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Would You Buy an iPhone Now? Coronavirus Tests Demand for Apple's Flagship Product

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03/26/2020 | 04:54pm EDT

By Tripp Mickle

After losing his job last week as a sports-radio producer, Adam Michaels scrutinized his family's spending. Among this year's planned cutbacks amid the economic devastation wrought by the coronavirus pandemic: no new iPhones.

It is a departure for the 42-year-old Chicago-area resident, who typically buys his family four new iPhones every two years. "The expense is not worth it right now," Mr. Michaels said.

The question of consumer demand looms large for Apple Inc. as it prepares to unveil a new low-price iPhone model and soon must begin ordering components for its latest flagship smartphones, which usually are launched in the fall.

The fall iPhones, which this year were expected to garner significant consumer interest because of the use of 5G wireless technology, make up a sizable portion of Apple revenue.

An Apple spokesman declined to comment.

Consumer demand in the age of coronavirus has quickly emerged as the biggest unknown for companies from soft-drink makers to airlines. European and U.S. lockdowns have triggered a sharp, unprecedented economic contraction that has left many businesses without a road map for what lies ahead.

Apple, which has navigated past economic challenges, has been whipsawed by the viral outbreak. The health crisis began in China, where it closed factories and eroded iPhone supplies. It then bounced to Europe and the U.S., forcing Apple to shut down stores and almost all activity at its Silicon Valley campus.

Sales of iPhones peaked in 2015, and the company has been focused on persuading customers to replace old devices -- a much tougher task amid an economic crisis.

The less expensive iPhone heading to the market could be a better fit for a cost-conscious time, but its lower price and targeted audience -- emerging markets and existing customers -- also will make it a modest contributor to Apple's bottom line. The new model, which has been compared with the $399 iPhone SE offered in 2016, was expected to be launched this month but might be delayed, analysts say.

Apple's new flagship models are usually unveiled in September, so the 5G phones are months away. However, the company's operations team typically places orders in March and April for camera modules and other components for iPhone assembly in summer months, former employees said.

They said orders dictate how many new devices Apple makes, and, under the shadow of the pandemic, consumer demand has never been more unclear. It is further complicated by lofty iPhone prices, after Apple three years ago raised its flagship models to $1,000 -- a 50% increase that lifted revenue as shipments fell.

The uncertain market has unnerved Apple's suppliers, who said they are now concerned iPhone shipments will decline this year instead of rise, as many analysts had expected. In 2018, suppliers suffered when Apple misread demand and slashed production, sticking some suppliers with excess inventory and underused production capacity.

Apple's next quarterly report is due out in late April.

The coronavirus outbreak has already hammered the smartphone industry, which last month shipped 38% fewer units world-wide amid China's shutdown compared with a year earlier, according to Strategy Analytics. It was the biggest single-month decline in industry history.

Apple relies on Europe and the U.S. for about two-thirds of sales and faces growing risk as those countries now combat the public-health crisis. The U.S. on Thursday reported a record 3.28 million workers applied for unemployment benefits last week -- five times the previous record, as millions of businesses announced furloughs and layoffs.

Apple's shares have fallen about 15% in the past month, in line with tech peers such as Microsoft Corp. and Facebook Inc. but less than the 28% decline in the S&P 500, according to FactSet.

Apple Chief Executive Tim Cook has encouraged staff in emails not to worry about the challenges confronting the company. He indicated that Apple -- which has about $200 billion in cash and cash equivalents -- is prepared for this moment and will continue to invest in the future.

The company has forged ahead with software updates and new products, including an updated MacBook Air and iPad Pro. Apple also has pushed to increase sales of apps with an App Store expansion into 20 new countries.

Pressure to order the right number of components in the face of fast-changing consumer behavior is especially high as Apple moves into 5G, the next generation of wireless technology. The 5G models require pricier modems and more memory that analysts say will increase costs of materials by $100 a phone.

Being stuck with extra modems or unsold 5G iPhones could cut into the rich profit margins that helped make Apple the first U.S. company valued at $1 trillion, said Mehdi Hosseini, an analyst with Susquehanna International Group. He expects Apple to have component suppliers continue making iPhone parts as planned while it reassesses demand in May or June.

The factories Apple relies on in China to make its products have restarted operations, but a stay-in-shelter order in California has forced staff to work remotely, complicating the well-oiled process that has long guided Apple's iPhone development.

Apple is scrambling to prevent product delays. Unable to travel to China, its U.S. engineering team is using video calls to direct Chinese colleagues through iPhone prototype assembly at factories in Asia, people familiar with the matter said. The company previously did a test run of that process in January.

The company last week also began allowing some engineers to take home prototypes of some future products, people familiar with the matter said, an unprecedented step for a company that has fired software engineers for coding off campus and used security staff to transport future iPhones. It asked employees not to discuss the new protocols.

Write to Tripp Mickle at Tripp.Mickle@wsj.com


Stocks mentioned in the article
ChangeLast1st jan.
APPLE INC. -1.44% 241.41 Delayed Quote.-17.79%
DJ INDUSTRIAL -1.69% 21052.53 Delayed Quote.-24.97%
NASDAQ 100 -1.41% 7528.113802 Delayed Quote.-10.53%
NASDAQ COMP. -1.53% 7373.08309 Delayed Quote.-14.18%
S&P 500 -1.51% 2488.65 Delayed Quote.-22.97%
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Financials (USD)
Sales 2020 268 B
EBIT 2020 64 381 M
Net income 2020 55 231 M
Finance 2020 75 737 M
Yield 2020 1,31%
P/E ratio 2020 19,2x
P/E ratio 2021 16,2x
EV / Sales2020 3,71x
EV / Sales2021 3,27x
Capitalization 1 072 B
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Income Statement Evolution
Mean consensus OUTPERFORM
Number of Analysts 41
Average target price 309,92  $
Last Close Price 244,93  $
Spread / Highest target 51,4%
Spread / Average Target 26,5%
Spread / Lowest Target -20,4%
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Timothy Donald Cook Chief Executive Officer & Director
Arthur D. Levinson Chairman
Jeffrey E. Williams Chief Operating Officer
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FITBIT, INC.-2.59%1 767