China’s Covid lockdowns are an ‘absolute gut punch’: analyst

COVID lockdowns at Apple’s (AAPL) major Plant iPhone 14 Pro and iPhone 14 Pro Max in Zhengzhou, China, are hitting the company at arguably the worst possible time. The holiday season is the biggest time of year for Apple, as consumers shop for new iPhones, Apple Watches and iPads for friends, family and themselves.

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

the news continues Mixed fourth quarter results from Applein which the company reported record revenue but saw a loss of $40 million in iPhone revenue and $800 million in service 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 outright blow to Apple in its biggest holiday quarter,” Wedbush analyst Dan Ives said. he wrote in a note to investors.

Add skyrocketing inflation, rising interest rates, and general malaise throughout the economy, and Apple’s holiday quarter could be a huge 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, boosting the company’s revenue and sales numbers at the same time every year.

To say that Apple’s iPhone is the mainstay of the company is an understatement. In 2021, Apple reported first-quarter revenue of $123.9 billion, 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

However, the closure at the Zhengzhou plant means Apple could have fewer iPhones available for holiday shoppers. Also, because the facility makes Apple’s most expensive iPhone 14 Pro and iPhone 14 Pro Max, customers who can’t get their hands on the Pro models can opt for the less expensive iPhone 14 and iPhone 14 Plus. As a result, consumers would spend less on their smartphones than Apple would like.

“Our checks suggest that the Zhengzhou facility is running at approximately 50% utilization rate and aims to increase to 70% in the last two weeks of November and return to full rate in December,” said Wamsi Mohan, an analyst from BofA Global Research. he wrote in a note to investors.

“We estimate a 5-6 [million] unit interruption in supply if the situation does not deteriorate further,” he added.

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

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

“While the Zhengzhou and Foxconn situation in China remains an ongoing issue for Apple, our positive thesis on the demand story during this dark economic storm for Apple remains unchanged and potential buyers on any gut weakness this morning as Street digest this. news,” Ives said in the note from him.

Longer-term, however, Apple’s production challenges are likely to be no more than the blink of an eye, as the company continues to grow its product lines and potentially expand into the AR/VR space with its own headsets.

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

“Pro and Pro Max, good initial reception as the product cycle progresses. If Apple can continue to execute its product cycles, I think the next year or two will be a good time for Apple and 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 affected sales.

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