The novel coronavirus outbreak is turning out to be a big problem for companies all over the world, including Apple (AAPL 0.64%). The smartphone giant has already warned that its fiscal second-quarter performance would fall short of expectations as a result of the fallout from the COVID-19 virus -- but things could be worse than expected, at least going by the latest news out of China.
Citing Chinese government data, Reuters recently reported that Apple sold just 494,000 iPhones in the country in February. That was a steep decline from the 1.27 million units the company had shipped in the prior-year period and the two million units sold in January. The situation was bad across the board, as overall smartphone shipments fell 54.7% annually during the month, according to the China Academy of Information and Communications Technology.
Investors reacted negatively to this news, and Apple has not been spared from the broad market fallout. However, the worst part is that this may not be the last piece of bad news for the iPhone maker.
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Difficult times ahead for Apple
For Apple, 2020 was expected to be the year when iPhone shipments would show significant improvement after years of stagnation. The roll-out of 5G networks, a massive installed base of users waiting to upgrade, and a new pricing strategy should have been tailwinds for the company this year.
But as the COVID-19 outbreak took hold, the company had to beat a retreat. Apple blamed store closures and a slow ramp-up of the supply chain for reducing its guidance. And now, the February shipment stats from China give us a better idea about the gravity of its situation.
Apple's revenue could take a big hit on account of the weakness in China, as the company generated nearly 15% of its revenue from that region last quarter. However, the impact of the COVID-19 outbreak elsewhere in the world may also knock the wind out of the company's sales.
Rabobank estimates that the epidemic could reduce global GDP (gross domestic product) growth to just 1.6% this year, well below last year's global economic growth rate of 2.9% per the International Monetary Fund. Meanwhile, analysts at Japanese investment bank Nomura are predicting a recession if the novel coronavirus outbreak is not contained soon enough.
The silver lining
Apple stock is trading at a trailing price-to-earnings (P/E) ratio of 20 as of this writing. Though that's down from earlier this year, it is still a bit expensive when compared to its five-year average P/E ratio of just over 16.
However, don't be surprised to see Apple stock test this average multiple, as Wall Street has turned bearish on the company's prospects. UBS recently slashed its price target on the stock, citing weak Chinese shipments. Needham had already slashed its sales and earnings estimates last month, citing the outbreak of novel coronavirus in more countries.
A weak set of second-quarter results will only add more pressure -- and make Apple stock more attractive from a valuation standpoint. In such a scenario, it would be a good idea for investors to pick up shares for two simple reasons.
First, a revolution is awaiting the smartphone industry in the form of 5G. The next-generation network is being rolled out across the globe in key geographies such as China, Europe, and North America. GSMA, a global association of mobile operators, predicts that 20% of global mobile connections in 2025 will be 5G.
Developed economies in Asia, North America, and Europe will be among the largest adopters of the new network standard. The report also points out that 5G is currently operational in 24 global markets. What's more, 79 operators spread across another 39 markets recently stated their intention to deploy 5G going forward.
All of this will create demand for new devices that support 5G networks, paving the way for Apple to sell new iPhones to its massive installed base, which reportedly stands at around a billion devices.
The second reason why investors should take advantage of any further pullbacks in Apple stock is because of the growing contribution of its services business. The company's services revenue was up 17% year-over-year last quarter, outpacing overall revenue growth of about 9%. More importantly, the gross profit margin of the services business was just over 64% last quarter, compared to the company's overall gross margin of 38%.
Looking ahead, Apple's services business is expected to keep growing at a terrific pace, and that would boost the company's bottom line thanks to the segment's superior profitability.
As such, Apple looks well-equipped to maintain its growth over the long run. This is why investors should use any outbreak-induced sell-off to buy more of this tech giant's stock -- it should only become more of a bargain in the coming weeks.
