Apple Issued A Revenue Warning Due To The Coronavirus & These Chip Stocks Are Falling As A Result

Plus, Raymond James analysts said China’s response to the virus outbreak is reminiscent of the Soviet Union’s reaction to the Chernobyl nuclear accident, Walmart missed on earnings, and Franklin Resources is buying rival Legg Mason. 

Stocks fell to start Tuesday with the Dow dropping 108 points, or 0.4%. The S&P 500 and Nasdaq both traded 0.3% lower.

There are now more than 73,400 cases of COVID-19 worldwide, with at least 1,874 deaths from the virus. Japan has reported that an additional 88 people aboard the Diamond Princess cruise ship quarantined there have tested positive for the novel coronavirus, taking the total number of infections on the ship to 542, and French Health Minister Olivier Veran said today that there is a “credible risk” that the virus could escalate into a global pandemic. As the outbreak continues to cause concern, the Bank of America Global Research Fund Manager Survey found that fund managers have cut their expectations for China’s GDP to the lowest level in four years, with investment professional now seeing the country’s $12.2 trillion economy rising just 5.2% over the next three years. And Raymond James analysts led by Chris Meekins said in a note to clients that China’s response to the outbreak means things could get worse in terms of economic and market impact. The analysts wrote that China’s “slow reaction and continued unanswered questions appear to be sowing real concerns among the Chinese people,” which is amplifying concerns over the Chinese Communist Party’s grip on power, with the firm adding that it has been “receiving questions on whether or not this will be a ‘Chernobyl-like’ event for China – the comparison being the impact of the Chernobyl nuclear power plant disaster on the fall of the Soviet Union. … If this virus becomes a true global pandemic, the actions by the Chinese leadership will come under great fire as they no doubt contributed to the spread… [and] the real impact will likely take years to fully measure.”

Apple shares are down more than -2% this morning after the iPhone maker said Monday that it does not expect to meet guidance for the current quarter due to the impact of COVID-19. “Work is starting to resume around the country, but we are experiencing a slower return to normal conditions than we had anticipated,” the company said in a release. “As a result, we do not expect to meet the revenue guidance we provided for the March quarter.” While Apple said its sales in China have been negatively impacted as all of its stores in the country are closed due to the virus outbreak, it also said that demand outside of China has remained “strong” and is inline with its expectations. Analysts noted Apple’s guidance warning, but many view it as just a blip that won’t impact the company’s financial results long term. “While the knee jerk reaction will be negative… we believe this is more of a timing issue rather than an extended supply/demand issue for iPhones globally and does not change our longer term bullish thesis,” wrote Wedbush analyst Dan Ives in a note. “While trying to gauge the impact of the iPhone miss and potential bounce back in the June quarter will be front and center for the Street, we remain bullish on Apple for the longer term 5G super cycle thesis despite [Monday’s] news.”

Apple suppliers and partners are also getting hit following the iPhone maker’s revenue warning. Qorvo shares are down nearly -2% this morning as the radio frequency chip supplier gets 30% of its revenue from Apple, while chipmaker Skyworks Solutions shares are down just over -1% as it gets roughly half of its sales from Apple. Other chip suppliers down on the news with significant revenue exposure to Apple include Broadcom, Cirrus Logic, Lumentum Holdings, STMicroelectronics, NXP Semiconductors, and Analog Devices. The Apple revenue warning “will have a ripple effect of increased uncertainty and guide-downs across the semiconductor supply chain since Apple’s warning suggests a weak demand environment in China which impacts other smartphone vendors and their respective supply chains also,” said Bank of America analyst Vivek Arya in a note to clients. “So the impact is greater than just Apple itself.”

Walmart shares were down in early trading this morning but have since recovered and are up roughly 1%. The big box retailer reported Q4 earnings that fell short of analysts estimates, with Walmart noting weak demand for toys, apparel, and video games during the holiday season. Walmart’s guidance for the year ahead also fell short of expectations, as the company anticipates growth will slow in its e-commerce segment. “The fourth quarter wasn’t our best,” Walmart CEO Doug McMillon told CNBC. McMillon also said that it’s “too soon” to factor in the impact on Walmart’s business due to the coronavirus, saying that “it’s not in our guidance. … It’s too difficult to tell at this early stage exactly how to forecast it. We are still operating our stores [in China]. Almost all of them are open… but operating on reduced hours,” with a focus on selling food and consumables at its 430 locations in the country. The Walmart CEO did warn however that, “shipping and product coming out of China… into the U.S. … is an issue. It’s too difficult to call right now exactly what will happen in the [first] quarter. But we’ve said, because of what’s happening on the ground in China… we do expect to have some impact. But we are not currently putting that into our guidance.”

And in news unrelated to the COVID-19 outbreak, Franklin Resources announced today that it is acquiring rival asset manager Legg Mason in an all-cash deal for $50 per share, or $4.5 billion. The deal will create a firm with a combined $1.5 trillion in assets that will be better able to compete against the low-cost index funds that are upending the active fund industry. “This is a landmark acquisition for our organization that unlocks substantial value and growth opportunities driven by greater scale, diversity and balance across investment strategies, distribution channels and geographies,” Greg Johnson, executive chairman of the board of Franklin Resources, said in a statement. “This transaction is playing offense,” added Franklin president and CEO Jenny Johnson, saying that it was about adding an “all-weather product lineup,” with more capabilities in fixed income, real estate, and alternatives, while also combining distribution platforms for the two companies globally, giving them more scale in retail and institutional sales along with a larger combined international presence in markets such as Japan, Australia, and the United Kingdom. “Having an all-weather platform—to always have something to sell—is incredibly important,” she added.

Stocks We’re Watching

SVMK Inc (NASDAQ: SVMK): SVMK shares popped 19% on Friday after the parent company of SurveyMonkey delivered an earnings beat for its fiscal fourth quarter. SVMK reported Q4 revenue was up 24% year-over-year to $84.3 million, beating the average analyst estimate buy roughly $500,000. Enterprise sales were also up 13% compared to the same period the year prior, and enterprise customers rose 84% year-over-year to 6,578 be the end of the quarter. JMP Securities raised its price target on SVMK shares from $22 to $25—15% higher than the current price—on the earnings beat, and said that it is “incrementally confident in its continued mix-shift to Enterprise client” and says SVMK is “evolving into a multi-product company,” highlighting surveys, customer experience, and market research as the core products moving forward.

GoDaddy Inc (NYSE: GDDY): GoDaddy shares jumped 11.5% on Friday following the domain name registrar and provider of online tools company releasing strong Q4 results. GoDaddy reported Q4 revenue came in 12.2% year-over-year to $780 million, beating analysts’ expectations for $777 million. Earnings also beat consensus estimates at $0.34 per share, compared to expectations of $0.31 per share. “GoDaddy continues to execute against its strategy – empowering everyday entrepreneurs through sage guidance, seamlessly intuitive experiences, and activating our community,” said GoDaddy CEO Aman Bhutani. “We are well positioned to deliver strong results for our customers, communities, and shareholders in 2020.”

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