Apple Shares Down 5%, Now What?

Bad news coming out of Apple’s (NASDAQ:AAPL) supply chain has driven some investors to panic, sending shares swooning.

Specifically, Lumentum, which makes Face ID technology for its latest generation of iPhones, slashed its adjusted EPS guidance range to $1.15 - $1.34 (previous $1.60 - $1.75) and its revenue outlook to $335 million - $355 million (previous $405 million - $430 million) citing notably softer demand at a key customer (this could be Apple, since the iPhone maker accounted for 30% of its annual revenue).

Suppliers Japan Display and British chipmaker IQE also pulled down estimates citing weaker smartphone demand.

This followed reports from Japanese daily Nikkei that suppliers Foxconn and Pegatron were halting plans to further expand production lines related to the cheapest of this year’s lineup, the XR.

Analysts turned negative following Apple’s announcement that it would no longer provide details about the number of devices it sells, or even how that breaks down between iPhones, iPads, Macs, etc.

"The lack of transparency is disappointing, and will likely limit investor's visibility into the company," said BMO Capital’s Tim Long. "Our view remains that units may not grow at all going forward, and while average selling prices (ASPs) are still increasing, at some point they will plateau."

So first, it was Apple’s announcement that it would no longer provide certain numbers, then it was the covering analysts voicing their misgivings, and finally, it’s Apple suppliers taking down their forecasts.

While things don’t look good at this point, the situation was expected. What remains unknown is the extent of damage to Apple, how it will tell on its revenue and profits, how much of it was planned by the company and how much damage control it has up its sleeve.

We won’t know the impact on the numbers until the next earnings announcement and we already know that the softness is largely driven by saturation in developed markets, weak demand for very high end devices in developing markets (like India), longer replacement cycles and the stronger dollar that makes Apple products more expensive internationally. But it also makes sense to revisit what Apple has knowingly done to boost its services business at the cost of its hardware business.

So consider the iOS 12, which for the first time, supports 28 devices, including models that launched way back in 2013. This will allow the camera to launch 70% faster and make the keyboard 50% faster, likely supporting the services Apple badly wants the user to avail.

The feeling that Apple is now helping users to hang on to their devices longer may also encourage some to try a more expensive device sometime in the future. Bernstein analyst Toni Sacconaghi estimates that this move could extend iPhone replacement cycles by six months to 3.2 years and push unit sales down by 6% percent a year for three years.

Second, earlier this year, Apple agreed to pay for battery replacement of older iPhones when they were slowing down, a cost they incurred for the sake of loyalty, so older iPhone users remained in the Apple ecosystem with no need to upgrade.

How much of this Apple will make up with increased service revenue is of course unclear, at least in the near to midterm. But its services prospects are bright and the company is also seeing momentum there.

Recommendation

Because of the increased uncertainty, it’s probably a better idea wait for the share price to stabilize before taking any further action. So Apple shares currently carry a Zacks Rank #3 (Hold).

Buy-ranked tech stocks worth considering instead would be Diodes Inc. (NASDAQ:DIOD) , Himax Technologies (NASDAQ:HIMX) , ACM Research (NASDAQ:ACMR) and Park City Group (NASDAQ:PCYG) . But since isnt the best time to invest in tech given the market’s concerns about its over valuation, you can also take a look at the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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