Apple’s warning on Monday night over the impact of the coronavirus outbreak on production of the iPhone sent a chill through world markets. The admission by the world’s largest company that it is unlikely to meet revenue guidance for the three months to the end of March, because of a virus-linked slowdown in production and demand in China, is not merely a headache for Apple shareholders — it has a knock-on effect on several UK-listed companies.
Shares in IQE, which makes semiconductor wafers for chips used in Apple’s products, lost almost 9 per cent of their value at one point yesterday as analysts began to downgrade their revenue and profit expectations for the Cardiff-based group on the back of Apple’s warning. Those shares closed 3¾p, or 6.3 per cent, lower at 57¼p last night.
Dixons Carphone, the electricals and mobiles retailer that stocks Apple products, was also caught up in the fallout. Its shares dipped 3½p, or 2.5 per cent, to 135p as dealers predicted that it could be hit by lower iPhone sales.
Apple is among the most dominant forces in world technology and it uses hundreds of suppliers; indeed, it lists the top 200 of them by name and location. Just over half the group’s $260.2 billion of sales last year were of iPhones, which it produces alongside an array of other hardware and software, including the iPad and Apple Mac PCs.
The Silicon Valley group originally had expected to generate revenues of between $63 billion and $67 billion over the first three months of the year, a range deliberately set wide late last month to take account of uncertainties around the coronavirus outbreak.
On Monday, however, the group tore up the guidance, citing two factors: delays in getting production facilities in China back up and running; and a slowdown in customer demand in the country, exacerbated by reduced opening hours for its stores.
This is not the first time that Apple has warned about its revenues. Just over a year ago, the technology group cut its sales guidance over the three months to the end of December 2018, citing a slowdown in sales of the iPhone and a particularly weak market in China.
With its latest coronavirus, or Covid-19, alert, logic dictates that lower production of the iPhone means reduced orders for component parts from supplier companies such as IQE and fewer handsets hitting the shops run by Dixons Carphone and other retailers. The great unanswered question, inevitably, is how long the problem is likely to last.
Dixons Carphone
For a company such as Dixons Carphone, the issues are fairly straightforward. The retailing group was created in 2014 through the merger of Dixons Retail and Carphone Warehouse. It owns the Currys, PC World and Carphone Warehouse brands and, as well as mobile phones, sells computers and electrical goods from about 1,000 shops in nine countries. It does not operate in China, so is exposed only to a shortfall in the supply of the iPhone, which it stocks alongside products from other manufacturers, including Samsung, of South Korea, and Huawei, of China.
Intuitively, if the production slowdown is short term, then the disruption should be minimal; the group is not thought yet to have noticed any problem. If it lasts longer, then, frankly, it is only the customer who suffers. It doesn’t matter to Dixons Carphone what kind of phone they buy.
However, Dixons Carphone, which does not report its iPhone sales separately, has been suffering from weak mobile phone sales irrespective of the manufacturer. Like-for-like sales in Britain and Ireland fell by 9 per cent over the crucial Christmas trading period, but were almost offset by gains in electricals and in overseas markets, such as Greece.
It’s been a turbulent time for the company’s shareholders and Dixons Carphone does not look to be a particularly attractive prospect for the new investor, but there is no reason for those that do own the stock to sell as a result of Apple’s alert.
IQE
IQE, as a supplier, is more directly exposed to Apple. The company was formed in 1988 and makes compound semiconductors — for which read superfast processing power for gadgets — across eight manufacturing sites, or foundries, including two in south Wales, in Newport and Cardiff. IQE does not disclose either the names of its customers or the specific revenues it receives from them, but Apple is one of several mobile phone groups that use its semiconductors and it is safe to assume that a good number of the others do so, as well.
However, analysts at Canaccord Genuity reckon that Apple’s woes could lead to a “low to mid-single digit” percentage decline in revenue and a fall in forecast profit before tax and other items of between 5 per cent and 20 per cent. This feels high, in part because of the way that IQE’s supply chain works. The companies it produces for tend to hold high stocks — its components are minuscule and take up little space.
It is understood that IQE is meeting orders for use in nine to twelve months’ time, which gives it a cushion against a short-term iPhone production hit. The implication is that IQE’s order book will start to come under serious strain only if the coronavirus spread becomes a big threat towards the end of the year. Unfortunately, that is possible.
It would be a mistake to see IQE as a one-trick pony. As well as phones, its superfast semiconductors are also used by the developers of autonomous vehicles, for 3G sensors and 5G mobile networks, which need its processing speed. Its chips feature in big data centres hosting the cloud and in advanced medical scanners. The potential of IQE, a market leader, is enormous, but it keeps being hobbled — by 5G delays, the Trump trade war with China, which forced it to switch manufacturing sites, and now by Covid-19.
Trading at a multiple of 23 times Peel Hunt’s forecast earnings for next year and with no dividend, this loss-making company feels too risky at the moment, but worth a look in future. Existing owners should hold on but prospective investors should leave well alone for now.
Advice Avoid both Dixons Carphone and IQE
Why Apple’s revenue warning is no reason in itself to sell but both companies have other worries of their own
