Apple (NASDAQ:AAPL) looked all set to step on the gas in 2020, as iPhone sales were expected to grow after years of stagnation. But the impact of COVID-19 is likely to dent that forecast and produce another year of mediocre iPhone sales.
After all, the smartphone giant has already slashed its fiscal second-quarter revenue guidance because it has been forced to shutter stores across the globe to combat the novel coronavirus outbreak. But the economic fallout of the pandemic could be far worse for Apple. Consumers might shy away from upgrading to a new device considering that the International Monetary Fund (IMF) has declared that a recession is already underway.
Another year of ho-hum results for the iPhone
Sales of the iPhone were expected to jump in 2020 thanks to the launch of 5G mobile networks and Apple's competitive pricing strategy. But supply-chain rumors indicate that a steep fall in sales might be in the cards.
According to Reuters, an official at a major Apple contractor said that the company has reduced orders for the March quarter by 18% compared to the prior-year period. The ramp-up of 5G smartphones has also been delayed. He also added that suppliers are now concerned with how iPhone demand in the U.S. and Europe would pan out in light of the novel coronavirus outbreak.
Not surprisingly, the tech giant's prospects look grim for the full year. A display supplier told Reuters that it is prepared to lower its shipment forecast for 2020 to 58 million units from the prior expectation of 70 million.
That's not surprising, as buyers may not return to Apple's stores quickly even when all of this is over. Raymond James analyst Logan Purk pointed out in an interview last week out that footfall continues to remain low at Apple's Chinese stores after the reopening because concerns about the disease continue to linger.
More importantly, the economic fallout of the COVID-19 outbreak is expected to dent iPhone demand. Civis Analytics conducted a survey of 2,600 adults in the U.S. from March 18-20 and found out that over half of the respondents would be spending the same amount of money on consumer electronics as they were planning to before the outbreak.
But that would happen if the disease is contained in the next few weeks (an outcome that is, unfortunately, becoming far less likely). If things get worse, a third of the respondents said that they will reduce their spending on consumer electronics items.
On top of that, the recent spike in unemployment claims is another ominous sign for iPhone demand. Seasonally adjusted initial jobless claims surged to a record 6.6 million for the week ending March 28. This was the highest number in history and easily beat the previous record of 3.3 million initial claims that was reported just a week prior. The previous high was 695,000 set back in October 1982.
U.S. Treasury Secretary Steve Mnuchin forecasts a 20% unemployment rate in the U.S. in the aftermath of the outbreak. Amid all of this uncertainty, 2020 could turn out to be a lost year for Apple's iPhone.
The silver linings
The good news is that Apple could emerge stronger out of this coronavirus-induced downturn.
For instance, the company could benefit from a diversified supply chain in a post-COVID-19 scenario, as its key suppliers are reportedly looking to move beyond China to reduce their reliance on a single country. Wistron, for instance, is planning to shift half of its capacity outside of China within the next year.
The Apple contractor is reportedly looking to expand capacity in India and also boost its presence in Vietnam and Mexico. Pegatron is another Apple supplier that's looking to increase its operations in Taiwan, Vietnam, and India after adding a new plant in Indonesia last year. Inventec -- which assembles AirPods -- is also planning to set up shop in Vietnam.
A diversified supply chain could help Apple avoid disruptions that arise from concentrating its production in one country. However, this is not the only benefit that may come the company's way in the aftermath of the novel coronavirus.
As it turns out, 5G network rollouts are gathering momentum despite the COVID-19 outbreak. China, for instance, is looking to speed up 5G network deployments and plans to deploy 300,000 base stations by the end of 2020. There are currently 75,000 base stations.
Meanwhile, the surge in bandwidth demand in the U.S. could also speed up 5G network adoption. Verizon points out that bandwidth demand for gaming shot up 75% in mid-March as compared to the previous week. Overall web traffic usage surged 20%, while virtual private network (VPN) usage was up 34% as people stay at home.
As a result, telecom carriers will have to upgrade their networks to handle the increased demand, and that could spur 5G adoption. This could create a perfect situation for Apple to sell more iPhones in 2021 thanks to a range of 5G-capable devices that are reportedly in the works.
What's more, the potential launch of a budget iPhone this year could be a smart move. The economic fallout of the novel coronavirus may create additional demand for such a device. As such, Apple could see favorable business conditions once all of this is over.
But investors should not rule out near-term pain. Apple's shares are likely to take a beating in the coming weeks after the impact of the outbreak is revealed in its upcoming earnings report. However, it may be a good idea to use any pullbacks to go long on Apple stock due to its attractive valuation. It could even expand its designation as a top tech stock once all this is over.