The coronavirus is impacting more than just human beings, as the world feels for the first time the problem with making one country its manufacturing capital. Chinese authorities are struggling to control the spread of the disease, cutting off transportation, shutting down factories and shops, and what not. Airlines too are cancelling flights to virus-affected areas.
But for the first time this week, new virus cases outside China outnumbered the cases inside the country, according to the WHO. This along with one suspected case in California is replacing the fear-of-missing-out (FOMO) related to some momentum stocks with fear of a pandemic. So stock markets are swooning.
It wouldn’t be such a bad thing, considering that valuations have been approaching bubble-like proportions, if there wasn’t the real fear that staying away from business activity impacts both the supply and the demand sides, with the ripple effect impacting the global economy.
Already some research firms have started cutting their outlooks for certain industries. Supply chain analytics firm Trendforce said that labor shortages and travel restrictions in China would have an impact on electronics/consumer items like smartphones, smartwatches and computer panels.
David Wong of Instinet LLC agrees: “We think there may be risk to demand in most electronic end markets, though we believe the end markets associated with consumer purchases might have the most potential downside. We remain cautious on the chip industry overall and selective in our chip and chip-equipment stock picks.” Moreover, he expects the impact to be prolonged: “We think that many investors, and companies, may have underestimated the risk of the current issues impacting electronics end market demand through 2020.”
Moody’s expects global auto sales to drop 2.5% this year (previous expectation was for a 0.9% drop). China produces a big chunk of the world’s automobiles and The China Association of Automobile Manufacturers (CAAM) has warned of significant virus-related declines in February production.
The slump in equity markets usually happens in stages. In the first stage, people dump the momentum names, in this case, companies like Apple (AAPL - Free Report) , Microsoft (MSFT - Free Report) and Tesla (TSLA - Free Report) as they expect supply chain issues and increasing costs. In the next stage, if the problem remains, long term investors start getting jittery and want to jump out of stocks altogether into safer investments like bonds and gold. And if the problem still continues, there’s a panic with everyone dumping everything. That’s when we have a recession.
The thing is, we don’t seem to be anywhere near those levels right now. Investors are mainly dropping momentum stocks and not buying the dips on value stocks nearly as much. There’s some indication that hedge funds are doing likewise. But this won’t derail the market unless the production freeze continues. Because unlike in past calamities, the trade war with China has gotten companies to build higher stockpiles and prepare alternative production sites outside China. This by no means replaces what China’s making, although it does provide some cushion. But we don’t know how much.
With that backdrop, let’s jump to the top stories-
Microsoft to Miss Guidance
Microsoft became the latest technology company to warn that the coronavirus will negatively impact its current-quarter results. In a press release, the company said that the $10.75 - $11.15 revenue guidance for its More Personal Computing segment, which was a wider-than-normal range to provide for the virus impact, would come in lower.
“Although we see strong Windows demand in line with our expectations, the supply chain is returning to normal operations at a slower pace than anticipated at the time of our Q2 earnings call. As a result, for the third quarter of fiscal year 2020, we do not expect to meet our More Personal Computing segment guidance as Windows OEM and Surface are more negatively impacted than previously anticipated. All other components of our Q3 guidance remain unchanged.”
Wedbush analyst Dan Ives said, “It fans the flames on Corona worries,” and “Apple and Microsoft now confirm the negative impact the Street had feared.” While Apple and Microsoft have actually adjusted expectations due to the impact of the virus. Cisco (CSCO - Free Report) , HP (HPQ - Free Report) , PayPal (PYPL - Free Report) and others, which have a later reporting date, gave weak guidance on virus-related concerns.
Other than the immediate impact on sales, there are inventory and other issues throughout the electronics supply chain that will impact a broad spectrum of companies in the sector.
New iPhones Could Be Virus-Delayed
Reuters reported that travel restrictions to China could delay the launch of this year’s iPhones. This is around the time that Apple engineers meet their counterparts in China to iron out final production issues, so they can get into volume production in the summer. Of course, it isn’t just the engineers, the plants themselves aren’t fully operational yet, so we don’t really know where 2020 is headed.
Amazon Merchants Curtail Ad Spending
Small sellers of China-made goods are reportedly cutting their ad spending and raising prices in anticipation of tighter supplies related to the coronavirus.
Quartile Digital, a New York-based firm that helps 2,300 brands manage their Amazon (AMZN - Free Report) advertising, says that they spent 6% less in the last wo weeks than in the same period a year ago.
While Amazon’s advertising business became a big topic because of its challenge to market leader Google, it’s actually just a small percentage of its overall sales. So advertising won’t be its biggest corona-headache. The disruption in the electronics supply chain will be a negative, as will be sales of other China-manufactured goods. This could impact overall results, but we haven’t received a guidance/update from Amazon yet.
Google Defeats Censorship Appeal
Alphabet’s (GOOGL - Free Report) Google scored an important legal win in what remains a highly controversial issue. The case was filed by Prager University, a conservative nonprofit run by radio talk show host Dennis Prager.
Prager U alleged that YouTube’s political bias led it to tag dozens of its videos on abortion, gun rights, Islam and terrorism with its "Restricted Mode" setting. This blocked it from certain age groups and kept away advertising revenue.
The University claimed that since YouTube was ubiquitous, it should be treated as a public forum and not a private product. So preventing the university from expressing certain opinions was tantamount to a censorship of free speech. All three presiding judges disagreed. Judge M. Margaret Mckeown said, “It remains a private forum, not a public forum subject to judicial scrutiny under the First Amendment.”
Social media platforms such as Facebook (FB) and YouTube have been asking to be treated as something in between a telecom which can’t control the content user’s upload to the site and a media house, which is responsible for the content hosted. For the most part, regulators have wanted to pin the job of controlling content on them, so they are incentivized to develop technologies for preventing the spread of hate speech, pornography and so on.
Intel ex-Employee Wins Lawsuit
Intel (INTC - Free Report) lost an appeal to the Supreme Court, in which it had argued that employees including ex-employee Christopher Sulyma (who worked at Intel between 2010 and 2012) couldn’t take retirement plan related issues to court after the period for suing on the issue was up. Employees usually have six years to sue, but if the facts of the case are known sooner, the deadline is cut in half.
In this case, Sulyma is reviving a class action lawsuit originally filed in 2015 over the investment of retirement funds in highly risky investments, in violation of the Employee Retirement Income Security Act (ERISA), a federal law that requires plan managers to invest prudently. Intel said that employees already knew the facts, Suleyman countered by saying they were only posted online. Moreover, he didn’t know while working at Intel what these hedge funds, etc were and what investing in them meant.
The justices unanimously upheld a lower court decision that revived the class-action lawsuit.
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