Apple’s Stock May Not Stay Down For Long Despite Its Sales Warnings

Michael Kramer and the clients of Mott Capital own AAPL

Apple Inc.’s (AAPL) stock dropped by over 1.8% on February 18 after the company noted it would not meet its fiscal second-quarter revenue guidance. The market seemed to have taken the news in stride. It could be that shares have underperformed the broader indexes since the company’s stunning fiscal first quarter results at the end of January.  Additionally, the equity managed to bounce off an essential level of technical support.

Investors may be willing to give Apple a pass this time around considering the revenue shortfall is due to impacts of the coronavirus in China. It doesn’t seem likely that Apple’s business has been hurt or has changed materially over the longer-term.

Looking For Trouble?

It seems that the market was already expecting trouble for Apple since January 29, the next trading session after it reported fiscal first quarter results. Through February 14, Apple’s stock had risen by around 20 basis points, despite the S&P 500 increasing by almost 3.5%, and the NASDAQ Composite rising by nearly 5%. The weak performance followed a blowout fiscal first quarter and strong revenue guidance. Now just three weeks later, the company has pulled that same guidance. Perhaps, investors had already seen the shortfall coming.

Holding Support

Initially, Apple fell by around 4% in the pre-market trading session on February 18, which was where the shares found a critical level of technical support between $310 to $312. Additionally, the sharp drop created a technical gap, which is the space created on the chart from the time the stock closed on Friday afternoon and started trading on Tuesday morning. It seems likely at this point; the stock can rise back to a price of around $325, closing the gap.

Cutting Second Quarter Revenue Estimates

Following the guidance reversal, analysts were quick to cut the second quarter estimates to $63.9 billion from $65.4 billion. However, those second quarter revenue estimates are likely to fall more, because the company had been guiding for revenue in a range of $63 to $67 billion. As a result, over time, we should see those revenue estimates fall below $63 billion, since the company noted it did not expect to meet that prior guidance.

Long-Term Views Unchanged

However, to this point, revenue estimates for the balance of 2020 have relatively remained unchanged at $284.6 billion, as well as the forecast for $308.4 billion in 2021. Perhaps that is because expectations are for the lost business in the second quarter to return in future quarters. Additionally, this is not likely to impact the outlook for the coming years, nor change the underpinnings of why the stock has had such a significant advance over the past year, which has centered around a more diversified business consisting of rapidly growing services and wearables, along with the core businesses of the iPhone, iPad, and Mac.

Not Clear Yet

The most apparent overhang for Apple over the short-term is that the company didn’t provide a revised revenue range. It would indicate that the company may not have a firm handle on the current conditions, or when the business is likely to rebound. It is something that could give the bears some ammunition in the weeks between now and the company’s next earnings release.

It seems plausible to think that Apple’s shares consolidate over the next few weeks as investors await more visibility around the impacts of the virus. However, any pullback isn’t likely to last for too long, given that the longer-term outlook remains unchanged.

Michael Kramer is a financial market strategist and the portfolio manager of the Mott Capital Thematic Growth Portfolio.

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