Apple

What China’s COVID-19 outbreak means for Apple’s iPhone production

What China's COVID-19 outbreak means for Apple's iPhone production

Wedbush Securities analyst Dan Ives joins Yahoo Finance Live to discuss supply chain issues, Apple vendor Foxconn halting operations in Shenzhen, Docusign earnings, the state of Big Tech and the outlook for technology mergers and acquisitions.

Video transcript

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BRIAN SOZZI: One of Apple’s biggest suppliers, Foxconn, is suspending operations in Shenzhen as the government locks down the region for a week due to fresh COVID-19 outbreaks. So what does this mean for Apple? Joining us now is Dan Ives, analyst at Wedbush Tech. Dan, is this worrying, or should this be for Apple shareholders?

DANIVES: This is concerning as it is a central hub in terms of iPhone production. I mean, really, the vast majority of production comes out of this factory. Listen, if it lasts longer than a week, it starts to become a problem.

For now, they could forgive other productions, factories across China. But it puts fuel on the fire. It’s the last thing you would want an investor in what I’ll call China’s Silicon Valley to see come to a standstill, especially in this choppy market.

Jared Blikre: And Dan, great to have you here. Can you maybe expand on some numbers, give some ideas of where exactly this is going from here?

DANIVES: Yeah, I mean, it’s not also against the backdrop of massive shortages across the board that we’re starting to moderate. I mean, what I would say is if it lasts another two to three weeks, it could probably reduce overall production for the quarter by 1% to 2%, especially if it continues into late March.

And that’s for a company that just launched the SE, got the iPhone 13 where the numbers, the demand is still, I would say, outpacing the supply by about 20%. So I would call it, OK, a week, it’s nerve-wracking, but manageable.

Passes a week, begins to hurt the numbers. And I think most of my conversations from last night to this morning with investors are trying to quantify that. I would say 1%, 2% seems to be under production for the quarter.

BRIAN SOZZI: Dan, does this affect the deployment of the SE? It doesn’t hurt him at first. But if it goes until the end of March, then supply is going to be a problem in this first half of April, because Apple thought they were done with that.

So and it couldn’t – if you look at Foxconn, they can sort of play next week in terms of moving to other production plants, but that’s the whole point. If it starts to last two, three or four weeks, it really starts to become a problem, especially in the middle of this launch of the iPhone SE, which we estimate is 30 million units. And of course, in this market, that’s exactly what you don’t want to see, especially in this type of environment, where tech investors are obviously fearful.

Jared Blikre: And Dan, I want to expand that. I want to show everyone the YFi Interactive. I’m looking at one of our software heatmaps here, and we’re seeing a lot of green today.

But you activate the current year button and it just gets nasty. Microsoft down 15%. Adobe down 25%. When do you start picking up, picking up some of these beat names based on an assessment?

DANIVES: Yeah. I think software is oversold, as I’ve seen since 2015. I mean, there were pockets in 2018 as well. Look at the high flyers in terms of work from home, Zooms, DocuSigns. I mean, these are, at this point, I’d say catch a [INAUDIBLE].

But when you look at commodity software, the Oracles, the Microsofts, the Adobes, the Salesforce, either as security blanket names, the demand continues to be robust in terms of moving to the cloud. And I think those names, as we look at the rest of the year, will be significant outperformers.

But investors, look, they paint everything with the same brush in terms of software. But look at this transformation to the cloud – think of cybersecurity as a huge pocket of strength. And I also think M&A will be on the horizon if these stocks continue to hold at these levels.

BRIAN SOZZI: Dan, what did you think of this Doc– of this DocuSign core? Now we had CEO Dan Springer on the show on Friday. And he said he’s likely to exit this week and be long on his own stock. Are you a buyer?

DANIVES: I mean, I wouldn’t touch a 10-foot pole, because the problem is– I mean, you know, he’s a buyer. But I mean, if you look at the communication, you look at the boards, you look at what happened to this company, it’s a Friday the 13th situation for DocuSign.

And I think that’s — and that’s part of the problem in this market is that there’s a feeling on the street that these management teams just don’t have their arms around this is happening in the application environment. And I think that’s the problem with DocuSign. They could talk forever. The results speak for themselves and that is why the stock continues to be crushed.

BRIAN SOZZI: Dan, a…

Jared Blikre: I wanted to go around… go ahead, Brian.

BRIAN SOZZI: No, go ahead, Jared.

Jared Blikre: Come on, Soz.

BRIAN SOZZI: Go ahead. No I was–

Jared Blikre: Yeah, I want to come back to something… [LAUGHS]. I’m sorry, I’ll go. I want to pick up on something you said a few minutes ago, Dan. You were talking about M&A.

I’m just wondering, because from time to time you have interesting speculations about certain transactions that could be concluded. Is there anything on your horizon that piques your interest at these valuation levels?

DANIVES: I think it’s cybersecurity, because when you look at Google Mandiant, it speaks to that larger trend. More and more cybersecurity intertwines the cloud. And that was a shot across the arc from Microsoft, to Oracle, to AWS, to IBM.

So you look at some of these names like a Tenable, a Varonis, Qualys, a Ping, among others. And I think you’re going to see more cybersecurity mergers and acquisitions from cloud players because it comes down to — like public investors, they’ll sell those stocks.

But these financial strategies, they’re going to be watching them closely, you know, especially given some of these valuations, and they have tons of cash. That’s why I think cybersecurity, especially mergers and acquisitions, is where you’ll see it.

Now it looks like DocuSign and other, I mean, those actions and such are missing. They could continue to get the natural split, be cut an additional 50%. No one is going to buy these strategic financiers. Totally different cybersecurity.

BRIAN SOZZI: Dan, a new tweet from Tesla CEO Elon Musk warning of inflation. I guess that’s a bigger question. It’s not just a Tesla thing, of course. Warning on inflation impacting its activity. Do you think this inflation, whether it’s steel workers, etc., is going to ruin Tesla’s year in terms of earnings?

DANIVES: I think Tesla is unique because – and I think they’ll probably announce another price increase in the next two weeks. So they still have the ability to pass that on to the consumer, very similar to Netflix, Amazon Prime, and of course other kinds of mainstays.

So I think for Tesla they might continue to pass it on. And right now, demand outstrips supply by about 40%. So I don’t think it really impacts Tesla to that extent. What Musk is talking about has become a real issue, you know, especially in terms of cost.

And that’s something that these companies aren’t going to absorb. They’re going to pass that on, which just reflects that environment, especially in the auto sector, in a constrained supply environment that continues to be more and more constrained. Even when you look at what comes out of China with the province of Shanghai, I mean Tesla obviously has a huge chunk of their production. But then you look…that’s why it’s so important with Giga Berlin, as well as with Austin. You know, they continue to flex their muscles and branch out, which is important.

BRIAN SOZZI: Well, speaking of supply, Dan, another automaker that has been hit due to its inability to meet supply needs is Rivian. Really, not a good quarter from this company last week, the stock is down a lot. Do you feel the same about Rivian as you do about DocuSign?

DANIVES: Listen, I think the other example of Rivian’s communication was horrible. And the supply chain and the problem. But their ability to move and communicate was an absolute disaster.

I mean, since the IPO, it’s really been a black story for the whole industry. And I think that’s the frustration with Rivian is that we’re staying positive long-term, because I think they might eventually expand that in terms of the category shift into electric vehicles and pickup trucks, in particular on SUVs from 2023.

But if you look at, I mean, step by step, quarters at the price increase, oh, actually, mea culpa, but no, we’re not going to increase the price. This is the JV team. And in this type of market, that’s not what investors want to see, which is why the stock is where it is.

We still have comments that could pass. It’s a fork in the road. One more blunder, one more major setback. You know, RJ and his team could potentially ruin Rivian’s story before it even begins.

BRIAN SOZZI: All right, clearly, Rivian is not Tom Brady. Wedbush Technical Analyst Dan Ives is always happy to spend time with you. We’ll talk to you soon.

DANIVES: Thank you.