Following in the footsteps of other Tech companies highly exposed to China, Apple warned it will not meet its March quarter revenue guidance as the coronavirus hit both demand and manufacturing in the country. In addition, the company was expected to launch, sometime in Q1, a low-cost iPhone model (currently nicknamed SE2 or iPhone 9), that will certainly be postponed to Q2. Apple stores are now gradually reopening and factories that have begun to reopen are ramping up slowly.
Clearly, Q1 will be a quarter to forget for the Tech and, more specifically, semiconductor industries. But this temporary supply-and-demand shock should not conceal the improving fundamentals we have seen since Q3/Q4 with 1) an easing of trade relations between the US and China 2) a semiconductor demand recovery driven by data center upgrades and first 5G network rollouts and 3) historically low chip inventory levels.
As all these drivers remain well in place, we are convinced that Apple and the semiconductor supply chain will enjoy a V-shaped earnings recovery post Q1, assuming the coronavirus epidemic loses steam. Pent-up demand will likely fuel revenue growth in Q2 and Q3 and, potentially, some of this pent-up demand could shift towards the 5G iPhones that are expected to start shipping in Q3 and to mark the start of a major smartphone upgrade cycle.
In all, the weakness since mid-January of many of the 5G-related names and of our Smart Connectivity certificate could be an attractive entry point for those believing in a massive smartphone upgrade cycle over 2020-21 and in the take-off of 5G industrial and business applications.