Apple smarts but could soon look smarter

Summary

Apple shares remain at the heart of market dramas.

Bad looking-out

The group’s shares continue to be punished in similar magnitude to a hefty 8% revenue forecast downgrade, mostly predicated on China. At least the let-down largely reflects deterioration in the broader smartphone market there. Unusually, the slump took the group off-guard. Said CEO Tim Cook in last night’s surprise letter to shareholders: "While we anticipated some challenges in key emerging markets, we did not foresee the magnitude of the economic deceleration, particularly in greater China”. So, it makes sense to interpret some of the savagery of the sell-off as a message. Something like, “must do better”. It’s a fair one, assuming Apple ought to possess some of the best forecasting capabilities around.

Bellwether bruising

Less quantifiable inputs, like toxic U.S.-China trade relations, may also have played a part. Still neither those, nor the wider and now unmistakeable slowdown in China are recent entrants into the market’s consciousness. Hence Apple’s bruising is well-deserved, but the group is more likely a bellwether of deepening global economic challenges. It is less likely to be out there on its own. As such, we expect Apple’s dominance (see 805 million active iPhones) and financials (e.g., $130bn in cash) to reassert themselves soon.

Watch Payrolls, Powell, post-ISM

Furthermore, low-yielding Apple could have the wind at its back when the stock market downdraft becomes more discriminating. A continued lack of bearish corroboration from top-level economic fundamentals could be the kicker, if Friday’s payrolls reassure. Yet even if not, Apple’s tanking, and that of the broader market could be the encouragement the Fed needs to tweak guidance further. An eye-catching slump in ISM’s manufacturing PMI on Thursday could be among more fundamental—albeit tacit—inputs. Indeed, the Dallas Fed president, Robert Kaplan outright called for a pause in the bank’s hiking path earlier. The next opportunity chairman Jay Powell will have to make his own views known is a symposium on Friday. He will be accompanied by QE-era chairs Yellen and Bernanke. With the market tightly wound in a pessimistic direction, at worst, even a pro-risk misinterpretation is possible. Of course, if slowdown fears crystallise to any extent, pessimism could yet deepen. We would then expect Apple to be spared the worst of a sustained downtrend, but it’s unlikely to be immune.

Suppliers on slippery slope

As ever, Apple’s ecosystem continues to look less well-defended. Its component suppliers tend to be relatively small and dependent on the Cupertino, California group for high double-digit percentages of revenues. Take AMS, the Austrian sensor-chip maker reliant on Apple for 40% of sales. Diversification might help such firms but is seldom rapid, so is no quick fix. Plus, the strategy favours firms situated in emerging economies where overheads are less demanding. Either way, with a total capitalisation of $1.4 trillion according to our September 2018 estimate, and assuming the global economy is entering a downcycle, Apple suppliers are poised to keep denting stock markets in the months ahead.