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The Worst May Be Over for Apple in China

By Donna Fuscaldo - Mar 13, 2020 at 9:19AM

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Business is returning to pre-coronavirus levels in China, which is music to Apple investors' ears. A return to normalcy means Apple can begin churning out iPhones again.

Apple's (AAPL -1.80%) stock may be taking a beating amid the novel coronavirus outbreak, but with factories in China reopening and staff returning to pre-virus levels, the worst may be over for the iPhone maker in one of its most important markets. 

Apple's performance in China had been off to a rocky start at the beginning of 2019. But by the end of the year, business was booming thanks to the iPhone 11, AirPods, and Apple Watch. Those three products were the reason Apple reported 9% revenue growth in its fiscal first quarter. That all changed in early February, when Apple issued a revenue warning due to the disruptions the coronavirus was causing on the supply chain. 

Most of Apple's manufacturing and lots of demand comes from China. With millions of people quarantined and stores shuttered, it was a foregone conclusion that Apple would suffer. Just how bad the revenue miss will be remains to be seen, but there are signs that business is going back to normal in China, which bodes well for Apple's prospects and its stock. 

Coronavirus sign with Chinese flag in background.

Image source: Getty Images.

Business in China shows signs of life 

Take Foxconn, Apple's main assembler of the iPhone, as one piece of evidence. Last week it told investors it expects to return to full production by the end of March. Foxconn said staffing levels are at 50% capacity less than two weeks after resuming production at its plants. It's not clear what effects coronavirus will have on full-year results, but Foxconn noted the demand drivers, including 5G, remain intact. 

Other signs are emerging that business is returning to normal in China, which means consumers should begin spending again. Alibaba (BABA -2.02%), China's largest eCommerce provider, told Bloomberg its logistics business Cainiao, food delivery service Ele.Me, and grocery chain Freshippo are operating at pre-coronavirus levels.JD.com (JD -0.97%), the Alibaba rival in China, is projecting 10% revenue growth in the current quarter, despite the coronavirus outbreak.  

At the start of this week, Nomura Securities said about 61% of Chinese businesses hit the hardest from the virus have resumed operations. Monday also marked the second day in a row that China reported no locally transmitted cases outside of the Hubei province, ground zero for the outbreak.  In addition to all that, last week Clarkson Platou Securities, a maritime brokerage, said port calls in China are on the mend and have already exceeded last year's numbers. 

Coronavirus will leave its mark 

Even if Apple is out of the woods in China, coronavirus will be a huge hit to Apple's business. The Chinese Academy of Information and Communications Technology (CAICT) said iPhone sales dropped 61% in February, with Apple selling 494,000 units compared to 1.27 million a year earlier. It shipped slightly more than two million iPhones in January. Some Wall Street bears think the sales decline will be even worse. UBS forecast Apple's iPhone sales will be down by 2 million units because of the coronavirus.

Wall Street also expects the launch of Apple's 5G iPhone will be delayed. That smartphone is expected to usher in a supercycle of upgrades as consumers finally have a real reason to purchase a new iPhone. Apple typically launches new iPhones in September, but that could be pushed back at least a month because of the supply chain interruptions. 

Despite the near-term hit and the potential delay of the iPhone 5G, Apple's business should be okay over the long haul. After all, 5G deployment isn't stopping, nor is the demand for devices that can take advantage of that. In China alone, Wedbush Securities estimates 60 million to 70 million iPhone users are ready to upgrade their devices. The Wall Street firm thinks Apple can capture half of those customers beginning in June. Ultimately it may just be a timing issue, with Apple selling more iPhones in fiscal year 2021 than 2020. 

With Apple's stock roughly 15% lower than its peak price in January, and with business getting back to normal in China, investors may want to consider taking a look at the iPhone maker amid the recent sell-off.  

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