The coronavirus pandemic has brought the market down. the S&P 500 has already been down more than 30% since the start of the year, and this liquidation has also brought down many technology stocks in the past month. Industry heavyweight Apple (NASDAQ: AAPL) is also down 30% from its February highs, and it now appears to be a solid bet for investors against the grain.
Apple expects weak March quarter
COVID-19 will seriously affect Apple’s business, as the company generates more than 60% of its revenues in international markets. The Greater China region has accounted for 16.5% of sales in the past 12 months. As China is the epicenter of the epidemic, the country has experienced a massive drop in consumer spending.
For the first two months of 2020, retail sales plunged more than 20% year on year. COVID-19 is now seriously affecting European countries such as Italy, Spain and France. Investors should expect a similar drop in demand in this region, where Apple has generated 23.6% of sales in the past year.
On February 17, Apple announced that it would miss its revenue forecast for the second fiscal quarter due to supply chain constraints in China and declining demand for products in that region as well. This drop in demand is expected to occur in all regions where the epidemic is spreading.
Although the coronavirus has scared investors, keep in mind that the pandemic will most likely be a headwind in the short term. The fundamentals of this technology giant remain solid.
A leader in smartphones
In fiscal 2019, Apple generated 55% of revenue from its iPhone business, which remains the company’s flagship product. It launched three new smartphones in September 2019, which boosted sales in the first quarter of fiscal 2020.
During this period, Apple announced year-over-year sales growth of 9% to $ 91.8 billion due to strong demand for its iPhone 11 line. The company will also launch a device cheaper in the near future to target price-conscious consumers in emerging markets such as India and Southeast Asia, not to mention the three 5G compatible smartphones expected to arrive later this year, increasing demand for beyond 2020.
Strong growth in services
Another reason to be optimistic about Apple’s long-term prospects is the strong growth in the company’s services. In fiscal 2019, this industry experienced revenue growth of 16.5% year over year.
It is now Apple’s second activity and represented 17.8% of total sales in fiscal 2019, compared to 15% in fiscal 2018. The services segment, which includes several products subscription, including Apple TV +, Apple Arcade, iCloud and Apple Music, generates a stable revenue stream. As a result, this can compensate for the cyclical nature of demand for smartphones and help the business in the event of a slowdown.
It is also Apple’s most profitable business and accounted for 30% of the company’s gross profits last year. Services revenue increased 17% in the last quarter, driven by double-digit growth in all major regions and exceptional performance from cloud services, the App Store, Apple Pay, Apple Music and Apple Care.
Underlying this solid performance in services, an increase in Apple’s installed base of more than 1.5 billion active devices, up 100 million year on year.
Apparel is a multi-billion dollar segment
Apple continues to launch high-end products such as AirPods and Apple Watch, and has established itself as the world leader in clothing with a market share of 36.5%, according to data from the fourth quarter of IDC research firm.
IDC estimates that Apple shipped 106.5 million wearable devices in 2019. Even using a conservative average retail price of $ 200 per unit, the category would have generated at least $ 21 billion in annual sales.
While growth in iPhone deliveries has plateaued, wearable products are now the fastest growing activity in the business. During the call for first quarter results, CEO Tim Cook said mobile device revenues had increased 44% year over year. Evercore analyst Amit Daryanani estimates the wearable clothing industry could make $ 60 billion and add $ 2 to earnings per share by 2023.
The stock of apples could decline in the short term, as the pandemic creates a sense of panic among investors and global economies are struggling under various preventive measures.
However, investors should view every drop in Apple stocks as a buying opportunity, given the company’s robust growth estimates across all of its business segments. As the world gradually returns to normal, Apple’s shares are expected to make a comeback in the second half of 2020.