from suppliers. Its suppliers lack those strengths, and they could suffer more than Apple if the coronavirus epidemic spreads.