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Apple (AAPL) Slashes Sales Forecast for Q1, Blames China

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Shares of Apple (AAPL - Free Report) plunged almost 8% after the company cut its first-quarter fiscal 2019 guidance. Apple also warned that iPhone sales will decline on a year-over-year basis, primarily due to weak demand in Greater China and fewer upgrades to its flagship device.

The company’s previous revenue estimate between $89 billion and $93 billion was reduced to $84 billion for first-quarter fiscal 2019. Moreover, the company revised its guidance for gross margin, which is now expected to be 38% compared with the earlier guided range of 38 - 38.5%. Further, operating expenses are now expected to be $8.7 billion compared with the previous guidance range of $8.7 - $8.8 billion.

Notably, beginning first-quarter fiscal 2019, Apple will no longer provide unit sales data for iPhone, iPad and Mac.

Slowdown in China to Hurt Apple

China is an important market for Apple, given the growing number of middle-class customers. Notably, in fourth-quarter fiscal 2018, Greater China accounted for 18.1% of total sales, which increased 16% year over year to $11.41 billion.

Apple assembles iPhone in China primarily to take advantage of the country’s abundant low-cost labor. While the company buys components from suppliers based in Japan, Korea, Taiwan and the United States, the final assembling is done by contract manufacturers like Foxconn at a significantly low labor cost.

Per reports, China also boasts more than 2 million highly skilled application developers, who develop apps for the App Store. Moreover, the country also has a flexible labor force, which benefits Apple when demand for products is hard to predict. Evidently, China is a driving force behind Apple’s growth.

However, a slowing Chinese economy is expected to hurt sales of iPhone, Mac and iPad on a year-over-year basis. Apple’s management attributed the sluggishness to the U.S.-China trade war.

Moreover, intensifying competition does not bode well for Apple in China. The steep pricing of new iPhones is also making it difficult for the company to gain market share. Notably, Apple’s rival Huawei is gaining traction in the Chinese market and is just behind Samsung as the largest smartphone maker in the world. Per reports, Huawei witnessed a 13% increase in sales in China in the third-quarter.

Apple Inc. Price and Consensus

Apple Inc. Price and Consensus | Apple Inc. Quote

Apple Remains Vulnerable to Trade War

China has a $375 billion trade surplus with the United States and the trade imbalance is one of the primary reasons behind the ongoing trade war. Apple’s iPhone has been blamed for the trade imbalance between the United States and China.

Per Reuters’ estimates, 61 million iPhones were shipped from China to the United State in 2017 and a single model, iPhone 7, accounted for $15.7 billion of the trade deficit.

The trade war between China and the United States has resulted in tariff imposition on $250 billion of Chinese imports. President Donald Trump had also threatened to increase tariffs from 10% to 25% on $200 billion worth of Chinese goods.

Moreover, Trump might impose a 10% import duty on iPhones and laptops imported from China, adding to Apple’s woes. However, a 90-day temporary truce has been called by both the countries.

Zacks Rank & Stocks to Consider

Currently, Apple carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader computer and technology sector include Qualcomm (QCOM - Free Report) , Alteryx (AYX - Free Report) and Veeva Systems (VEEV - Free Report) . All the three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks Rank #1 stocks here.

Expected long-term earnings growth rate for Qualcomm, Alteryx and Veeva is 10.9%, 8% and 19.5%, respectively.

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