China’s Covid Locks Down an ‘Absolute Punch in the Gut’: Analyst

The COVID-related lockdowns at Apple’s (AAPL) main iPhone 14 Pro and iPhone 14 Pro Max factory in Zhengzhou, China are hitting the company at arguably the worst possible time. The holiday season is the most important time of year for Apple, as consumers buy new iPhones, Apple Watches and iPads for friends, family and themselves.

Lockdowns at the Zhengzhou factory mean Apple may not have enough iPhones to meet demand this year, which could significantly affect the company’s performance.

The news follows Apple’s mixed fourth-quarter results, in which the company reported record revenue but saw a $40 million loss in iPhone revenue and an $800 million loss in services revenue.

“After battling macroeconomic headwinds and delivering a strong September quarter/guidance in stark contrast to the rest of Big Tech, this latest zero-covid situation is an absolute blow to Apple in its most important holiday quarter,” said Wedbush analyst Dan Ives. wrote in an investor note.

Rising inflation, rising interest rates and general uneasiness throughout the economy, and Apple’s holiday quarter could be a serious disappointment.

Apple’s holidays aren’t looking so bright

Like most consumer technology companies, the holiday season brings in huge amounts of cash for Apple. Consumers eager to get their hands on the latest iPhones are ordering online and heading to stores in droves, counting the company’s revenue and sales numbers at the same time every year.

To say that Apple’s iPhone is the company’s lifeblood is an understatement. In 2021, Apple reported revenue of $123.9 billion for the first quarter, of which about 57%, or $71.6 billion, came from iPhone sales. For the full year, the iPhone accounted for 52% of Apple’s total revenue of $394.3 billion.

Apple’s iPhone could face supply shortages this holiday season. Credit: RW/MediaPunch/IPX

The shutdown at the Zhengzhou factory, however, means Apple could have fewer iPhones available for holiday shoppers. Additionally, because the facility makes Apple’s more expensive iPhone 14 Pro and iPhone 14 Pro Max, customers who can’t get their hands on Pro models may opt for the less expensive iPhone 14 and iPhone 14 Plus. As a result, consumers would spend less for their smartphones than Apple would otherwise like.

“Our checks show that the Zhengzhou facility is operating at around 50% utilization and aims to increase to 70% in the last two weeks of November and return to full capacity in December,” BofA Global Research analyst Wamsi Mohan. wrote in an investor note.

“We count 5-6 [million] stopping supply to the unit if the situation does not deteriorate further,” he added.

The iPhone will continue to fuel sales for the rest of the year

While China’s zero-COVID-19 policy may hurt Apple in the short term, analysts don’t see the problem as a serious threat in the long term. After all, consumers still want to get their hands on iPhones regardless of when they can buy them.

“While the Zhengzhou and Foxconn situation in China remains an ongoing albatross for Apple, our positive thesis on the demand story during this dark financial storm for Apple remains unchanged and would-be buyers in any knee-jerk weakness today in the morning as the Street digests this. news,” Ives said in his note.

In the long run, however, Apple’s production challenges will likely be nothing more than incidental as the company continues to develop its product lines and potentially expand into the AR/VR space with its own headsets.

“What will matter in the short term, and certainly in the long term, is the demand for the products is health,” Daniel Flax, senior research analyst at Neuberger Berman, told Yahoo Finance.

“Pro and Pro Max, good initial reception as the product cycle begins. If Apple is able to continue to execute its product cycles, I think the next one to two years will be a good time for Apple and a good time for its shareholders,” Flax added.

As for the holidays, we’ll have to wait until Apple reports its first-quarter earnings sometime in late January to find out how much the lockdowns are hurting sales.

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Do you have a tip? Email Daniel Howley at dhowley@yahoofinance.com. Follow him on Twitter at @DanielHowley.

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